Financial Interconnectedness in the Caribbean - IMF · Financial Interconnectedness in the...

Financial

Interconnectedness

in the Caribbean Challenges for Financial Stability

Elie Canetti & CRFP team

International Monetary Fund*

The 2014 High Level Caribbean Forum

October 2014

* The views expressed here are those of the authors and do not

necessarily represent those of the IMF or IMF policy.

Agenda

• Why Worry?

– Fragilities

– Potential Financial Contagion Channels

• Caribbean Regional Financial Project

• Conclusions

Agenda

• Why Worry?

– Fragilities

– Potential Financial Contagion Channels

• Caribbean Regional Financial Project

• Conclusions

Bank capital generally high (but falling in some jurisdictions)

0

5

10

15

20

25

30

The

Bahamas

Barbados Belize ECCU Guyana Haiti Jamaica Suriname Trinidad &

Tobago

Basel I and II minimum

Capital Adequacy Ratio by Year, 2007-13 (percent)

Source: National authorities.

Non-Performing loans elevated,

rising in some jurisdictions

0

2

4

6

8

10

12

14

16

18

20

ECCU Belize Bahamas,

The

Barbados Guyana Suriname Jamaica Trinidad &

Tobago

Haiti

2013

Caribbean NPLs, 2007-2013 Range (percent of total loans)

Sources: National authorities; and IMF staff calculations.

Exposures to public sector (Especially in countries with highly indebted sovereigns)

0

2

4

6

8

10

12

14

16

18

0 20 40 60 80 100 120 140 160

Cla

ims

on

pu

blic s

ecto

r (%

of

ban

kin

g

ass

ets

) 1

/

Debt (% of GDP)

Caribbean Banking Systems: Exposure to Sovereign Risk

SUR

JAM

BLZ

GUY BRB

BHS

HTI

ECCU

TTO

Sources: National authorities; and IMF staff calculations.

1/ Includes central, state, and local governments.

High market concentration

50

60

70

80

90

100Asia and the PacificLatin AmericaAfrica and the Middle EastEastern EuropeOther small states

Market Share of the Three Largest Banks (In percent of banking system assets)

Sources: National authorities; Bankscope; banks' annual reports; and IMF staff calculations.

The Caribbean has been dominated by

large insurers

0

1

2

3

4

5

6

7

8

CLICO, 2007 Guardian Sagicor 1/

Sources: Annual reports; and IMF staff estimates.

1/ Excludes Sagicor USA.

Total Assets, 2013 (percent of total Caribbean GDP)

Cross-border bank operations have led to strong

interconnectedness in the Caribbean banking

system

Belize

St. Lucia

St. Kitts &

Nevis

Dominica

Jamaica

The Bahamas

Antigua &

Barbuda

Grenada

Trinidad &

Tobago

Suriname

Guyana

Barbados

St. Vincent & the

Grens.

Haiti

Branch

Subsidiary

Hub

Cross-border bank operations have led to strong

interconnectedness in the Caribbean banking

system

Belize

St. Lucia

St. Kitts &

Nevis

Dominica

Jamaica

The Bahamas

Antigua &

Barbuda

Grenada

Trinidad &

Tobago

Suriname

Guyana

Barbados

St. Vincent & the

Grens.

Haiti

Branch

Subsidiary

Hub

Does the expanding non-traditional life segment

present risks to financial stability?

0

2

4

6

8

10

12

14

2008 2009 2010 2011 2012

Trinidad and Tobago, Life Insurance Sector (TTD billion)

Non-Traditional Business

Traditional Business

Source: Central Bank of Trinidad and Tobago Financial Stability Report, 2012.

Agenda

• Why Worry?

– Fragilities

– Potential Financial Contagion Channels

• Caribbean Regional Financial Project

• Conclusions

Are there adverse feedback loops?

Domestic Economic Slowdown

Sovereign Distress

Bank Distress/ High NPLs

Deterioration in Bank

Safety Nets

Bank Deleveraging

Are there adverse feedback loops?

Domestic Economic Slowdown

Sovereign Distress

Bank Distress/ High NPLs

Deterioration in Bank

Safety Nets

Bank Deleveraging

Non-bank SIFI

Hypothetical Contagion Channel

Via Regional Bank Group Structure

Step 0 (initial condition)

Assets Liabilities Assets Liabilities Assets Liabilities

+ + =

Capital Capital Capital

Assets Liabilities

Capital

Country A Country B Country C Consolidated Regional Group

Step 1: Losses in subsidiary imply losses in consolidated

capital of the regional group

Hypothetical Contagion Channel

Via Regional Bank Group Structure

Assets Liabilities Assets Liabilities Assets Liabilities

+ + =

Capital Capital Capital

Shock to Country A Country B Country C

Capital

Assets Liabilities

Shock to Consolidated Regional Group

Hypothetical Contagion Channel

Via Regional Bank Group Structure

Step 2: Subsidiary sheds assets. Is this delevering enough to restore

capital ratio of the group?

Assets Liabilities Assets Liabilities Assets Liabilities

+ + =Capital

Capital Capital

Capital

Deleveraging:

Country A Country B Country C Deleveraging: Consolidated Regional Group

Assets Liabilities

Step 3: If not, parent may decide to delever at other regional subsidiaries

to restore capital ratio of the group

Hypothetical Contagion Channel

Via Regional Bank Group Structure

Assets Liabilities Assets Liabilities Assets Liabilities

+ + =Capital Capital Capital

Deleveraging:

Country B

Deleveraging:

Country C Deleveraging: Consolidated Regional GroupCountry A

Contagion

Assets Liabilities

Capital

Contagion through “Common Owner”

Channel: simulation results

-12

-10

-8

-6

-4

-2

0

Shock to A Shock to B Shock to C Shock to D

Pro

jecte

d p

erc

en

t ch

an

ge

in

ba

nk

ing

cre

dit

Impact on A

Impact on B

Impact on C

Impact on D

Contagion Scenario 1/

Sources: National authorities; Bankscope; banks' annual reports; and IMF staff estimates.

1/ Deleveraging in response to losses of 15% of total loans in selected bank affiliates in the trigger country.

Agenda

• Why Worry?

– Fragilities

– Potential Financial Contagion Channels

• Caribbean Regional Financial Project

• Conclusions

The Caribbean Regional

Financial Project (CRFP) • Project Aims:

– Phase I – Analysis • Collect inter-sectoral exposure data

• Map financial interconnections

• Assess financial contagion risks

• Phase II - Policy • Crisis prevention and management

• Project status: – Data collection underway

– Expected Phase I completion: mid-2015

Note: Luxembourg's

importance as a conduit.

Interconnectedness

map example:

cross-border funds

Source: “Understanding Financial

Interconnectedness”, IMF, 10/4/10

Agenda

• Why Worry?

– Fragilities

– Potential Financial Contagion Channels

• Caribbean Regional Financial Project

• Conclusions

Broad Policy Priorities:

A Systemic Perspective

• Harmonize/strengthen prudential regulations and

standards

• Bring non-bank financial institutions into regulatory

perimeter

• Introduce consolidated supervision

• Enhance regional safety nets and resolution frameworks

• Identify and fill data gaps, including on interconnections

• Strengthen regional cooperation and information sharing

Challenge: How do we ensure that those

responsible for financial stability are

taking a high-level, systemic perspective?

Because when you’re looking at the

problem from ground level, you can’t

always see the dangers.