The financial system remained stable during 2019, supporting Barbados’ progress in addressing its macroeconomic imbalances. Commercial banks registered improved non-performing loans ratios and achieved modest profitability that enabled them to stay well-capitalised. Credit unions out-performed other deposit taking institutions in terms of asset growth, while mutual funds also increased their penetration. System-wide prudential indicators were generally favourable for the non-banking sector.
The evolution of these sectoral developments reflects the adaptation by financial institutions to the challenges created by a low interest rate environment, excess build-up of liquidity and limited investment opportunities after the 2018 domestic debt restructuring and the implementation of IFRS 9. However, these gains were undermined in the first half of 2020, as the impact of COVID-19 led to a deep recession and surging unemployment in the private sector.
To contain the fall in economic activity, Government has introduced programmes aimed at maintaining household expenditures and public sector employment. It is also attempting to accelerate its capital works program, and to incentivise a return to work in the private sector.
The Central Bank of Barbados (Bank), has adapted its regulatory policies to enable lending institutions to manage the disruption caused by the crisis and to make available, if necessary, low-cost liquidity support. At the same time, the financial industry has offered cash flow relief to borrowers via loan moratoria schemes. The moratoria, although temporary in nature, have so far helped to ameliorate cash flow challenges faced by borrowers without resulting in liquidity problems for financial institutions..
A prolonged deep recession could increase non-performing loans, depress profitability and reduce capital buffers. Returning the financial system to normalcy therefore, requires a sustained economic recovery that enables borrowers to resume loan payments, while encouraging lending institutions to provide new loans. The slower the recovery, the greater the challenge for businesses, individuals and financial institutions.
As a consequence, this Report, in addition to the historical review, focuses on anticipating the challenges for the financial sector. Consequently, the Central Bank and the FSC have again stress tested the financial system. The system should remain stable but some instutions may face difficulties with extreme shocks. These results will inform regulatory guidance, enabling the identification of those segments that may be challenged. These tests are indicative rather than strictly predictive, but they do suggest areas where regulators will need to further engage the industry, including, if necessary, requiring additional capital, tightening up on loan loss recognition and driving industry consolidation to ensure continued financial stability.