||Central Bank Of Barbados
The severe impact of the COVID-19 pandemic on macro-economic conditions shifted economic policy as the Government of Barbados focused its efforts on preserving lives and livelihoods. Revised targets under the Extended Fund Facility with the International Monetary Fund were achieved, but the effects of the virus on households and businesses elevated financial sector risks. However, given the pre-COVID strength of financial institutions and the regulatory support provided by the Central Bank and the Financial Services Commission, the system remains stable.
The financial sector continued to grow with commercial banks, which dominate the sector, contributing the most to asset growth. Despite the COVID-related challenges, banks remained well-capitalised and with substantial liquidity that will help them to cope with emerging risks. The capital of insurance companies, life and general, also improved, partly because lower operating costs enhanced their profitability.
The assets of long-term investors such as life insurance companies, mutual funds and pension funds also continued to grow, but the low interest rate environment and the unavailability of new investment instruments limited the investment options for these institutions.
Reduced economic activity, heightened unemployment and lower employment incomes influenced the inability of some borrowers to service their debt obligations. However, banks and other lending institutions, including credit unions, tempered the effects of the interruption in employment opportunities and business operations by offering moratoria on loan repayments and restructuring debt in some cases.
There is evidence of rising non-performing loans (NPLs), but these measures contained NPLs to levels that are well below expectations, given the jump in unemployment and decline in economic activity. To cushion potential negative effects on their balance sheets, banks increased their precautionary provisions on these loans without adverse effects on their capital adequacy. The pandemic has placed a new perspective on loan delinquency across the entire financial sector and new approaches to credit risk management of affected loans are needed.
With the tourism industry only expected to recover gradually, due to the uncertainty associated with the continued spread of the virus and the success of the global and local vaccination efforts, stress tests for the financial system assume greater significance. These tests suggest that even with extreme shocks, the system is still capable of withstanding substantial increases in NPLs or provisions that are associated with heightened credit risk. However, the Bank and the FSC will need to continue to monitor individual institutions.
Download the full report.
2020 Financial Stability Report.pdf