2018 was especially challenging for financial institutions. The resumption of sustainable growth continued to lag positive developments associated with the recovery of other key macroeconomic indicators, including international reserves, fiscal balance and public sector indebtedness. In these circumstances, asset growth was generally weak, except in the credit union and life insurance sectors. Credit demand remained tepid and the financial system continued to record substantial excess liquidity. However, non-performing loans remained higher than desired.
The Government of Barbados’ decision to restructure the domestic securities and loans in which these institutions had invested and the adoption of the IFRS 9 accounting standard by financial companies resulted in accounting losses for deposit takers, insurance companies, mutual funds and pension funds. These developments had an adverse impact on indicative indicators of financial stability, especially profitability and capital buffers.
The new securities were issued to financial institutions at par, with long maturities and very low coupons, particularly in the early years. However, in these circumstances, the IFRS standards require institutions to recognise net present value losses, resulting in the erosion of capital. Consistent with the expectations from pre-restructuring stress tests, the financial system was able to absorb these losses without the emergence of a systemic crisis and, by year-end, most financial institutions remained above their minimum regulatory capital or solvency requirements. Given different financial year-ends, some institutions were still in the process of evaluating the impact of these developments on their balance sheets. Over time, these losses are expected to be reversed as the new securities come to maturity, but stress tests demonstrate that, in the short term, the buffers to absorb substantial shocks have been reduced.
The cost of the restructuring on financial institutions emphasised the prior reliance placed on Government securities in what remains a shallow capital market. With commercial banks already offering very low rates on deposits, the restructuring reduced future investment income in an environment of fiscal consolidation and growing liquidity pools. The limited domestic investment opportunities therefore create the potential for increased interconnectedness among financial institutions.
In the interim, the Bank and the FSC have undertaken to work with any institutions that incurred regulatory breaches as a result of the debt restructuring. These regulators will discuss the implications of the stress tests with individual institutions. At the same time, deposit-taking institutions need to monitor closely the persistently high non-performing loan levels and the associated loan loss provisioning.