48120




LATINAMERICA THE CARIBBEANREGIONVICEPRESIDENCY
                        &
FINANCIAL        AND PRIVATESECTORDEVELOPMENTVICEPRESIDENCY


BASEDON THE JOINTIMF-WORLDBANKFSAP UPDATE




As part of the joint IMF-World Bank Financial Sector Assessment Program (FSAP), a mission
visited Barbados during March 26 to April 9,2008.' The principal objective of the mission was
to update the FSAP conducted in 2002 focusing on financial system stability and specific
institutional development issues.' The mission also provided an assessment of the observance
of international standards and codes in financial regulation and supervision for the banking and
securities sectors as well as of the development needs of the financial system and its potential
contribution to economic developmelit. Preliminary results of the mission were discussed with
the authorities during the subsequent IMF Article IV mission.




'The  FSAP team was led by Messrs. Marco Espinosa-Vega (IMF, Mission Chief) and Craig Thorbum (World
Bank, Deputy Mission Chief) and was composed of Joon Soon Lee, Bikki Randhawa (fiom headquarters), and
Florencia Moizeszowicz (all World Bank); Giancarlo Gasha and Eugenio Cerutli (IMF), Diane Mendoza (external
expert, formerly with the Resolution Trust Corporation and the Office of the Controller of the Currency, United
States), Tanis MacLaren (external expert, formerly with the Ontario Securities Commission, Canada), and Linda
Hytry (external expert, currently with the Texas Department of Insurance, United States). Gamal El-Masry (IMF)
participated in the meetings and supported the FSAP team on macro issues.
'The  FSAP team met with Senator Darcy Boyce, Minister of State; Dr. Marion Williams, Governor, Central Bank
of Barbados (CBB); and officials at the Ministry of Finance; Central Bank of Barbados, Securities Commission;
Barbados Stock Exchange; the Office of the Supervisor of Insurance and Pensions, Ministry of Finance; Registrar
of Cooperatives; National Insurance Scheme; and representatives of commercial banks, insurers, credit unions,
external auditing firms, and other private sector institutions.

                  I.      OVERALLSTABILITY DEVELOPMENTASSESSMENT
                                                 AND


1.       The 2008 FSAP Update for Barbados took place in the context of considerable
turmoil in global financial markets. Encouragingly, the financial system in Barbados has
been little affected by this turmoil and the macroeconomic situation reniains robust with
economic growth continuing to benefit from healthy tourism numbers and ongoing construction
activity. As a result, the unemployment rate continues near historic lows. Nonetheless,
economic prospects are tied to continuing tourism and, as such, to the slowing economic
performance in Europe, particularly the United Kingdom, and the United States.

2.       The dominant domestic banking sector appears sound, resilient, and profitable.
Since the first FSAP, the financial system has benefited froni the strong econon~icexpansion,
which has boosted credit demand while contributing to a steady improvement in banks' asset
quality. Capital adequacy for locally incorporated banks remains above .theminimum required,
and profits are at healthy levels. Stress tests reveal that the sector would be resilient to most
market shocks, but capital levels may be at risk in the case of more extreme events. In
particular, the system is vulnerable to credit quality shocks, and an extreme but plausible
decline in tourism receipts, or in construction activity, would reduce banks' capital to below the
regulatory minimum.

3.      Progress has been made in addressing the recommendations of the 2002 FSAP
assessment. The Bank Supervision Department (BSD) of the Central Bank of Barbados (CBB)
has been moving toward a risk-based supervisory framework, increased the number and
training of its staff, and issued many guidelines on risk management. The Financial Institutions
Act (FIA) was amended, inter alia, to require auditors to be approved by the CBB and to
improve the procedures for winding up, restructuring and license revocation. The crisis
management framework was enhanced with the introduction of a compulsory deposit insurance
scheme in mid-2007. A full update of progress against the 2002 FSAP recommendations is
included in the annex.

4.      To assure continued financial stability and competitiveness, important regulatory
and remaining supervisory weaknesses in the financial system also should be addressed.
The prudential oversight of the banking sector could be strengthened by enhancing supervisory
capabilities, accelerating the transition to risk-based banking supervision, tightening
supervision of large exposures and exposures to related parties, improving the criteria for asset
classification and provisioning, improving consolidated supervision for banking groups and
regional financial conglomerates, and establishing more active home-host supervisory
cooperation arrangements.

5.      Limitations in the supervision of the insurance sector expose the sector to material
risks. Profitability and capital adequacy are difficult to assess due to incomplete and inadequate
data. Single negative events may significantly damage the reputation of ajurisdiction in an
increasingly regional and global market. Although the mission noted the introduction of on-site
inspections, the sector remains largely self-regulated owing to continuing shortages of qualified
staff, inadequate regulation, and out-of-date financial reporting. Greater cooperation and
exchange of information, particularly with the authorities in Trinidad and Tobago, are
necessary to facilitate effective assessment of financial soundness and the protection of
Barbadian policyholders.

6.      Capital markets remain underdeveloped. Efforts to integrate the Barbados Stock
Exchange with the Trinidad and Tobago and Jamaica exchanges through the Caribbean
Exchange Network (CXN), pending regulatory approval, are in line with the 2002 FSAP
recommendations to adopt common listing, trading, and settlement rules across the exchanges
in the region to promote development of capital markets.

7.      The Registrar of the Cooperatives Department is slowly building capacity to
adequately supervise credit unions. This agency has continued to carry outjoint inspections
with the CBB of larger institutions as recommended by the 2002 FSAP. However, the number
of inspections conducted and the joint inspections are not yet being conducted with the
recommended frequency. Official figures for loan delinquency at Credit Unions understate the
position and require close monitoring.

8.      The offshore financial sector appears insulated from the onshore banking system,
thus limiting the risk of contagion. Barbados will continue to face competition from offshore
financial centers in the region. To differentiate itself, the country is seeking to continue
strengthening its reputation for stability and a selective licensing process, and to develop a
workforce with strong skills in financial services. However, the authorities continue to face the
challenge of overseeing a large iiumber of very heterogeneous financial institutions with
constrained resources.

                      11.     THEMACROECONOMICSETTING               AND RISKS


9.      Barbados is a small country with a developing infrastructure, boasting one of the
highest levels of GDP per capita in the region. Economic growth has been strong in tandem
with increased tourism. Robust outp~~tgrowth has helped bring the unemployment rate to a
historical low 2007. The country enjoys an investnlent grade rating and has one of the highest
S&P foreign currency sovereign credit ratings in the region. Tourism, real estate, and financial
services are the most dynamic sectors and represent almost half of GDP and almost 80 percent
of foreign currency receipts. The Barbados dollar is pegged to the U.S. dollar at BDS$2=US$l.
The country maintains a number of exchange controls, and interest rates have typically
followed U.S. rates closely. Inflation has declined from about 6.75 percent during 2005-06 to 4
percent in 2007. However, food and energy prices have had a material impact on inflation in
2008.

10.     In the context of an uncertain global environment, GDP growth is expected to
slow. Barbados is a popular destination for affluent U.K., U.S., and Canadian tourists, and
tourism receipts are less sensitive to global economic trends than other destinations. However,
both general economic conditions in Europe, the U.K., Canada and the U.S. along with relative
exchange rates between these countries and the BDS$/US$ impact price competitiveness.

11.     Barbados is also exposed to international oil prices through its impact on domestic
prices and tourism. As Barbados is a net importer of oil, increases in the oil price translates to
domestic prices and represents a negative terms-of-trade shock. Barbados is relatively distant
from the main Caribbean cruise market, and higlier fuel costs could adversely affect numbers of
cruise ship arrivals. Thus far, these two channels do not seem to have had a material effect,
partially due to government subsidies of domestic gas prices, and the upscale characteristics of
Barbados' tourism market.

