IMF urges FSC to watch out for troubled banks
The international Monetary Fund his charging the Financial Services Commission to be hawkish on local financial institution so that depositors do not relive TCI Bank and the British Atlantic Financial Service nightmares.
The IMF issued the warning through its report done on the financial conditions of the Turks and Caicos following its April 14 to 27, 2015 visit. The international funding agency said that while the TCI financial sector is showing signs of recovery from the 2008 global economic collapse, it is still on shaky grounds.
It said one of the peg backs of the banks’ progress is the high level of Non Performing Loans (NPL) ratios and their general credit growth remains in the red. It said though that the high levels of capital being injected into the TCI should be able to cushion them from shocks.
“The financial system is been gradually recovering from the 2008 economic crisis. Banks continue to show high levels of Non Performing Loan (NPL) ratios and credit growth remains negative. But high levels of capital buffers should help them withstanding a range of adverse shocks,” the IMF said in a news release.
It said that the FSC should ensure that, among other things, quality of asset and liquidity of the institutions.
“While the economy is recovering, the FSC should remain vigilant and monitor asset quality and liquidity conditions, and ensure the capital buffers remain,” the IMF further noted.
It said that the domestic insurance sector is small and do not appear to pose systemic risks. The offshore insurance sector has little link to the domestic financial system. It said though that small depositors and policyholders suffered substantially from a lack of standard safety net tools, including deposit insurance.
“The territory does not have lender of last resort (namely, a central bank) or a deposit insurance scheme (DIS). Without government support, small depositors of a systemically important indigenous bank, failed in 2010, lost significant amount. Policyholders of a failed local insurance company (originally a branch of failed Trinidad-and-Tobago-based CL Financial) are expected to lose a considerable sum as well,” the agency said.
It said that at this time, the local government is not ready to introduce a deposit insurance scheme, saying that such a scheme can function properly when its two preconditions - a strong supervisory framework and a special resolution regime for banks that are not viable – are met.
“While progress has been made in the first area, more needs to be done in the second area. More specifically, enhance regulation and supervision. The FSC has made notable progress since the previous IMF assessment in 2003 and now has better governance, ample financial resources, and supervisory power.
“Nonetheless, there remains a need for modernizing key legislations urgently, strengthening the Board’s oversight, filling key senior management positions, implementing supervisory guidelines, and more intrusively examining the nature of risks.
“Introduce a Special Bank Resolution Regime; such a regime empowers the FSC to directly take a whole array of actions to deal with non-viable banks before they become insolvent. It includes power to remove and replace senior managers, restructure or wind down the bank, establishing a bridge bank, and transfer the bank’s assets and liabilities.
“Nonetheless, there are other tools that can protect small depositors and policyholders, and these should be introduced urgently.”
The IMF urged that when an institution is liquidated, preference be provided for smaller depositors and policyholders before considering better-off creditors.
“The Company Ordinance should be modified to pay out small depositors and insurance policyholders ahead of larger and wealthier creditors when a financial institution is liquidated.
"For banks, create a Special Purpose Reserve Fund that holds a portion of total customer deposits in high quality liquid assets, earmarked exclusively for protecting small depositors in case of a failure of the particular bank. For insurers, the new draft domestic Insurance Ordinance will require setting up a statutory segregated trust in TCI, which is dedicated to pay out policyholder claims,” the IMF noted.
It said that coordination with various stakeholders is important for the FSC, adding that the TCI should create a Financial Stability Committee, including the representatives from the Governor’s office, the Ministry of Finance, and the FSC, to ensure what it described as interagency coordination in both regular and crisis periods.
The international money lending agency argued that since TCI’s financial system is dominated by foreign-owned institutions, there should be adequate cross-border collaboration with relevant supervisors. Communication and consultation with the industry need to be formalized to facilitate dialogues.
The IMF mission to the TCI, headed by Hiroko Oura, was to conduct a financial stability assessment under the IMF’s Financial Sector Assessment Program (FSAP).
The group met with His Excellency Governor Peter Beckingham; the FSC’s Managing Director Kevin Higgins, Minister of Finance, Trade, and Investment Hon. Washington Misick; Chief Financial Officer Stephen Turnbull; Permanent Secretary for Finance Sonia Thomas-Been; senior officials from the FSC and other agencies, as well as representatives of financial institutions and professional bodies.
