The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) has praised The Bahamas for “considerable progress” in developing a regime to prevent and address banking industry failures but also warned much work remains to be done.

The Fund, in its findings and recommendations on the country’s “financial crisis management” and resolution framework, said there was “a need to clarify” how and when taxpayer monies can be used to rescue or bail-out a stricken financial institution and how this funding source is ultimately to be repaid.

Acknowledging that systemically important institutions, such as the commercial banks, should in the first instance be saved with internally-sourced funds, the IMF said there were circumstances in which taxpayer funding may be required. Government help was required within the past decade to twice bail-out Bank of The Bahamas, via two bond injections collectively worth $267m, as well as a rights issue that was almost entirely picked up by the Public Treasury.

“There may be circumstances in which public funding is required, such as in the case of banks with limited scope for bail-in due to most liabilities being in the form of deposits or where bail-in could potentially destabilise the financial system. In recognition of this, the authorities need to establish plans for how any public funding, if required, would be applied in the case of systemically important banks,” the IMF said.

“The resolution law in The Bahamas provides scope for public funding of systemically important banks. However, the public funding provisions in the law are in need of review and reform. In particular, there is a need to clarify the purposes for which public funds may be used, the pre-conditions for the use of public funds, the source of public funding (with any funding being sourced from the Government) and the means by which funding outlays can be repaid.

“There is a need for the authorities to develop a contingency plan for public funding, if it is required. The authorities have not as yet prepared a contingency plan of this nature. It is recommended that the Central Bank and Ministry of Finance jointly develop a contingency plan to provide guidance on when and how any public funding might be applied to resolve a domestic systemically important bank or other potentially systemically important bank,” the Fund added.

“It is suggested that the Central Bank and the Ministry of Finance develop a public funding contingency plan in parallel with the Central Bank’s development of the bank resolution manual. The contingency plan should be informed by the resolution guidance in the manual pertinent to the resolution of systemically important banks. The mission recommends that the Central Bank and the Ministry of Finance aim to complete the public funding contingency plan by about mid-2023, if possible.”

Elsewhere, the IMF urged that the powers granted to the Central Bank to appoint a statutory administrator to take over troubled licensees also be overhauled via reforms to the Banks and Trust Companies Regulation Act. In particular, it noted that the authority granted to the Central Bank to own a so-called “bridge bank” - an entity established to run an insolvent bank until a buyer can be found - creates a conflict with its role as regulator.

“There are some significant deficiencies in the Banks and Trust Companies Regulation Act that need to be addressed,” the IMF warned. “It is noted that the Act does not enable a statutory administrator to be appointed to a holding company or to a bank’s subsidiaries.

“The lack of this power would impede the ability to implement a group resolution where, for example, a bank is owned by a holding company, or is otherwise part of a group of companies, and where critical functions or services are performed by one or more of these entities. Given the increasing tendency for banks, especially large banks, to operate via group structures, often of a complex nature, the existing law is an impediment to effectively resolving a bank on a group basis.”

The IMF added that the Act, as well as the Central Bank of The Bahamas Act, was “also problematic in the statutory provisions relating to bridge banks and asset management companies”. It explained: “The Central Bank Act empowers the Central Bank to establish and own a bridge bank, while the Banks and Trust Companies Regulation Act refers to the ability of the Central Bank to licence a bridge bank.

“Standard international practice is for a bridge bank to be established by the resolution authority and licensed by the supervisory authority (Central Bank in both cases). The law in The Bahamas is consistent with these practices. However, standard international practice is for a bridge bank to be owned by the Government or by bailed-in creditors.

“It is inappropriate for a supervisory or resolution authority (Central Bank in this case) to be the owner of a bridge bank given that this creates conflicts between its supervisory and resolution functions and the ownership function. It also exacerbates moral hazard risk and poses a risk of a competitively non-neutral regulatory framework applying to the bridge bank to the potential disadvantage of peer banks,” the Fund added.

“Similar arguments apply in the case of an asset management company. It is reasonable that the Central Bank has the power, as resolution authority, to establish an asset management company if that is assessed as being justified on cost/benefit terms. However, the asset management company should not be owned by the Central Bank but, rather, by those whose funds are used to capitalise it - again, either bailed-in creditors or the Government.”

The IMF also urged that the Banks and Trust Companies Act be amended so that it allows a statutory administrator to immediately implement a rescue plan or strategy already devised by the Central Bank. “

“Absent the power for immediate implementation of the Central Bank;s resolution strategy, there is the risk of adverse market reaction and further losses being incurred as a result of a significant interval between the appointment of a statutory administrator and the announcement of the resolution option to be implemented,” the Fund warned.