12.       The protracted global financial market turmoil could also impact the real estate
market and the financial sector in the medium term. Real estate and construction have been
important contributors to GDP. Acquisition of real estate by foreigners has boomed and is often
externally financed. A sharp aiid protracted slowdown could increase uneniploynieiit and credit
risk for the domestic banking sector.

                   111.    THEFINANCIALSYSTEM,INSTITUTIONS, MARKETS           AND


Onshore Banks

13.       The onshore banking sector has grown significantly since the 2002 PSAP and has
seen increased consolidation and globalization. Bank assets have increased from
US$3.1 billioii in 2002 to US$5 billion in 2007, equivalent to 142 percent of GDP and
80 percent of all deposit-taking institutions' assets. Onshore banks have increased regional
links and continue to focus operations on consumer and real estate lending; have investment
portfolios comprising mostly governmelit bonds (70 percent of investnieiits) held to maturity;
and operations funded by local deposits (almost 90 percent of liabilities). Off-balance sheet
operations are virtually nonexistent. The sector is dominated by the operations of Canadian
banks and increasingly so with the acquisition of RBTT by RBC completed in mid-June 200S3
(see Figure 1).

14.       Onshore banks' CAR exceeds regulatory requirements and nonperforming loans
are declining. At end-September 2007 the sector's CAR stood at 10.8 per~ent.~However, the
CAR has been declining mainly due to an increase in higher risk-weighted consumer and real
estate lending. Supported by economic expansion, nonperforming loans have sharply declined
from 8.2 percent in 2003 to 2.9 percent in 2007.

15.       The system remains profitable and liquid, with moderate positions in foreign
currency. Regulatory requirements on liquidity and foreign exchange exposures have induced
banks to remain liquid and only modestly exposed to foreign currencies. Short-term assets as a
ratio to short-term liabilities stand at close to 59 percent. Subsidiaries maintain a long net open
position in foreign exchange of 35.3 percent of their capital, and loans and deposits ill foreign
currency represent only 3 percent and 17percent of the respective totals. For branches, loans
and deposits in foreign currency represent 17percent and 26 percent of the respective totals.

16.       Consumer credit has expanded faster than other credit activities (Figure 2).
Although private credit has moderated, and is now one of the slowest growing in tlie region
from 2003-2006, growtli exceeded 15percent annually.' Consumer credit, iiicluding residential
mortgages, has beell the most dynamic, contributing to the system's hefty profitability.
According to published indicators, rapid credit growth has not, so far, adversely affected asset
quality, largely due to the persistent expansionary environment. However, since consumer and




 Currently, the sector comprises six foreign-owned banks (four subsidiaries, two branches) with preeminent
Canadian dominance (about 70 percent of system's assets). The Canadian parent banks of the Barbadian
institutions remain sound, with a combined CAR of 11.5percent, and NPLs of only 0.5 percent of loans.
 The Minimum regulatory CAR of 8 percent applies.
'In 2007, Barbados' private non-financial credit growth was close to 8 percent, compared with close to 10 percent
for Bahamas, 27 percent for Dominican Republic, 36 percent for Jamaica, and 17 percent for Trinidad and Tobago.

mortgage lei~diiigrepresents as much as 68 percent of total loans, then a deep or sustained
downturn would require close monitoring6

                                       Figure 1. Banking Sector Trends since 2002 FSAP

                                            Tlze Financial System in Barbados expanded since previous FSAP




            2001 BDS

            Figures are appro.;. not ~nscale




                Thepresence of banksfrom foreign financial groups has accentuated, with predominance of Canadian
                                                                         Banks




                                               Tlze banking sector experienced additional concentration




                 CCB
                  4%




           lutual Bank
              4%




           Source: CBB and FSAP 2002.




6Mortgages grew by about 20 percent in 2007. Most of them cany adjustable interest rates and up to a 95 percent
loan-to-value ratio. According to industry participants, the recovery of collateral through ajudicial process takes
between 6-18 months, relatively rapid compared with the rest of the Caribbean.

                             Figure 2. Credit by Economic Sector, 2003 vs. 2007

                                                   (In percent of total loans)



                                                                                        'Dec-03

                                                                                        'Sep 07




           Agricultural     Commercial      Construction    Consumer         Industrial     Tourism          Others



    Source: CBB and staff estimates.

17.       The stress test analysis suggests that the main vulnerability faced by the domestic
banking system is credit risk stemming from a downturn in economic activity.
Specifically, although a credit risk baseline scenario based on WE0 projections shows that the
capitalization of the onshore system would remain above the minimum capital requirement, one
bank's CAR would fall below the minimum 8 percent."

18.       An extreme but plausible decline in tourism receipts, or in construction activity,
would reduce banks' capital adequacy requirement below the regulatory minimum. A
15percent decline in tourist arrivals, or a 15percent decline in the construction sector, would
drive the CAR of the system from the current 10.2 percent to 6.7 percent and 5.9 percent
respectively. If the system were hit simultaneously by several significant shocks, including a
15percent decline in both tourism and construction, a 500 bps increase in interest rates,
50 percent increase in oil prices, and a material recession in the U.S., the capitalization ratio of
the system could decline to 3.6 percent in the absence of other initiatives, and all the banks
would be below the regulatory minimum. Some of these shocks are extreme. The tourism shock
would be about 30 percent larger than the large tourism drop experienced in 2001; the
construction shock would be a sharp reversal of recent trends (about 9 percent growth on
average per year), and much deeper than the previous cycles, where there was only a slowdown
in construction activity (e.g., in 1996,2000 and 2003). However they are also plausible because
GDP fell by 4 percent form the last quarter of 2001 through the first half of 2002, and in the
early 1990s, GDP fell by more than 6 percent.

19.       Domestic bank vulnerability to market risks is more limited. In particular:



 In light of shortcomings in asset classification and provisioning standards identified by the BCP assessors, adjustments
were applied to the official data for stress testing purposes. These adjustments reduced tlie effective average CAR for the
universe of banks analyzed from 10.8percent to 10.2 percent, with all the banks still complying with the regulatory
minimum. The stress test covers tlie four subsidiaries of the onshore banking system. All the stress tests were conducted
considering a benchmark CAR of 10.2 percent.
 The authorities have approached this bank requesting an increase in its CAR because it is currently only slightly higher
than the minimum regulatory level.

         Interest Rate Risk. An increase in interest rates of 5 percentage points would reduce
         the system wide CAR to 8.4 percent, and one bank with a sizable maturity gap would
         fall below the regulatory minim~m.~

         Exchange Rate Risk. Changes to the currency peg would have only moderate effects
         on banks' capitalization. In the event of a depreciation, given the long net position in
         foreign currency held by banks, the negative effect of the limited foreign currency
         induced credit risk would be offset by the direct positive balance sheet effect from long
         positions and would be positive for sector CARS.A material appreciation would slightly
         reduce system CAR from 10.2percent to 9.9 percent and no bank would fall below the
         regulatory threshold.

         Liquidity Risk. Liquidity risk was tested assuming a sudden, large deposit run on the
         subsidiaries of foreign banks (e.g., simulating a reputational shock to the parent
         company abroad), equivalent to a run on deposits of 30 percent in a 30-day period. No
         banks become illiquid under this scenario, although two banks would suffer strain-the
         ratio of liquid assets to short term liabilities would decline from 57.3 percent to 31.6
         percent for subsidiaries, and from 60.8 to 36.1 for branches. The same deposit run
         would potentially leave one foreign branch illiquid. Should the current levels of external
         funding cease altogether, no banks would become illiquid.''

