Barbados’ financial system remained stable throughout 2022 and remained so up to the end of the third quarter of 2023, despite global economic and political turmoil. The domestic financial sector retained its capability to serve as a conduit between savers and investors while also providing clients with a range of credit, investment and payment options. This stability was supported by steady and broad-based economic growth, improved labour market conditions, and a robust payments system in which electronic payment methods are playing an ever-greater role.
Financial stability was largely sustained by improved domestic economic conditions. The majority of the sector’s financial stability metrics improved, including asset growth, credit quality, liquidity, and capital adequacy. Profitability picked up for banks and finance companies in 2022, but was virtually unchanged for credit unions over 2022, but dipped for the year ended March 2023.
In particular, the credit quality of deposit-taking institutions (DTIs) improved over the review period, albeit at varying rates. Non-performing loans as a percent of total loans declined for each of the three DTI segments. However, bad debt provisioning as at March 2023 was lower for banks, but increased for credit unions and finance companies, as each DTI adjusted its provisioning to reflect its perceived credit risk.
Stress test results were not markedly different from the 2021 Financial Stability Report. The credit risk stress tests showed that the DTIs’ resilience to delinquency and provisioning shocks was largely on par with the results produced one year ago, with the DTI’s generally well positioned to absorb significant shocks. Similarly, the stress tests proved that the capital levels were adequate, and in the case of commercial banks, extremely robust up to the end of March 2023. However, based on stress test results, the resilience of the general insurance industry was slightly lower, as greater underwriting expenses and higher claims provisioning resulted in a loss and reduced capital in 2022. The life insurance industry’s stability indicators improved and resilience to shocks remained similar to that of 2021.
Other metrics of financial health remained mainly positive. Exchange rate risk appears to be minimal given the currency composition of the aggregate banking and finance companies’ net foreign currency open positions, and the level of these positions as a percent of their respective regulatory capital bases. There was a general improvement in the liquidity positions of DTIs, as liquidity remained in abundance for the financial system as a whole. For both banks and finance companies, profitability as measured by the annual return on average assets increased in 2022 and held steady into the first quarter of 2023. Credit unions’ annual return on average assets in 2022 was virtually unchanged relative to the prior period, but declined slightly during the year ended March 2023. The capital adequacy ratios of each segment of DTIs grew.
The domestic financial system, while largely insulated from international interest rates, was not totally immune from the impact of rising global interest rates. By the end of March 2023, the Federal Reserve’s policy rate reached levels last seen in 2007, triggering corresponding sharp rises in emerging and developing country interest rates. With significant exposure to international markets, the value of Barbadian-based mutual and pension fund assets weakened modestly in 2022, due to these policy-driven hikes in global interest rates. Even with these reductions however, portfolio losses remained fairly well contained.
Gross financial sector assets expanded on the strength of asset growth at deposit-taking institutions (DTIs). The commercial banking sector dominated the financial landscape, and increased its share of the sector by roughly 1 percent in 2022. Other DTIs also experienced asset growth. Conversely, mutual funds, occupational pension plans and the insurance sector had a collectively smaller share of assets. While there were slight changes in the relative share of assets in the domestic financial sector, system-wide stability was maintained.
The structural shift to electronic payments accelerated in 2022 and the first quarter of 2023 due to the surging demand for convenient payment methods. The value of domestic credit card payments jumped by around a third, as households’ demand for dining and services improved. At the same time, electronic transfers exceeded cheque clearances for the first time at the Barbados Automated Clearing House (BACHI), a stark reversal of the 2015 position when nearly 90 percent of the value of transactions being cleared were cheque-based.
The local financial system was largely unimpaired by the challenging international macro-financial environment. The failures of three mid-sized US banks and one large Swiss-based bank in early 2023 did not have a detectable impact on Barbados’ financial system. U.S. and Swiss regulators moved quickly to contain any further fallout, limiting the impact of this episode and addressing contagion fears. Furthermore, during the review period, the local deposit-taking financial sector as a whole did not experience a severe shock from the rising international interest rates caused by monetary tightening in advanced economies
Enhanced risk identification featured prominently in this report. The Financial Oversight Management Committee (FOMC) identified the following areas as key risks to Barbados’ financial stability: (1) cyber-attacks; (2) the widening US-Barbados interest rate spread; (3) the absence of deposit insurance for credit unions; (4) elevated non-performing loan (NPL) ratios of deposit-taking institutions; (5) the introduction of the 15 percent global corporate minimum tax rate in 2024; and (6) climate change and its transitional and physical risks to the financial system.
The above risks differ in terms of immediacy, intensity and persistence and require differing policy responses. Some, such as climate-shocks of a more medium to long-term nature; Others such as cyber-risk, are difficult to quantify but are every present in any connected modern financial system. Based on quantitative simulations, global experiences, international guidelines and knowledge of exposures in the areas the FOMC will work towards deepening our understanding over these identified risk areas. Furthermore, the FOMC will be seeking to counter these risks where possible, or put safeguards in place to withstand the materialisation of risks that cannot be avoided.