The IMF issued the warning through its report done on the financial conditions of the Turks and Caicos following its April 14 to 27, 2015 visit. The international funding agency said that while the TCI financial sector is showing signs of recovery from the 2008 global economic collapse, it is still on shaky grounds.
It said one of the peg backs of the banks’ progress is the high level of Non Performing Loans (NPL) ratios and their general credit growth remains in the red. It said though that the high levels of capital being injected into the TCI should be able to cushion them from shocks.
“The financial system is been gradually recovering from the 2008 economic crisis. Banks continue to show high levels of Non Performing Loan (NPL) ratios and credit growth remains negative. But high levels of capital buffers should help them withstanding a range of adverse shocks,” the IMF said in a news release.
It said that the FSC should ensure that, among other things, quality of asset and liquidity of the institutions.
“While the economy is recovering, the FSC should remain vigilant and monitor asset quality and liquidity conditions, and ensure the capital buffers remain,” the IMF further noted.
It said that the domestic insurance sector is small and do not appear to pose systemic risks. The offshore insurance sector has little link to the domestic financial system. It said though that small depositors and policyholders suffered substantially from a lack of standard safety net tools, including deposit insurance.
“The territory does not have lender of last resort (namely, a central bank) or a deposit insurance scheme (DIS). Without government support, small depositors of a systemically important indigenous bank, failed in 2010, lost significant amount. Policyholders of a failed local insurance company (originally a branch of failed Trinidad-and-Tobago-based CL Financial) are expected to lose a considerable sum as well,” the agency said.
It said that at this time, the local government is not ready to introduce a deposit insurance scheme, saying that such a scheme can function properly when its two preconditions - a strong supervisory framework and a special resolution regime for banks that are not viable – are met.
“While progress has been made in the first area, more needs to be done in the second area. More specifically, enhance regulation and supervision. The FSC has made notable progress since the previous IMF assessment in 2003 and now has better governance, ample financial resources, and supervisory power.
“Nonetheless, there remains a need for modernizing key legislations urgently, strengthening the Board’s oversight, filling key senior management positions, implementing supervisory guidelines, and more intrusively examining the nature of risks.
“Introduce a Special Bank Resolution Regime; such a regime empowers the FSC to directly take a whole array of actions to deal with non-viable banks before they become insolvent. It includes power to remove and replace senior managers, restructure or wind down the bank, establishing a bridge bank, and transfer the bank’s assets and liabilities.
“Nonetheless, there are other tools that can protect small depositors and policyholders, and these should be introduced urgently.”
The IMF urged that when an institution is liquidated, preference be provided for smaller depositors and policyholders before considering better-off creditors.
“The Company Ordinance should be modified to pay out small depositors and insurance policyholders ahead of larger and wealthier creditors when a financial institution is liquidated.
"For banks, create a Special Purpose Reserve Fund that holds a portion of total customer deposits in high quality liquid assets, earmarked exclusively for protecting small depositors in case of a failure of the particular bank. For insurers, the new draft domestic Insurance Ordinance will require setting up a statutory segregated trust in TCI, which is dedicated to pay out policyholder claims,” the IMF noted.
It said that coordination with various stakeholders is important for the FSC, adding that the TCI should create a Financial Stability Committee, including the representatives from the Governor’s office, the Ministry of Finance, and the FSC, to ensure what it described as interagency coordination in both regular and crisis periods.
The international money lending agency argued that since TCI’s financial system is dominated by foreign-owned institutions, there should be adequate cross-border collaboration with relevant supervisors. Communication and consultation with the industry need to be formalized to facilitate dialogues.
The IMF mission to the TCI, headed by Hiroko Oura, was to conduct a financial stability assessment under the IMF’s Financial Sector Assessment Program (FSAP).
The group met with His Excellency Governor Peter Beckingham; the FSC’s Managing Director Kevin Higgins, Minister of Finance, Trade, and Investment Hon. Washington Misick; Chief Financial Officer Stephen Turnbull; Permanent Secretary for Finance Sonia Thomas-Been; senior officials from the FSC and other agencies, as well as representatives of financial institutions and professional bodies.