                                Table 1. Stress Testing: Summary of Results

                                                 ","K;"
                                       CAR                                            Number of       Number of
                 Case                Official               Baseline                    Banks           Banks
                                                                         Shock
                                       Data                                            CAR<S%          CAR<O%
   Credit Risk
    Baseline 21
     "Perfect Storm" Scenario
   31
   Interest Rate Risk
    +500bp                              10.8       10.2                   8.4             1               0
    -500bp                              10.8       10.2                   11.9            0               0
   Exchange Rate Risk
     10 percent depreciation            10.8       10.2                   10.5            0               0
     10 percent appreciation            10.8       10.2                   9.9             0               0
   Source: authorities and staff estimates.
   Notes:
   1. Adjusted CAR correspond to the CAR after introducing a 5 percent provisioning rate for "Special
   Mention" loans, increasing the provisioning rate for "Substandard" loans to 20 percent, and migrating 20
   percent of "Pass" loans to "Special Mention."
   2. The Baseline case is based on WE0 projection of macroecononlic variables for 2008 at the time of the
   mission.
   3. The Macroeconomic Scenario includes a 15 percent decline in tourism, a 15 percent decline in the
   construction sector, a recession in the US of -3.0 percent of GDP, and an increase in oil prices of 50 percent.




9Subsidiaries and branches have similar ratios of cunlulative gaps over assets: -26.8 percent and -24.2 percent
respectively. Also, government securities conlprised only 14percent of assets of the subsidiaries, and 17percent of
the assets of the branches.
loNo formal inter-bank contagion analysis was carried out due to the lack of individual interbank lending activity
data. However, the fact that interbank lending amounts to 5 percent of total excess reserves suggests that interbank
contagion is not a significant concern. Contagion from a foreign parent bank may also be limited because funding
from foreign parent banks amounts to only 10 percent of total funding.

Credit Unions

20.      The credit union sector has continued to expand and compete with banks in the
consumer lending segment. Although there have been no new registrations in the last five
years, the combined assets of the 34 credit unions" are equivalent to about 14percent of GDP,
comparedto 10percent during the 2002 FSAP (see Figure 3). The sector remains highly
concentrated with the two largest credit unions accounting for 71 percent of total assets and
73 percent of the total membership. Smaller banks express fmstration at the tax breaks and
perceived lower compliance costs afforded to the credit unions.

21.      Official figures understate actualloan delinquency rates in the credit union sector.
The official rate was 6 percent rate, as of September 2007, but does not consider arrears on past
due loans over 30 days.12Return on equity for the largest credit union was 6 percent for 2007,
while the loan-to-deposit ratio for the sector stands at 87 percent. Loan origination polices for
the largest two credit unions have improved since the 2002 FSAP due to enhancementsmade to
the credit policy guidelines and member financial education progranis. The tax break to credit
union members, which was in place during the 2002 FSAP, has now been extended to mutual
funds and equities.l3

                               Figure 3. Credit Unions Growth (2001-2007)

               160,000T                                                                  T 600,000




                            2001              2003            2005              2007

                                     i:"i:rmMembers +Assets



             Source:Registrar, CooperativesDepartment.

Insurers

22.      The insurance sector continuesto be an important part of the financial system.
Existing high market penetration has led the sector to look outside Barbados for growth. The
insurance penetration rate-the       ratio of premiums to GDP-was            equal to 10.3percent in 2006



l1The largest two credit unions have assets of $252 million and $134 million, eight "medium" credit unions have
assetswhich range from $34 million to $7.5 million, and the remaining 24 "small" credit unions have combined
total assets of US$28 million.
l2Late payment is considered past due only after 90 days.
l3The frst BDS$10,000 generated from combined investmentsin credit union, mutual fund and equity holdings
are tax exempt.

(3.3 percent for life insurance and 7 percent for non life insurance)14and is the currently the
highest figure in the world for non life insurance and 9thin total. Real and nominal growth has
been strong over the last five years. Strong competition in the non life sector, in the context of a
moderating market growth outlook, can be expected to continue to drive consolidation in the
local market and reliance on regional expansion.

23.     Insurance market profitability and capital adequacy are difficult to assess due to
incomplete and inadequate data. The introduction of Minimum Contiiiuing Capital and
Surplus Requirements for life companies, a Minimum Capital Test for non life insurance
conipanies, and a Branch Adequacy Test for foreign branches are important achievements
made possible by the Supervisors' (SOIP) amendments to the Insurance Act. However,
effective oversight of these regulations is severely limited by returns that are neither timely or
sufficiently comprehensive to facilitate proper analysis. Although most companies adhere to
provisioning techniques based on Canadian systems voluntarily, providing a measure of
consistency, adequacy and comparability, the system is heavily dependent on the continuing
ethical standards and competence of insurer management. Adopting appropriate accounting and
reporting standards under the insurance law would allow the supervisor to better assess the
stability of the insurance sector.

24.     The exposure to natural hazards in the Caribbean is an important challenge for
the sector and is, increasingly, managed through the group head offices of regionally
linked companies. Continued regional diversification has meant that reinsurance programs
have become niore complex and are often arranged at a group level. Although no specific
issues were identified regarding the quality of reinsurance programs, continued diligence and
assessment is recommended. The effectiveness of reinsurance programs is a key issue for
supervisory oversight and, with the regionalization of the sector, can only be adequately
addressed through cooperation between supervisors in home and host jurisdictions.

25.     Insurers continue to face challenges in sourcing investable assets. Insurance
companies have difficulty in finding appropriate long-term investment vehicles in the Barbados
capital markets that meet the statutory investment regulations. Non-life companies in 2006 had
more than 36 percent of their invested assets in cash balances. In contrast, cash represented
only 12.5percent of the life companies' investment portfolios in 2006, as they were more
active in domestic mortgage and policy loan transactions as a means of balancing their
portfolio.

The Investment Role of the National Insurance Scheme

26.     The National Insurance Scheme PIS) underwent a reform in 2002 increasing
contributions, increasing the retirement age and lengthening the expected duration
profile of its liabilities. The reforms significantly lengthened the time horizon for investment
of the assets of the NIS. As of February 2008, NIS' assets were valued at BDS$2.7 billion
(about 30 percent of GDP) up from BDS$1.4 billion in 2002. Current actuarial estimates
indicate that assets will continue to grow until around 2030, or longer under more optimistic
assumptions.



l4These figures were computed based on unpublished and incomplete Supervisor of Insurance's report for
December 2006.

27.      A shortage of suitable local investment opportunitieshas meant the NIS cannot
achieve its preferred investmentprofile and its target investment mix appears suboptimal.
The current NIS investments include largely domestic instruments: government securities,
other fixed interest investments and bank deposits (see Figure 4). Equity and real estate
(including government occupied buildings) represents only 18percent of investments. The
current portfolio mix is suboptimal comparedto the target asset mix developed by the NIS
before the reforms. All NIS's asset classes, other than money market investments, are below
the target asset mix--due to a lack of investable opportunities. Over 63 percent of assets are
directly or indirectly invested in Barbadian government instruments and a sizable 24 percent is
held in money market instruments (mostly deniand deposits). Furthermore, because the liability
profile has changed and lengthened as a result of the reforms, the optimal investmentportfolio
strategy should now include a larger share of longer term investments, and in all likelihood,
increased investment outside Barbados.

                                    Figure 4. NIS portfolio structure, 2007




                                      Source: NIS.


SecuritiesMarkets

28.      Securities markets remain illiquid and lack depth owing to the size of the economy,
restrictionson capital movements, and investor preferencefor privately held interests. As
of December 2001, the Barbados Stock Exchange (BSE) capitalization was estimated at
US$1.8 billion or 71 percent of GDP. Sincethen, market capitalization has reached US$5.6
billion or close to 150percent of GDP despite the number of issues traded on the regular
market not having materially expanded, and, on a net basis, only one additional companybeing
listed as of December 200715,l6

29.      The stock market has not yet been as significantlyaffected by the current global
turmoil as other markets. The BSE index increased by 12percent in 2007, reversingthe
6 percent losses registered in 2006 and has lost less than 5 percent to November 2008 despite
the wider global turmoil.


l5There were three new issues over the period and two delistings. Each of the three new offerings was of a
substantial size, the most significant one being a demutualization of a local insurance company, producing more
than 40,000 individual shareholders.
l6If cross-listed shares are included, the market capitalization at the end of 2007 reached US$9.4 billion or 250
percent of GDP.

