'Stability' concern on NIB's $100m COVID drawdown

Central Bank of the Bahamas.

Central Bank of the Bahamas.


Tribune Business Editor


The Central Bank has voiced confidence that COVID-19 will not produce a 'bad loan' blow-out to match the $1.2bn credit arrears peak caused by the 2008-2009 global recession.

The banking sector regulator, in its just-unveiled Financial Stability Report, argued that commercial lending institutions have sufficient capital reserves to absorb and deal with the pandemic's devastating impact on commercial, household and individual borrowers.

However, it warned that the National Insurance Board's (NIB) drawdown on its liquid assets to finance almost $100m in COVID-19 related unemployment benefit claims could create systemic issues within several years.

"While NIB is considered systemically important for financial institutions’ liquidity management practice, given its sizeable deposit holdings, there were no financial stability concerns pertaining to the Board’s operations over the course of the year," the Central Bank report said of its 2019 performance.

"Due to the effects of the 2020 COVID-19 pandemic, however, the resultant surge in claims on The Board has led to a drawdown in liquidity, which could have implications for financial stability over the next few years."

There was better news, though, when it came to the commercial banking industry's ability to absorb escalating borrower defaults now that COVID-19 loan deferral initiatives are being unwound and are coming to an end.

"With the onset of the COVID-19 pandemic, risks to the outlook have increased, with credit losses expected to become elevated," the Central Bank said. "However, such setbacks are expected to pace below the major write-offs recorded after the 2008 great recession, and to be absorbed without having destabilising effects, in view of the healthy excess capital retained by banks....

"Since March 2020, the system has faced substantial operational and financial challenges arising from the COVID-19 pandemic and related restrictions on Bahamian business operations.

"This latest episode has not materially altered the financial stability assessments. The exposed credit risks are estimated to be within manageable limits, either systemically or because of more than adequate loss absorbing buffers of lending institutions."

Combined non-performing loans, which is credit 90 days or more past due, and arrears representing credit between 30 and 90 days past due, peaked at $1.2bn - or one out of every five dollars in outstanding loans - following the 2008-2009 recession before starting to come down to more manageable levels in the hundreds of millions of dollars just prior to COVID-19.

Noting that banks, credit unions and other lenders had implemented loan deferral initiatives to help their borrower clients mitigate COVID-19's impact, the Central Bank added: "As deferments unwind, the impact on non-performing loans and capital are expected to become more pronounced, albeit with less negative effects than the accumulated impacts of the great recession, which started in 2008.

"However, banks will rely on higher average excess capital than credit unions. Greater oversight will be required in managing the credit union sector’s adjustment; albeit the improving prospects around distribution of COVID-19 vaccines could shorten the duration of stress experienced by these cooperatives."

Focusing on credit unions in more detail, the Central Bank added: "The narrow excess capital base leaves the sector more vulnerable to the effects of the COVID-19 pandemic. Losses are expected to deplete the sector’s capital to a greater extent than for banks.

"Concerns, however, are diminished by the enhanced safety net mechanisms in which these entities are being enrolled, and greater certainty around the access to vaccines for COVID-19 that will enable a strengthened performance for tourism over the course of the second half of 2021 and into 2022."


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