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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.