30.     To address the low liquidity and limited number of listed companies, the
Barbados, Jamaica, and Trinidad and Tobago stock exchanges have developed the
Caribbean Exchange Network (CXN) to be implemented in two phases. Phase I involves a
high speed communications network and common trading, clearing and settlement rules to
facilitate trading across the three exchanges, although it does not integrate the three trading
books. Trades will be cleared and settled between the exchanges' central securities
depositories, with payments processed through a major bank operating in all three couiltries.
Phase I1would consolidate the three order books, with automated order routing. The linking of
the exchanges may create operational interdependences across the jurisdictions. As trading
volumes increase, the interconnections will place greater demands on the relevant regulators
acrossjurisdictions, for effective and coordinated oversight of the exchanges, central
depositories and clearing facility.

31.     The mutual fund industry is small, but has more than doubled in size
between 2003 and 2007, aided by tax preferences. In 2003, there were 12funds with total net
assets of BDS$298 million. At the end of 2007, there were total net assets of BDS$759 million
in 14mutual funds, including one closed end property fund listed on the BSE and 13open-
ended funds. Investments in mutual funds and credit uilions that are held for at least five years
attract a tax credit.

32.     Debt markets are underdeveloped. From 2003 to 2007, there have been 28 public
issues of corporate debt securities for a total of BDS$1,370 million, with slightly over
35 percent of the total being raised in 2006. The BSE facilitates secondary market trading of
corporate and government debt securities, but trading is almost nonexistent. The yearly average
total value of secondary market trades in government debentures and treasury bills recorded by
the CBB as registrar between 2003 and 2007 was BDS22.4 million. The average number of
transfers recorded was 188 per year.

Regional Linkages and the Offshore Sector

33.     As in the rest of the Caribbean, the importance of regional and global financial
linkages has continued to increase. Motivation for financial linkages includes risk
diversification, search for yield, and a desire to increase scale and achieve economies. Financial
conglomerate activity in Barbados has accelerated in size and heterogeneity. The authorities
also value the offshore sector as a source of employment for the professional sector and
revenue for the government through license fees.

34.     Offshore financial institutions saw a rapid growth in 2007. Total assets of offshore
banks grew 15percent in the first nine months of 2007 to BDS94.78 billion and represented
about 1,285 percent of GDP. Although there are currently 54 offshore banks, there is
considerable concentration. The four largest offshore banks, all members of Canadian groups,"
represent 75 percent of the system's assets, and the ten largest represent 91 percent. At the end
of 2006, there were 441 insurance companies registered to carry on exempt or qualifying
business in Barbados. However, of these only 181 exempt and 61 qualifying companies were
active. The majority of these insurers is of U.S. and Canadian origin and is associated with
either financial institutions in those doniiciles or industrial firms. In the case of the industrial


17The four largest banks (in order) are CIBC Offshore Banking Services Corporation, Barrick International Bank
Corp., National Bank of Canada (Global) Ltd and Bank of Montreal (Barbados) Ltd.

firms, the insurer is most likely to be a captive. In the case of the firms associated with financial
institutions, some will be captives and some will be companies providing cover to the customer
base of the institution.

35.      Offshore banks are a heterogeneous group. They differ significantly in terms of size,
capitalization stmcture, activity and presence in the region. Operations of the offshore service
providers include: banks that take non-Barbadian third party deposits; those that offer treasury
functions for their related organizations; wealth managers for high-net worth individuals; and a
commodities broker.

36.      Offshore banks are insulated from the domestic banking system. Their deposit-
taking activities are highly circumscribed, thereby limiting their potential to destabilize the
domestic financial system, and effective "Chinese walls" appear to exist between affiliated on-
and offshore banks. Although some financial groups have both types of operations incorporated
in Barbados, traiisactions between their on- and offshore entities appear to be limited or
nonexistent. Domestic banks conduct operations only with residents while offshore banks are
prohibited from doing business with local residents and operate only with international clients.
Strict prohibitions on activities between on- and offshore banks and the incentive to comply,
given the risk the loss of tax incentives (through the loss of their license), promote a distinct
and separate offshore sector.

37.      Reputation risk is a concern among offshore financial institutions. Foreign banks
choose to establish an offshore subsidiary in Barbados not only for its tax advantages, but also
for its reputation. Given the importance of reputation to the health of this sector, the CBB is
advised to increase the number of staff at the CBB qualified to deal with the coniplexities of the
offshore sector, and to establish closer working relationship with the home supervisors of
foreign banks.

38.      Supervision of the offshore insurance sector is almost nonexistent. Apart from filing
the company's financial statement with the SOIP, little if any contact exists between the SOIP
and the sector. Timely information from the sector appears to be problematic, as 2006 financial
data had not been compiled at the time of this assessment. Due to resource constraints, there
have been no onsite inspections or offsite analytical reviews of these entities. Given the number
of entities, and the importance of maintaining reputation, then the opportunity to revisit the
processes and build up the supervision of the offshore sector would seem important.

39.      The benefits of global and regional linkages have to be balanced with the risk of
contagion, requiring greater cross-border supervisory coordination. To avoid regulatory
arbitrage and contagion risk, harmonization among regulators is paramount. Given the regional
and international stmcture and operations of the commercial and offshore banks, the CBB has
entered into a few MOUs that facilitate the sharing of information. A regional MOU was signed
May 2004 among most of the Caribbeanjurisdictions, with a number ofjurisdictions, including
the Eastern Caribbean Central Bank not yet a signatory. Despite the long standing presence of
foreign banks in Barbados, the CBB does not yet have an MOU with either Canada or
Bermuda. Also, closer comniunication with the Canadian financial sector supervisor (OSFI) in
the case of banks and with the insurance supervisory staff in Trinidad in the case of insurance
will provide the local authorities with a better understanding of the risks associated with the
institutions that they supervise.

                       IV.      FINANCIALSYSTEMSUPERVISION REGULATION            AND


40.       At the time of the mission, the authorities are reviewing a blueprint to reform the
regulatory architecture by establishing a Financial Services Commission. The previous
Administration recommended the establishment of an FSC, which would bring together three
supervisory agencies (the Supervisor of Insurance and Pensions, the Securities Commission,
the Cooperatives Department) and the unit in the International Business Division of the
Ministry of Economic Affairs and Development (MAED). Economies of scale and the
strengthening of supervision of the non-bank financial sector were the main motivations for this
initiative.

Bank Supervision

41.       The Bank Supervision Department (BSD) is shifting its scope of operations and the
structure of its office to more effectively conduct risk-based supervision. Currently, it is in
a transitional phase, shifting from a pure off-sitelon-site model to a portfolio approach.
Responsibility for many institutions has been recently re-assigned, and guidelines addressing
the existing risks are in various stages of devel~pment;'~risk-based supervision is being
implemented and the BSD is preparing to implement the Base1 I1 capital accord.

42.       The BSD plans to implement Base1 I1 from 2009 although it indicated a possible
delay. According to the BSD's plan, all licensees are required to implement the Standardized
Approach for credit risk and market risk, and the Basic Indicator Approach or Standardized
Approach for operational risk from 2009. The BSD intends to consider a possible transition to
the Advanced approaclies for credit risk after 2012. It is recommended that the BSD considers
the results of a full-scale qualitative impact study and the risk weightings for retail credit and
residential mortgage loans, as well as strengthening Pillar 2, in the planed implementation of
Base1 11;to prevent any undue reduction in the capital level of the Barbados banking system.

