Prudential regulationi Relationship with the prudential regulator
The CBB was in the process of implementing the Basel II Capital Framework when the global financial crisis emerged in 2007, and several later enhancements to the Framework were made. The implementation road map has been reviewed, and focus was initially on the implementation of Pillar II, which emphasises the importance of strong regulatory oversight and strong industry risk-management practices. The CBB's implementation of the Framework has identified three phases, and it is continuing with the implementation of Basel II and Basel III.
The goals of the Bank Supervision Department are facilitated through both on-site and off-site inspections of all licensed financial institutions. During an on-site inspection, bank examiners review the major areas of risk for the institution. The process includes assessments of liquidity, and operational and other kinds of risks, fully recognising that the major risk on a bank's balance sheet in Barbados is often in the area of lending. It is also recognised that any serious causes of banking problems are directly related to poor credit standards for borrowers, poor credit administration, and a lack of attention by the bank to changes in the economy and other factors that may affect borrowers' ability to repay a debt.
Bank examiners also review the strength of corporate governance within banks. Under scrutiny are the structures and relationships through which the objectives of an entity are met, as well as a full assessment of the role of the board of directors, management of the entity, and the strategies, policies and practices that have been implemented. Inspections will also allow for an assessment of the internal control systems of the bank, a factor that is clearly critical for effective bank management and sound operations. Arising from the assessments undertaken, the examiner will determine areas of deficiencies. A report is prepared detailing the condition of the bank's operations and, where necessary, recommendations are made for improvement. The report is ultimately provided to the institution's board of directors.ii Management of banks
Management of Barbadian banks is governed by the general rules that apply to the prudence and skills criteria of the business director and, by extension, of the corporate enterprise. Typically, banks will also have an audit committee, a risk committee, an investment committee and a human resources committee, depending on the nature of the business areas, risk profile and size of the bank. They are required to have scheduled quarterly board meetings at which reports on the various committees will be considered in detail. The audit committee will often be expanded into or combined with a risk policy committee. At its quarterly meetings, the board will also typically receive a report on capital adequacy ratios, a financial report, a credit portfolio report, a new and large credit review, a watch list of non-performing loans, and a Treasury interbank and country limits review. Other matters will also be considered, such as a litigation review.iii Regulatory capital and liquidity
By virtue of the FIA, a licence is not issued to a commercial bank unless (in the case of a Barbados bank) the stated capital or (in the case of a foreign bank) the assigned capital is at least Bd$4 million or such other amount as the CBB may in any particular case determine. Banks must not have a capital adequacy ratio of less than the percentage as may be prescribed by the CBB and must be calculated as prescribed. A bank is also required to have a reserve fund, and must transfer a sum of not less than 25 per cent of its net profits, prior to declaring dividends, each year whenever the amount in the reserve fund is less than its issued and paid-up capital. However, this stipulation will not apply to a bank that has satisfied the CBB that its aggregate reserves are adequate in relation to its business. The CBB may also require banks to maintain reserves for bad and doubtful debts of an amount that the CBB deems adequate. A bank may only pay an interim dividend out of the profits of previous years or out of the reserves of previous years.
Under the IFSA and the amended FIA, a licence for an international bank or FCB may be issued to a company that accepts third-party deposits if the stated or assigned capital of the company is at least Bd$4 million and, furthermore, does not accept third-party deposits if the stated or assigned capital of the company is at least Bd$1 million. The CBB also reserves the right determine a different amount of stated or assigned capital in any particular case.
Additionally, a bank must always maintain a capital adequacy ratio of less than the prescribed percentage, which is currently 8 per cent. Assigned capital in this context refers to the portion of the capital of a company represented by such unencumbered assets as are approved by the CBB and specifically assigned by the company to its local branch operations. A bank is mandated to maintain a reserve fund and, out of its net profits each year and before any dividend is paid, to transfer to the fund a sum equal to not less than 25 per cent of those profits wherever the amount of the reserve fund is less than the stated capital of the licence, or indeed such other sum as is prescribed. Yet again, this requirement will not apply to a licensee that has shown to the satisfaction of the CBB that its stated capital and aggregate reserves are adequate in relation to its business.
