The International Monetary Fund (IMF) has concluded that this country’s banks could be at risk.
The IMF came to that conclusion after completing its Financial Stability Assessment Program (FSAP) with T&T on August 31, 2020 and reported in its Financial System Stability Assessment (FSSA) report that the country’s banks might be facing potential vulnerabilities.
The report noted: “The banking system was well capitalized and liquid but exposed to sovereign risk and potential liquidity risks stemming from non-bank financial entities in the group on the eve of the COVID-19 crisis.”
The IMF has disclosed that FSAP work was mostly conducted prior to the COVID-19 crisis. It added that since the FSAP’s focus is on medium-term challenges and tail risks, its findings and recommendations for strengthening policy and institutional frameworks remain pertinent.
Just before the COVID-19 crisis, the IMF indicated that T&T’s financial system had weathered the 2016–18 economic slowdown but faced vulnerabilities. Aside from noting that the banking system was well capitalised and liquid, the IMF added that the general insurance sector had recovered from claims pertaining to climate-related events in the region.
It added that the Financial Action Task Force (FATF) had removed T&T from the list of jurisdictions under increased monitoring, following the country’s significant progress in enhancing its Anti Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework.
However, the IMF disclosed that T&T’s financial system, which is nearly twice the size of the economy and is of regional importance, still faced vulnerabilities before the COVID-19 crisis.
The IMF expressed: “These included the rise in household debt, a lack of supervisory independence and out-of-date regulatory frameworks, the sovereign-bank nexus and the absence of a macro-prudential toolkit and contagion risks between investment funds and banks.”
It went on to noted that growing regional exposures increased the potential for regional shocks from natural disasters (flooding, hurricanes, earthquakes) to propagate, while energy-related shocks could negatively impact growth and the fiscal position, with potential spillovers to the financial sector.
The supranational institution noted that while banks appear resilient, potential weaknesses arise from group risks and the COVID-19 shock. It revealed that illustrative stress tests were subsequently run to quantify the possible impact on bank solvency in adverse COVID-19 economic scenarios, noting that the “results suggest that under further strong deterioration of macro-financial conditions some banks could breach their minimum capital requirements.”
The results also indicated that liquidity risks could arise through group structures. The IMF highlighted that approximately 60 per cent of investment funds are issued at fixed prices, and investors expect both preservation of capital and instant access.
It argued that if the underlying value of a fund falls below the fixed price, these funds could quickly become depleted and “liquidity stress could propagate across financial conglomerate structures from fund issuers to banks in the same group.”
The IMF also contended that reform of the investment fund sector should be carefully sequenced to deliver a significant reduction in systemic risk by transitioning to floating-price products over time.
It highlighted: “Financial sector legislation and regulation have not kept pace with international best practice. The supervisors operate with guidelines in key areas, instead of binding powers, which limits their authority.”
The IMF put forward that financial supervisors should be given powers to issue regulations independently, and their independence and resources strengthened. It continued to note that up-to-date insurance legislation is expected to come into effect shortly and “a new dedicated legal framework for independent prudential regulation and supervision of credit unions is urgently required.