43.       In spite of progress since the 2002 FSAP, there is still room for improvement in
bank regulation and supervision. Some weaknesses identified in the BCP assessment include
(i) outdated regulations (e.g., capital adequacy, asset classification and provisioning),
(ii) deficiency of prudential rules on large exposures and exposures to related parties, (iii) the
incomplete state of the supervisory framework (e.g., risk assessment model, prompt corrective
actions) for risk based supervision, (iv) the lack of a broader scope for onsite inspections that
would review banks' risk management activities, (v) a weak legal framework for consolidated
supervision of banking groups and financial conglomerates, and (vi) the insufficiency of cross-
border homelhost cooperation.

44.       Improving the legal framework would facilitate improved consolidated supervision
of banking groups and financial conglomerates. In the short-term, it would be beneficial to
complete MOUs with OSFI, Bermuda and otherjurisdictions, expand and document homelhost
information sharing on risk profiles of parents and subsidiaries to assess the impact of
parentlrelated party on Barbados banks, and conduct comprehensive scope, coordinated cross-
border inspections of Barbados-based banks. In the medium-term, there is a need to establish


l8Since the 2002 FSAP, 12 guidelines have been issued as of April 2008 and three more guidelines are expected to be
issued. The current guidelines range from corporate governance, operational risk, outsourcing, AML, foreign exchange
and settlement risk, electronic banking, liquidity risk, credit risk, country risk, and market risk.

clear legal framework for consolidated supervision of banking groups or financial
conglomerates including explicit provisions on legal definition of a bank group and
consolidated prudential rules or limits, strengthened surveillance of regional cross-border
financial groups through more frequent and comprehensive group-wide risk assessment taking
account of risk contagion across the region, and the development of multilateral MOUs specific
to the most important holding companies or groups.

45.     There is no aggregate limit on banks' large exposures. Expos~~resto a single person
or group are limited to 25 percent of a bank's stated capital and reserves, and 10percent of its
stated capital and reserves for unsecured exposures. Although the authorities monitor large
exposure limits for groups, there is no explicit legal provision dealing with an aggregate large
exposure limit. The CBB indicated that it is working on introducing a regulation for an
aggregate limit for such exposures. In addition, the CBB is encouraged to expand the guidelines
on credit risk management to address concentration risk.

Securities Markets

46.     In 2001, a new SA was enacted leading to the creation of the Securities
Commission, which is in charge of supervising and regulating the securities markets.
Market intermediaries, public conipanies, the BSE and the Barbados Central Securities
Depository Inc. (CSD) all are required to be authorized under the SA by the Securities
Commission. In 2002, the new MFA was proclaimed, governing the licensing and operation of
mutual funds and mutual fund administrators.

47.     Owing to regional initiatives, such as the formation of CXN and IOSCO
developments, the need for improvements in and harmonization of the relevant legislation
has been recognized. A committee has been meeting regularly to identify needed updates. In
particular, gaps in the Commission's authority with respect to on-site supervision and
information sharing were noted. The Securities Commission does not have rule-making
authority or a general ability to grant exemptions and so cannot react quickly to changing
market demands.

48.     The Securities Commission and BSE are both responsible for licensing and
overseeing the activities of broker-dealers. The Securities Comnlission does not perform an
on-site visit prior to the applicant being licensed. The BSE confirms the appropriate books and
records before granting approval to an applicant. Neither imposes a specific requirement that
firms have adequate internal controls and risk management procedures or a compliance
function. The Securities Commission has carried out limited on-site examinations of firms in
collaboration with the CBB and is building capacity to perform regular inspections on its own.
The BSE is developing an inspection program for its members.

49.     A recent takeover bid highlighted the need for updating and harmonizing the
regulatory regime across the region and the application of local rules in a cross-border
context. The takeover bid regulations were made under the 2002 Companies Act and had
functioned acceptably for friendly bid transactions. They proved to be less robust during a
recent cross-border multiple bidder hostile takeover. The transaction also brought to the surface
material differences between the requirements in Barbados and in Trinidad and Tobago, gaps in
the overall regime and limits on the Commission's authority to obtain information. Also, the
requirements of companies and insiders to disclose material transactions were brought into

question. Several industry members commented that the transaction, and how it was handled,
had eroded market confidence.

Credit Unions

50.     The Registrar of Cooperatives and Friendly Societies is charged with the
supervision and regulation of the credit unions and other cooperatives, and is slowly
building capacity to conduct adequate supervision. The Registrar's office has a staff of five
supervisors responsible for the oversight of 34 institutions. The authorities have carried out
joint Registrar-Cooperatives Department CBB inspections on an annual basis for each of the
largest credit unions during 2003-2007. However, there were no planned inspections for 2008
which, given the capacity limitations of the Cooperatives Department, exposes the sector to
inadequate oversight.

51.     The Cooperative Societies Act was amended in December 2007 and its regulations
updated in January 2008. In 2002, the authorities were weighing some amendments to the
Act, among other things, to strengthen the supervision of credit unions. As an alternative, and
recognizing their focus on financial services compared to the rest of the cooperative societies,
the mission recommended the issuance of a specialized credit unions law. Specifically, such a
law would better tailor the prudential oversight of credit unions, including through credit union-
specific inspections, well-targeted regulations and guidelines, clear identification of permissible
and prohibited activities, improved definition of the operations a credit union could undertake,
and improved loan origination policies. It is unlikely that the amendments will serve as a good
substitute for a dedicated Act.

Insurers

52.     The supervisory and regulatory standards with respect to the insurance sector in
Barbados have, hitherto, relied primarily on the good faith of industry participants. This
approach exposes tlie sector to important risks. A single negative event may significantly
damage the reputation of a jurisdiction in an increasingly regional and global market. Steps to
formalize and improve regulation would help to protect the reputation and the charter value of
the insurance business in Barbados from negative shocks.

53.     The authorities are in the process of improving supervision and regulation of the
insurance sector. The one material regulatory project that has been advanced since the 2002
FSAP is the development of additional capital requirements based on risk assessment. This
includes the introduction of the Mininiuni Continuing Capital and Surplus Requirements for
life companies, the Minimum Capital Test for general companies, and the Branch Adequacy of
Assets Test for branches of foreign companies operating in Barbados. These provisions are part
of the SOIP's proposed amendments to the Insurance Act Cap 310 and are expected to be
finalized this year.

54.    Insurance supervision has added resources and commenced a limited on-site
inspection program, but continues to need more resources and redesigned processes to
enforce the current provisions in the law. On-site inspections commenced in 2004, although
they need to be supported by a more analytical, rather than compliance oriented, off- site
analysis. This, in turn, will require better content and more timely infomiation collection.
Supervisory independence should be enhanced by greater transparency and public reporting
and through the transition to the proposed FSC.

55.     Attention to the development of several standards and circulars would further
enhance the observance of the IAIS principles. In particular, standards on corporate
governance, market conduct, internal controls (including asset and derivative controls,
particularly in the case of the offshore market), asset and liability valuation, and a solvency
standard for life insurers would lead to a considerable improvement in the observance of the
principles.

Safety Nets and Crisis Management

56.     The CBB is the Lender of Last Resort. The authorities introduced a compulsory
deposit insurance scheme in mid-2007 jointly funded by the CBB and DIC members. The
deposit insurance corporation (DIC) was established as a distinct separate entity from the CBB
to manage the deposit insurance fund. This Fund covers up to BDS$25,000 (US$12,500) per
depositor and per institution. Membership of the relevant institutions in the DIC is compulsory.

57.     Even though the Deposit Insurance Act also gives powers to the DIC to act as a
liquidator of failed institutions, the CBB would continue to lead the liquidation process.
The 2006 FIA amendments grant the CBB more bank intervention and resolution powers. The
DIC and the CBB are also drafting an MOU, which would include several cooperation areas
and would clarify relations and procedures, including in case of an institution's failure. Going
forward, both the CBB and the DIC will need to work on the design of early warning systems, a
prompt corrective action framework, and resolution procedures to coniplete the safety net
framework.

