Government’s domestic debt restructuring did not trigger economic destabilization but it did weaken the country’s financial stability, among other “wide-ranging” effects, the Central Bank’s chief economic researcher has reported
This analysis from Director of Research and Economic Analysis at the Central Bank of Barbados Anton Belgrave pointed to an overall decline in the value of assets of financial institutions in 2018 as a result of the debt restructuring.
“We did find that our financial stability has been weakened by the loss of profitability stemming from the restructuring.”
Belgrave’s comments came as he gave an overview of the 2018 Financial Stability Report at the Central Bank’s 39th Annual Review Seminar at the Hilton Resort on Wednesday.
He added: “One of the over-arching themes of the document is the impact of the domestic debt restructuring on our financial system and it will hopefully be a once in a lifetime event, but as you can see… it had wide-ranging repercussions and yet the financial system still remained stable.”
The restructuring also affected the stability of the financial system last with the adoption of the new IFRS 9 accounting standard by financial companies.
Explaining the extent of the impact that the restructuring had on the financial system, Belgrave said it was “mainly driven by accounting valuation issues, because the newer bonds had a longer maturity and lower coupons – the net present value of the bonds, in an accounting sense, was lower than what they replaced”.
He pointed out that immediately following the debt restructuring last year there was a “clear drop in what we call our buffers (capital adequacy ratio)”.
He said: “That has fallen from about 17 to about 13.9 per cent, and that is a significant fall in the context.
“This was driven by the valuation issue, the placement bonds had a lesser accounting value and the loss in that value had to be reflected somewhere.
“It was reflected in terms of the retained earnings of the bank and hence the capital of the banks fell.
“This has been quite a traumatic event for the banking system.”
Singling out commercial banks, Belgrave said as a result of the debt restructuring that segment of the financial system recorded an overall loss of about -0.2 per cent in returns on profit.
“This is obviously another area where the banks will be looking to recover from the losses from the debt restructuring,” he said.
The report, which took just over four months to compile, showed that while there was a slight fall in the value of the assets of commercial banks, that segment of the financial system remained the most dominant in Barbados with just over $12.77 billion in assets.
This was followed by insurance companies, ($4.2 billion), which was an increase of just under $1 billion in assets; and credit unions, which witnessed an increase of about $2 million to reach $2.42 billion in assets as at the end of last year.
Other institutions include pension funds ($2.35 billion); mutual funds ($2.13 billion); and finance and trust companies, which saw a decline in assets from $1.57 billion in 2017 to reach $1.02 billion last year.
“During 2018, the value of assets fell about 2.8 per cent. This might not seem like much, but for a financial system that is fairly significant,” said Belgrave.
Non-performing loans were lower when compared to 2017, but remained higher than desired.
But Belgrave said despite all of the highlighted challenges the financial system remained stable, adding that there were “no indicators of any systemic events on the horizon that would cause any immediate concern”.
At the end of last year the country had a total estimated insurable deposits of just over $9.6 billion, with commercial banks accounting for just over $8.8 billion of that total.