In its just-published Financial Stability Report June 2015 for the six months ending June 2015, The Central Bank of The Bahamas (CBOB) reported that the Bahamian banking system stood up well overall to stress testing. However, the bank also reported that at the current levels, the capital adequacy ratio (CAR) is slightly below 30 percent. Due to a stressed loan portfolio, this will negatively impact the banks' bottom line, thus indicating that should NPLs (non-performing loans) reach the 200 percent shock level, there will be a need to inject capital into the system, with the lowest ratio reaching a low of 14.4 percent, just slightly above the 14 percent trigger, but in breach of the 17 percent target ratio, the required level.
The Central Bank reported that "prudential supervision" required continuous assessment of its licensees' credit, interest rate and liquidity risks resilience via stress testing models.
"For the first half of 2015, the results showed that the overall impact of the banking system's capital levels--based on the application of credit and the interest rate risk stress tests--was minimal, as healthy capital buffers were maintained. In addition, robust levels of liquidity were sustained," the bank said.
Credit risk
The bank explained that stress testing for credit risks simulates the impact on earnings and capital adequacy of shocks - improvements or deteriorations - to the level of non-performing loans and provisioning levels, having regard to potential shortfalls against the 14 percent trigger and 17 percent target capital adequacy ratios.
"Since the last update, the provisioning assumption for mortgages has changed, because the 50 percent additional haircut taken for mortgage property values, due to the subdued economic environment, is no longer assumed, given that the level of provisions has increased to more than 50 percent for this sector of loans.
"In conducting the stressed scenarios and using shocks to the NPL rates of 100, 150 and 200 percent for forecasted years 2015 through 2017, the level of deterioration in the non-performing loan book continued in 2015, but is anticipated to improve slightly in 2016 and 2017," the bank reported.
At forecasted levels over the three-year period, NPLs remain at the $1 billion mark in 2015, but real economic indicators suggest that in the following two years, levels should drop below the $1 million mark. At shocked levels, NPLs increase within the $1.7 billion to $2.0 billion range (at 100 percent); $2.2 billion to $2.6 billion range (at 150 percent) and $2.6 billion to $3.1 billion (at 200 percent).
Click here to read more at The Nassau Guardian