58.     Beyond the immediate steps required to diagnose and contain a financial crisis, the
authorities need to have clear procedures for the subsequent process of resolving a crisis.
Ideally, such procedures should rely on least-cost criteria. There should be a clear
understanding of the circumstances in which emergency lending arrangements for individual
institutions should be used; when the provision of such assistance should give way to measures
aimed at resolving a solvency problem; how alternative options for resolving such a problem
should be selected and implemented; and various institutional arrangements, such as asset
management corporations, or bridge banks should be designed and used in the resolution
process. In addition, the authorities could establish protocols, based on regular "fire drills" with
Caribbean and Canadian financial system supervisors, regarding crisis management procedures
and the treatment of a failure of internationally active financial institutions.

59.     An important consideration in planning the response to a crisis would be
consultation and co-ordination with overseas authorities, especially from Canada. In the
event of a crisis affecting a Barbadian financial institution with overseas affiliates, it would be
important that foreign host authorities be informed. Likewise, in the event of a problem
overseas affecting an affiliate of a Barbadian financial institution, it would be important to
obtain information from the host and home authorities. In either case, all authorities need to
establish a clear understanding regarding their respective roles, information needs, and co-
ordination of actions. Exchange of information and consultation with regulatory authorities in
Canada does not seem to be as fluid as it should be given the important presence of Canadian
banks in Barbados.

60.      The key challenge for the authoritiesis to maintain the balance between the
hitherto successful reliance on a conservativeapproach that has ensured both the stability
and reputation of the Barbadian financial sector, and a dynamic response to the more
regionally integrated future. Currently, Barbados is able to maintain a leadership role in the
region however, depending on how well it is able to respond to and take advantage of regional
initiatives; it risks being overtaken in the longer term by more aggressive and flexible
jurisdictions. As a result, whilst maintaining caution, proactive opportunities to ensure
continuing leadership in the region could be beneficial.

61.      In the short term, Barbados' role in regional leadership will continue to be
enhanced by proactively ensuring the fullest opportunity is taken from current and near
term initiatives, for example, as the authoritiesensure that the CXN initiative is one that is
lead by the Barbados authoritiesjointly with the other partners, and avoid any external
perception that Barbados is follower. This will include the need to promptly resolve all
outstanding regulatory issues in a proactive manner. Barbados can also leverage the usefulness
of doing domestic crisis preparedness fire drills and contingency planning (recommendedon
stability grounds in any event) and improvinghome host supervision in the banking and
insurance sectors by hosting regional discussions and initiatives on these issues. Thirdly,
Barbados could take the lead in revisiting takeover regulations in the light of recent experience.

62.      In the medium term, continuing to enhance the regulation and supervision of the
domestic financial sector will be the cornerstoneof regional leadership. This will also
support continued domestic stability and financial security from a shorter term
perspective. Key initiatives to enhance the regulation and supervision of the domestic sector
that can be commenced in the short term include:

         Updating regulations. This includes,for banks, updating capital adequacy regulations,
         classification of assets and loss provisions and issuing new regulations on large
         exposures; related party transactions; licensing activities-to                include holding
         companies. Enhancing the statutorypowers of the Securities Commission to make
         legally binding rules, give exemptions, inspect and access information, and share
         information and otherwise cooperatewith domestic and foreign supervisors. Requiring
         all registered securities market firms to have adequate internal control and risk
         management policies and procedures. Leading an initiative to update and harmonize
         takeover bid rules across the region at the exchange and statutory levels. Efforts to
         improve insurance supervision through the timeliness and usefulness of supervisory
         returns, and the development of standardsand circulars to enhance the observanceof
         the IAIS principles should have a high priority.19A specialist credit union law could be
         beneficial.

         Accelerating developnlent of risk based supervision in the banking sector including
         the development of a risk assessmentmodel and associated delineated supervisory
         strategy, and in the insurance sectorthrough enhanced analysis capacity and processes.


l9In particular, standards on corporate governance, market conduct, internal controls (including asset and
derivative controls, particularly in the case of the offshore market), asset and liability valuation, and a solvency
standard for life insurers would lead to a considerable improvement in the observance of the principles.

a       Implementing and maintaining a proper level of onsite inspections for banks,
        insurers, credit unions, and firms registered under the securities acts.

a       Expanding and deepening information exchanges, supervisory cooperation, and
        coordinated cross border review of institutions between Barbados and Canada (with
        respect to banks) and Trinidad and Tobago (with respect to insurers).

63.     The development of longer term investment markets would be beneficial to the
wider economy. A well targeted study to develop a strategy to improve both the supply and
effective delivery of investable long term assets for the NIS and the life insurers would be a
useful starting point for policy development. Both the NIS and the insurers have a substantial
unrnet need for longer term investable assets. The NIS's investment strategy should be also
revisited in the light of their amended investment outlook as a result of the reforms. Both
initiatives could be resourced through technical assistance that was oriented toward identifying
and proposing recommendations to address limitations on capital market development.

64.     With a view to the longer term, the following initiatives will enhance the financial
sectorreputation and capacity and provide a platform for developnlent:

        Increased independence and flexibility for the financial sector supervisors to
        support a risk based supervisory model and to reflect the need for greater flexibility. In
        particular it is suggested that, for example, the authorities could be give rulemaking
        authority for the domestic market similarto that already in place in the International
        Financial Services Act; clearer, delegated authority from the MoF for the CBB; and
        elimination of the Minister's exemptivepower under the MFA.

        Specific improvements to facilitate group wide and consolidated supervision:
        Establish clear legal framework for consolidated supervision of banking groups or
        financial conglomerates including explicit provisions on legal definition of a bank
        group and consolidated prudential rules or limits; strengthen surveillance of regional
        cross-border financial groups through more frequent and comprehensive group-wide
        risk assessment taking account of risk contagion across the region; and develop
        multilateral MOU for specific holding company or group.

                          Table 2. Selected Economic, Financial, and Social Indicators

                                                      I. Social and Demographic Indicators (most recent year)

           Population (people in millions)                                       0.274               Adult literacy rate                       99.4
           Per capita GDP (in US$)                                              12,426                Population share below poverty line      13.0
           Life expectancy at birth in years                                      75.4                Gini coefficient                         42.0
           Rank in UNDP Development Index                                           31                Unemployment rate                         7.4
           Main products, services and exports: tourtsm, financial services, rum, sugar, and chemicals.

                                                          II. Economic lndicators

                                                                                                                          Prel.          Proj
                                                                                  2004        2005          2006         2007          2008

                                                                                                   (Annual percentage change)

          National accounts and prices
           Real GDP
           Deflator
           Nominal GDP
           CPI inflation (average)
           CPI inflation (end of period)

           Domestic demand (contribution to growth)
           Foreign demand (contribution to growth)

          External sector
           Exports of goods and services
           Imports of goods and services
           Real effective exchange rate (average)
           Terms of trade

          Money and credit (end of period)
           Net domestic assets
             Of which: private sector credit
           Broad money
           Velocity (GDP relative to broad money)
           Interest rate on deposits (average in percent per annum)
           Interest rate on loans (average in percent per annum)

                                                                                          (In percent of GDP, unless otherwise indicated)

         Public finances (fiscal year)
           Nonfinancial public sector overall balance
            Central Government
              Revenue and grants
              Expenditure
                Interests
              Balance
            NIS
            Public enterprises
            Off-budget activities
           Prtmaly balance

         Debt
          Total external debt I/
           Public sector (liscal year)
            External
            Domestic

         Savings and investment
          Gross domestic investment
            Public
            Private
           National savings
            Public
            Private
           External savings

         Balance of payments
          Current account
          Capital and financial account
            Official capital
            Private capital 21
              Of which: long-term flows
          Overall balance

         Memorandum items:
          Exchange rate (domestic currency1U.S. dollar)
          Nominal GDP (in millions of Barbados dollars)




Note: Table 2 shows data as prepared at the time of the mission. Most recently, the IMF World Economic Outlook
projects GDP growth of 1.7percent in 2008 and 1.0percent in 2009.

