The In­ter­na­tion­al Mon­e­tary Fund (IMF) has con­clud­ed that this coun­try’s banks could be at risk.

The IMF came to that con­clu­sion af­ter com­plet­ing its Fi­nan­cial Sta­bil­i­ty As­sess­ment Pro­gram (FS­AP) with T&T on Au­gust 31, 2020 and re­port­ed in its Fi­nan­cial Sys­tem Sta­bil­i­ty As­sess­ment (FS­SA) re­port that the coun­try’s banks might be fac­ing po­ten­tial vul­ner­a­bil­i­ties.

The re­port not­ed: “The bank­ing sys­tem was well cap­i­tal­ized and liq­uid but ex­posed to sov­er­eign risk and po­ten­tial liq­uid­i­ty risks stem­ming from non-bank fi­nan­cial en­ti­ties in the group on the eve of the COVID-19 cri­sis.”

The IMF has dis­closed that FS­AP work was most­ly con­duct­ed pri­or to the COVID-19 cri­sis. It added that since the FS­AP’s fo­cus is on medi­um-term chal­lenges and tail risks, its find­ings and rec­om­men­da­tions for strength­en­ing pol­i­cy and in­sti­tu­tion­al frame­works re­main per­ti­nent.

Just be­fore the COVID-19 cri­sis, the IMF in­di­cat­ed that T&T’s fi­nan­cial sys­tem had weath­ered the 2016–18 eco­nom­ic slow­down but faced vul­ner­a­bil­i­ties. Aside from not­ing that the bank­ing sys­tem was well cap­i­talised and liq­uid, the IMF added that the gen­er­al in­sur­ance sec­tor had re­cov­ered from claims per­tain­ing to cli­mate-re­lat­ed events in the re­gion.

It added that the Fi­nan­cial Ac­tion Task Force (FATF) had re­moved T&T from the list of ju­ris­dic­tions un­der in­creased mon­i­tor­ing, fol­low­ing the coun­try’s sig­nif­i­cant progress in en­hanc­ing its An­ti Mon­ey Laun­der­ing/Com­bat­ing the Fi­nanc­ing of Ter­ror­ism (AML/CFT) frame­work.

How­ev­er, the IMF dis­closed that T&T’s fi­nan­cial sys­tem, which is near­ly twice the size of the econ­o­my and is of re­gion­al im­por­tance, still faced vul­ner­a­bil­i­ties be­fore the COVID-19 cri­sis.

The IMF ex­pressed: “These in­clud­ed the rise in house­hold debt, a lack of su­per­vi­so­ry in­de­pen­dence and out-of-date reg­u­la­to­ry frame­works, the sov­er­eign-bank nexus and the ab­sence of a macro-pru­den­tial toolk­it and con­ta­gion risks be­tween in­vest­ment funds and banks.”

It went on to not­ed that grow­ing re­gion­al ex­po­sures in­creased the po­ten­tial for re­gion­al shocks from nat­ur­al dis­as­ters (flood­ing, hur­ri­canes, earth­quakes) to prop­a­gate, while en­er­gy-re­lat­ed shocks could neg­a­tive­ly im­pact growth and the fis­cal po­si­tion, with po­ten­tial spillovers to the fi­nan­cial sec­tor.

The supra­na­tion­al in­sti­tu­tion not­ed that while banks ap­pear re­silient, po­ten­tial weak­ness­es arise from group risks and the COVID-19 shock. It re­vealed that il­lus­tra­tive stress tests were sub­se­quent­ly run to quan­ti­fy the pos­si­ble im­pact on bank sol­ven­cy in ad­verse COVID-19 eco­nom­ic sce­nar­ios, not­ing that the “re­sults sug­gest that un­der fur­ther strong de­te­ri­o­ra­tion of macro-fi­nan­cial con­di­tions some banks could breach their min­i­mum cap­i­tal re­quire­ments.”

The re­sults al­so in­di­cat­ed that liq­uid­i­ty risks could arise through group struc­tures. The IMF high­light­ed that ap­prox­i­mate­ly 60 per cent of in­vest­ment funds are is­sued at fixed prices, and in­vestors ex­pect both preser­va­tion of cap­i­tal and in­stant ac­cess.

It ar­gued that if the un­der­ly­ing val­ue of a fund falls be­low the fixed price, these funds could quick­ly be­come de­plet­ed and “liq­uid­i­ty stress could prop­a­gate across fi­nan­cial con­glom­er­ate struc­tures from fund is­suers to banks in the same group.”

The IMF al­so con­tend­ed that re­form of the in­vest­ment fund sec­tor should be care­ful­ly se­quenced to de­liv­er a sig­nif­i­cant re­duc­tion in sys­temic risk by tran­si­tion­ing to float­ing-price prod­ucts over time.

It high­light­ed: “Fi­nan­cial sec­tor leg­is­la­tion and reg­u­la­tion have not kept pace with in­ter­na­tion­al best prac­tice. The su­per­vi­sors op­er­ate with guide­lines in key ar­eas, in­stead of bind­ing pow­ers, which lim­its their au­thor­i­ty.”

The IMF put for­ward that fi­nan­cial su­per­vi­sors should be giv­en pow­ers to is­sue reg­u­la­tions in­de­pen­dent­ly, and their in­de­pen­dence and re­sources strength­ened. It con­tin­ued to note that up-to-date in­sur­ance leg­is­la­tion is ex­pect­ed to come in­to ef­fect short­ly and “a new ded­i­cat­ed le­gal frame­work for in­de­pen­dent pru­den­tial reg­u­la­tion and su­per­vi­sion of cred­it unions is ur­gent­ly re­quired.