WASHINGTON, CMC – The International Monetary Fund (IMF) says the Central Bank of the Bahamas (CBOB) has made good progress in implementing recovery plans for the domestic systemically important banks (DSIBs).
It said that based on this progress, it is recommending that the CBOB provide the DSIBs with structured feedback on their initial recovery plans and, based on lessons learned from the pilot, provide to all banks and credit unions updated industry-wide guidance that sets out high-level expectations on the content for recovery plans.
“Engagement with home supervisory authorities of foreign-owned banks should also be strengthened to ensure that parent-bank recovery plans adequately address recovery actions for subsidiaries in the Bahamas.”
At the request of the CBOB, the Monetary and Capital Markets (MCM) Department of the IMF she provided a second Technical Assistance (TA) mission in virtual format from November 7–18, last year, following the first virtual mission between October 18 and November 8, the previous year.
In its report, the IMF advised the CBOB to develop a comprehensive strategy for resolving failed financial institutions.
“This would require the development of guidance on the selection of resolution options, including special reference to the systemically important banks (SIBs) and the step-by-step procedures for implementing the resolution process.”
It said that these procedures could be laid out in a resolution manual that would identify the critical steps in the resolution process, including the activation triggers for resolution, selection of the resolution strategy, step-by-step implementation of the resolution process, and communication protocols.
The IMF said that once a resolution manual has been developed, the CBOB is advised to prepare a framework for undertaking resolvability assessments and resolution planning for DSIBs. It said the framework would include a data template for obtaining the information needed to launch a resolvability assessment and prepare a resolution plan.
“The mission recommends starting with a pilot program involving one or two domestically owned DSIBs; then, drawing on lessons learned, extending the resolution planning process to the remaining DSIBs. The CBOB is encouraged to strengthen its engagement with the home resolution authorities of foreign-owned DSIBs to support their close cooperation in the CBOB’s preparation of resolution plans.”
It said that scaling up the Deposit Insurance Corporation (DIC) operations to cover banks and credit unions under the amended law needs reforms in various areas. The DIC’s governance should be strengthened by a proposed increase of the board’s size by appointing additional external directors, thereby reducing the dominance of ex officio directors.
The relations with other financial safety net members should be strengthened, giving the DIC access to more timely information on impending failures. The IMF said that design features of the DIC should be supported, including extending protection to US dollar-denominated deposits, increasing the target fund ratio, and establishing a backup emergency liquidity facility.
It said improvements are also needed in the reimbursement process, noting that while the bank resolution law was strengthened in 2020 and provides the CBOB with the essential resolution tools required for an effective resolution regime, some aspects of the law would benefit from review to better align with international principles and good practice.
“In particular, it would be desirable to consider amendments to the law to, among other matters, clarify and place appropriate safeguards on the use of public funding for bank resolution and clarify the ownership arrangements if a bridge bank or asset management company (AMC) is established.”
The IMF said that the credit union law is under review, and draft legislation has been prepared to strengthen resolution powers regarding credit unions.
“This is important given the lack of adequate powers to resolve nonviable credit unions. A further review of the draft bill is recommended to tailor it more precisely to the resolution needs applicable to the sector.
“The CBOB should further develop a sector-specific strategy to address financial stress in credit unions, including establishing a contingency plan for early intervention; a framework for implementing credit union mergers, where feasible; initiatives to help build financial viability and resilience in the sector; and strengthening preparedness for resolving nonviable credit unions. “
The IMF said that the domestic coordination on financial stability and crisis management matters would benefit from strengthening.
Under development, the Bahamas Financial Stability Council (BFSC) will be a non-statutory, inter-agency body established to monitor and coordinate policy for emerging risks to financial stability.
“All financial safety net players should be represented in the BFSC, including the MOF and the DIC, and it should have a broad-based overview of the financial system, including banks, credit unions, insurers, securities firms and markets, wealth management firms, and payment and settlement systems,” the IMF added.
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