      Table 3. Financial Soundness Indicators of the Onshore Banking System 11



 Solvency indicators
   Capital adequacy ratio 31
   Core capital adequacy ratio 3141
   Nonperforming loans net of provisions to capital
   Off-balance sheet obligations, percent of liabilities


  Liquidity indicators
   Loan to deposit ratio
   Demand deposits, percent of total deposits
   Liquid assets, percent of total assets 51


 Credit risk indicators
   Total assets, annual growth rate
   Loans and advances, annual growth rate
   Total mortgage loans, percent of loans and advances 61
   Nonperforming loans, percent of total loans
   Provisions to nonperforming loans, percent of NPL
   Sectoral distribution of loans to total loans
     Agricultural
     Commercial
     Construction
     Consumer
      Industrial
     Tourism
     Others


 Foreign exchange risk indicators
   Global position in foreign currency to regulatory capital
   Share of foreign currency deposits in total deposits
   Share of foreign currency loans in total credit
  Deposits in Foreign Exchange, percent of total deposits 71
  Net foreign assets, percent of total assets


 Profitability indicators
   ROA
   ROE
   Gross financial spread to financial revenues
   Financial revenues to total revenues
   Annualized financial revenues to revenue-generating assets
   Profit before tax, percent of total assets
   Total noninterest expense, percent of total assets
   Spread between lending rate and deposit rate 81


 Operational efficiency
   Nonfinancial expenditure to total revenues
   Nonfinancial expenditure to total revenue-generating assets


Memorandum Items:
Banks' credit card loans to total loans
Banks' consumer loans to total loans 91
Banks' mortgage loans to total loans
Banks' mortgage loans (BDS$ millions)
Trust & mortgage companies ' mortgage loans (BDS$ millions)
Banks' mortgage loans, growth rate
Banks' credit cards loans, growth rate
Banks' consumer instalment credit, growth rate 101

 11As of Sep. 2007, the two foreign branches are Bank of Nova Scotia and Royal Bank of Canada; and
 the four foreign subsidiaries are Barbados National Bank, Butterfield Bank, RBTT Bank, and First
 21 Preliminary data as of September 2007.
 31 Does not include branches of foreign banks.
 41 Tier-l capital.
 51 Sum of excess cash reserve requirements and excess of the statutory requirement to invest in
 government securities in percent of total assets.
 61 Other loans, including personal loans, may be used to finance real estate activities.
 71 It includes both resident and non-resident deposits in foreign currency.
 81This spread does not fully reflect the intermediation margin due to fees, commissions, etc.
 91 Consumer loans excluding mortgages.
101 It includes car loans, durable goods loans, home improvement loans and debt consolidation loans.

                                           Table 4. Financial Sector Structure


 Number of lnstitutions
     Banks 21
       Domestic private banks
       Public banks
       Foreign banks
         Branches
         Subsidiaries
     Non-bank Financial Institutions
     Credit unions
     Offshore banks
      Insurance companies 31

 Assets (as percent of GDP)
    Banks
      Branches
      Subsidiaries

    Nonbank financial institutions
    Credit unions
    Offshore banks
    Insurance companies 41




11Preliminary data as of September 2007
21As of Sep. 2007, the two foreign branches are Bank of Nova Scotia and Royal Bank of Canada; and the four foreign
subsidiaries are Barbados National Bank, Butterfield Bank, RBTT Bank, and First Caribbean International Bank.


31As of 2006, seven of the 11 life companies, and 16 general insurance companies were actively writing business.
41 Investment Assets of domestic general insurance and life insurance companies.


                               Table 5. Onshore Banks and their Parent Institutions


                 Commercial Banks incorporated in                   Affiliated Financial
                                                                                                        Headquarter
                               Barbados                                Conglomerate


            First Caribbean International Bank
                                                                           CIBC                          Canada
            (Barbados) Ltd (FCIBB)        '
                                                               Republic Bank of Trinidad               Trinidad and
            Barbados National Bank Inc. (BNB)
                                                                        and Tobago                       Tobago

            RBC Royal Bank of Canada (RBC)                     RBC Royal Bank of Canada                  Canada

            Bank of Nova Scotia (BNS)                                   Scotiabank                       Canada

            Royal Bank of Trinidad and Tobago                   RBTT Financial Holdings               Trinidad and
            Bank (Barbados) Ltd (RBTT)                                      Ltd                          Tobago

                                                                    The Bank of N.T.
            Butterfield Bank (Barbados) Ltd (BBL)                                                        Bermuda
                                                                  Butterfield & Son Ltd
            ' FCIBB  is owned by First Caribbean International Bank, a holding company that consolidates regional
            operations in Barbados.

                                          Table 6. Credit Union Indicators




I.Structure of the Credit UnionSector

  Number of Institutions
  Number of Members
    Share of the 3 largest credit unions, percent


   Assets (as percentage of GDP)
   Assets (as percentage of GDP, 3 largest credit unions)


   Loans (as percentage of GDP)
   Loans (as percentage of GDP, 3 largest credit unions)


II. Selected Financial Soundness Indicators


Solvency indicators
Reservesto total Liabilities 21


Liquidity indicators
Loan to deposit ratio
On call deposits, percent of total deposits
Liquid Assets to short-term liabilities


Credit risk indicators
Total assets, annual growth rate                                         9.2     17.4    15.3  13.6   13.8
Loans, annual growth rate                                                        24.1   22.6   14.3   12.8
Total mortgage loans, percent of loans                                  34.1     34.3   39.9   39.6   NIA
Nonperforming loans, percent of total loans                              6.0      5.0    4.0    5.0    6.0
Provisions for Nonperforming loans, percent of total loans                          NIA                31

Source: Registrar of Cooperatives.



                        Table 7. Mutual Funds-Total            Assets under Management

                                     (as at end of year, unless otherwise indicated)

                                            2003          2004         2005           2006       2007
   Number of mutual funds                    12            12           14             14          14
   Net Assets (millions BDS$)              $298.3         n/a        $502.9"         $611.9     $758.9




"As at October 31, 2005.

                              Table 8. Insurance Sector: Summary Statistics


                      Year                           2001       2002       2003       2004    2005    2006

Domestic sector

General Insurance

 Gross written premia BDS$ million

 As a percent of GDP

 Investment assets BDS$ million

 As a percent of GDP

Life Insurance

 Gross written premia BDS$ million

 As a percent of GDP

 Investment assets BDS$ million

 As a percent of GDP


Offshore Sector 20

Net premiums (BDS$ billion)

Assets

 Source: Ministry of Finance; Supervisor of Insurance-unpublished     data.21



                     Table 9. Insurance Sector: Asset Composition-Life                Insurance

                        Year                           2001        2002      2003       2004   2005* 2006**

  Bonds and debentures                                 22.54       21.19     24.23     27.00   34.00   35.59

  Ordinary shares                                      14.43       26.03     26.19     23.00   21.00   16.54

  Preference shares                                     0.03       0.09       0.07      0.00    0.00    0.06

  Mortgages and Loans                                  22.31       20.98     17.69     13.00   21.00   22.74

  Real estate and leaseholds                            8.51       6.41      10.33     10.00   10.00    9.48

  Cash balances                                        15.35       21.76     18.40     20.00   11.00   12.53

  Other instruments                                    16.83       3.54       3.09      7.00    3.00    3.06

  Total                                                100.00     100.00     100.00    186.9   213.6  100.00

 Source: Ministry of Finance; Supervisor of Insurance-unpublished     data.