The CBB had previously indicated its intention to adopt the Basel II methodology for the calculation of capital adequacy in 2009 for licensees regulated under the FIA and the IFSA. As part of the process, the CBB issued the first round of guidance and reporting forms to the banking industry for comments and feedback in 2009. In view of lessons learned from the 2007–2009 financial crisis and the revisions to Basel II, and the emergence of Basel III, the CBB has deemed it prudent to adjust its approach to the implementation of Basel II.
Papers issued by the Basel Committee on Banking Supervision (BCBS) and other entities that opined on the financial crisis have focused on the need to improve risk-management processes and techniques within the banking industry and to strengthen the regulatory framework. The importance of Pillar II of the Framework has therefore assumed special significance. In particular, 'Enhancements to the Basel II Framework', issued by the BCBS in July 2009, considered several of the risk-management weaknesses that were revealed during the financial crisis, and reinforced the ways in which banks should manage and mitigate risks identified through the Pillar II Internal Capital Adequacy Assessment Process (ICAAP). The CBB has issued a guidance note to banks indicating its expectation that they will improve and strengthen their risk-management processes. It indicated that the draft ICAAP guidance that was issued for comments should be used as a guide by banks.
The CBB is therefore using a phased approach to the implementation. It is focusing initially on the qualitative aspects of Pillar II and, in that regard, on gaining a better understanding of the risk profiles of licensees. It has proposed an implementation of Basel II in three phases. Within the first phase, the emphasis will be on strengthening the qualitative aspects of Pillar II, while the second phase will take into account the implementation of the Market Risk Amendment. It is proposed that Pillars I and III will be implemented in the third phase.
Phase I recognises the need to strengthen compliance with Pillar II by re-examining important risks and factors not covered under Pillar I, because Pillar II requires that banks assess the capital that is required to support all their material risks. Banks are therefore required to explore weaknesses and gaps in their risk-management framework, and to use better risk-management techniques in monitoring and managing risks. The procedures used to remedy these areas are generally subsumed under the nomenclature of an ICAAP, namely a process to more adequately link capital allocation to the risks inherent within a bank's operations. During Phase II, the CBB proposes implementing the Market Risk Amendment. In this regard, banks will be required to implement a standardised approach for the calculation of the market risk capital charge. The CBB will consider use of the more advanced internal models approach. The third phase will involve implementation of Pillars I and III.
The CBB's Pillar III reinforces Pillars I and II by way of increased disclosure requirements that impose market discipline on financial institutions. Banks will be required to make core and supplementary disclosures, which will allow market participants to assess important pieces of information on the scope of application, capital, risk exposures, risk assessment processes, and therefore the capital adequacy, of the institution. Banks will also be required to publish information on their approach to risk management, thereby raising the overall standards of transparency within the jurisdiction.
The CBB is also making amendments to strengthen the framework for Basel III. Hence, it is conducting an assessment and impact study of the additional requirements introduced under Basel III, such as liquidity requirements and the redefinition of regulatory capital. It will therefore amend the plan as deemed necessary. It also recognises that further changes to the framework may be required, and has undertaken to consider the materiality of those updates on a case-by-case basis to determine their impact and applicability to the implementation process. It has assured the banking industry that it will be kept informed of any updates to the road map, and that the CBB will seek feedback and comments from the industry.iv Recovery and resolution
The procedures for the resolution of failed banks are well documented through the interplay of the banking legislation and the modern corporate legislation that Barbados borrows from the Ontario and Delaware statutes. The jurisdiction has also benefited from very effective regulation and, as a result, has had no bank failures. In the case of the global Bank of Credit and Commerce International collapse in the 1990s, Barbados as a jurisdiction put together a rescue plan, as a result of which no depositors suffered, and the book of business was taken over by another banking institution.