FTC notices exposure risk

Barbados’ two chief regulators of the financial sector have taken note that in 2020, insurance companies and credit unions faced increased exposure to risks from commercial banks because both segments increased the level of their deposits in these institutions.

Addressing the issue of contagion, the Central Bank of Barbados and the Financial Services Commission (FSC) who produced the recently released 2020 Financial Stability Report on the impact of contagion in the system, noted: “Financial system contagion can occur as failure in one section of the financial system can spread through its interconnected firms, thus creating disturbances that have the potential to adversely impact financial stability.

“Contagion risk arises through both direct and indirect linkages. Exposures in direct linkages occur when the financial balance sheets are exposed via interbank markets and non-bank financial institutions’ connection failures.”

According to the regulators, they used a network analysis to help them assess other financial institutions’ exposure to commercial banks, finance, and trust companies, relative to their assets.

“Given their centrality in the payments system, commercial banks remained the main source of interconnectivity in the domestic financial sector, as the financial institutions held substantial assets in the banking system in 2020,” the FSC and Central Bank disclosed.

However, the regulators stressed that “The exposure to commercial banks was reduced from the previous year, as all financial institutions held smaller balances except credit unions.

The credit union sector became the subgroup most exposed to the commercial banks, as they increased their deposits, while the finance and trust companies significantly reduced their deposit holdings compared to 2019.

“As for deposit-taking finance and trust companies, both insurance companies and credit unions increased their exposures through higher deposits with these institutions.”

Meanwhile, in the report’s commentary on Barbados’ financial system, the regulators disclosed that during 2020, assets in the financial system expanded by three per cent, to represent 285 per cent of GDP.

In addition, asset growth was recorded in all segments of the financial system, except for finance and trust companies.

Those deposit taking institutions recorded a marginal decline for the year. On the other hand, commercial banks and credit unions, continued to lead the increase in assets, with larger cash balances stemming from higher deposits and weak demand for credit.

(IMC1)