20 Totals for 2006 only includes companies fi-omU.S. and Canada.
   Figures for 2006 are, in some cases, not available and in other cases represent estimates.

                  Table 10. Insurance Sector: Asset Composition-Non-Life                Insurance



Bonds and debentures                                    24.05    24.17      29.31     32.70    35.63    34.17

 Ordinary shares                                        13.68     10.94     11.50      13.62   12.00      7.03

Preference shares                                       0.58      0.65      0.60       0.54    0.43       0.00

Mortgages and Loans                                     5.20      7.89      6.86       5.75    4.11       5.80

Real estate and leaseholds                              13.83    14.18      15.10      14.54   11.69      7.65

 Cash balances                                          33.75    31.15      26.71     23.58    25.89    36.66

Other instruments                                       8.93     11.02      9.92       9.27    10.25      8.69

Total                                                   100.00   100.00    100.00      186.9   213.6    100.00

Source: Ministry of Finance; Supervisor of Insurance-unpublished     data.

 Figures for 2006 are, in some cases, not available and in other cases represent estimates.



                                    Table 11. BSE Main Indicators 2003-2007


 Number of listed companies-Total                         24            24           26       27       26
 Number of listed companies-Regular             market
 Number of listed companies-Junior           market
 Number of cross listed companies
 Number of instruments listed1/
 Number of new issues
 Value of new issues (millionsBDS$)

 Number of brokers
 Market capitalization3/(millioi~sBDS$)

 Market Capitalization (% of GDP)

  Total annual trading volume (millions of
  shares)
 Total annual trading value (millions BDS$)              394.8        190.1        100.6    2,072.9  597.3
 Annual turnover4'(%)                                    3.25          2.21        0.85      10.10    3.17
 Nominal GDP (millions BDS$)                            5,389.0      5,648.0      6,183.0   6,860.9  7,375.1

Source: BSE and Securities Commission.

11 One is a closed end fund, the rest are equities.
21Cross listing of Jamaican company.
31Includes cross-listed securities.
41Total Trading Value1Composite Market Capitalization.

                                                          25

                  Table 12. Follow-Up on Key Recommendations of the 2002 FSAP

FSAP Recommendations                                        Status as of April 2008

Banking Sector

 Financial Institutions Act: The FIA should be amended      The FIA (Amendment, 2006) did not address the
 to strengthen the independence of CBB, impose               independence of CBB, aggregate limits on large
 aggregate limits on large exposure and connected            exposure and connected lending and liceilse revocation.
 lending, facilitate license revocation and distressed bank Distressed bank resolution and CBB's prior approval of
 resolution, and require CBB's prior approval of the         the external auditor were addressed in the amendment.
 external auditor for licensees.                             Most of the outstanding items are in a proposed
                                                             amendment currently being worked on by the CBB.
 On-site examinations: Supervisory resources of the CBB BSD's supervisory staff has increased kom 28 at 2002 to
 should be boosted to enable it to conduct regular onsite    32 at March 2008. However, regular on site examination
 examinations of all onshore and offshore banks on an        cycle has lengthened due to an increase in other
 18-24 months cycle.                                         mandates.
 Deposit Insurance Act: The potential for financial         The deposit insurance scheme was introduced in mid-
 instability may be contained by a well designed deposit     2007 for institutions licensed under the FIA. It covers up
 insurance scheme in a properly supervised banking           to BDS$25,000 per depositor and per institution, and its
 system.                                                     fund represents about 0.2 percent of total deposits.
                                                             Aspects related to the organization, the MOU with the
                                                             Central Bank; and staffing are in progress.
Credit Unions
 CBB assisted on site examinations: A high priority         The focus of the joint inspections has shifted k o n ~the
 should be assigned to completing the CBB assisted on        largest five to the largest two credit unions. The two
 site examinations of the five large credit unions and such largest are not being inspected on an annual basis.
 examinations should be made regular.                        Consideration should be given to adding the third largest
                                                            to thejoint inspection process as it has significantly
                                                            higher assets than its peers (medium sized category).
 Credit Union Law: Consideration could be given to          The Cooperative Societies Act was amended in
 introducing a separate credit unions law in light of the    December 2007 and its regulations updated in
 experience gained with these examinations. In the           January 2008, however, the amendments are unlikely to
 meantime, the capacity of the Registrar of Cooperatives     serve as a good substitute for a dedicated Act. Plans are
 to effectively supervise credit unions should be           being considered to establish a Financial Services
 strengthened.                                               Commission which will bring under one roof the
                                                             supervision of all nonblank institutions, includingthe
                                                             insurance companies, credit unions, and the stock
                                                            exchange. The IDB project will provide training in risk
                                                            based supervision to the Cooperatives Department.
Insurance Sector
 Supervisory resources: Supervisory resources need to be On-site inspections commenced in 2004. However, these
 increased to allow the instigation of an on-site inspection inspections need to be supported by a more analytical
 process supported by a more analytical off-site review     off-site review, with attention to standard procedures,
 using timely and sufficiently detailed returns from        rather than compliance oriented off site analysis. This, in
 companies.                                                 turn, will require better content and more timely
                                                            information collection.

                                                            Staff has increased since the last assessment; however
                                                            four positions created in 2006 have yet to be filled.
 Solvency margins: A solvency margin requirement can        Proposed amendments regarding solvency margins and
 be developed for life insurance companies which, if        capital requirements have been drafted but not
 supplemented by a review of provisioning rules and asset implemented.
 requirements will greatly improve the regulatory
 framework.

FSAP Recommendations                                         Status as of April 2008

 Circulars: The development of several circulars would       Several circulars and standards were recommended from
 codify presumed understandings between market               the previous assessment, in particular, standards on
 participants and the supervisor. In particular, attention to corporate governance, market conduct, internal controls
 corporate governance and internal controls would offer       (including asset and derivative controls, particularly in
 ready improvement. Such circulars would assist in           the case of the offshore market), asset and liability
 ensuring that reputational risk is minimized.               valuation. Except for one circular covering segregated
                                                              cell companies distributed in October 2007, no other
                                                              circulars were issued.
 Independence and Transparency: The supervisor has not Returns from the industry continue to be delinquent.At
 published information about the operations of the office the time of this assessment, the Supervisor of
 or the market. A draft has been prepared. Improved          Insurance's 2005 Report was still in draft form.
 transparency would promote independence and would be The 2006 information had not been compiled.
the most cost effective way to deliver better compliance
                                                             The Financial Services Commission (the single
 with the core principles.
                                                             regulatory agency of the nonbank sector), which has not
                                                             been approved as of the date of this re-assessment. If
                                                             approved, it will increase the independence and
                                                             transparency of the regulation of the insurance sector.
Capital Markets
 Securities Commission: The new legislation and the          The authorities report that inspection and enforcement of
 authorities' efforts to promote a more efficient and        the Securities Act has improved since the Securities
transparent market have been reflected in the assessment Commission became fully operational in 2003. Some
 of the IOSCO Principles. Full implementation of many        joint inspections done with CBB. Three new
 of the Principles requires effective exercise of the SC's   inspection/compliance examiners to be added in 2008
 powers in practice. However, as the SC is not yet hlly      and own inspection program to commence. BSE in
 staffed or operational, this is not yet in place.           process of establishing own inspection program for
                                                             member brokers.
Public company reporting: Disclosure could be improved No change.
by immediate disclosure of material events by public
 companies and immediate disclosure of transactions in
 company's securities by insiders of company.
 Securities settlement period: Securities clearing and       Effective January 1st2006, the securities clearing and
 settlement should move toward DVP principles and T+3 settlement cycle was reduced to T+3, or three business
 settlement cycle.                                           days after trade day.