Central Bank: NIB liquidity drawdown could have long-term implications

While the latest Financial Stability Report, published recently by The Central Bank of The Bahamas (CBOB), maintains that the domestic financial system remains stable, it explained that the drawdown in liquidity by the National Insurance Board (NIB) during the coarse of the COVID-19 pandemic could later lead to implications for financial stability.

The report, which covers financial sector developments and is guided by information from the CBOB, Securities Commission of The Bahamas and the Insurance Commission of The Bahamas, explains that NIB is “considered systemically important for financial institutions’ liquidity management practices, given its sizeable deposit holdings”.

The report explains that while there are future concerns over the impact COVID-19 has had on NIB, “there were no financial stability concerns pertaining to the board’s operations over the course of the year”.

“Due to the effects of the COVID-19 pandemic, however, the resultant surge in claims on the board has led to a drawdown in liquidity, which could have implications for financial stability over the next few years,” the report states.

The report notes, though, that currently the domestic financial system is “stable and sound”, as the CBOB implements policies and reforms to mitigate any risks to supervised financial institutions.

“Against this backdrop, the bank will sustain efforts to upgrade the risk-based supervisory framework Basel III for banks and trust companies,” the report states.

“These measures entail an emphasis on increased buffers, among other risks, over the course of the business cycle for domestic systemically important banks (D-SIBs) and maturity mismatches. In addition, they will improve oversight frameworks for the assessment and suppression of risks related to money laundering, terrorism financing, proliferation and other financial crimes, ensuring internationally compliant systems within supervised financial institutions. Further, the bank will continue to strengthen the prudential oversight for domestic credit unions, inclusive of transitioning to membership in the deposit insurance scheme.”

The report explains that COVID-19 has not materially altered the financial stability assessments, while credit risks are said to be within manageable limits, “either systemically or because of more than adequate loss absorbing buffers of lending institutions”.

And while the impact of non-performing loans (NPLs) is expected to be felt more acutely in 2021, the report explains that their impact will be less noticeable than during the Great Recession of 2008.

“While there is expected to be some expansion in NPLs into 2021, as COVID-19-related loan payment deferral schemes conclude, banks’ capital and provisioning levels are still projected to be adequate, with losses for banks likely to peak below the magnitude that accrued after the 2008 recession,” the report states.

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