By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government's majority ownership of Bank of The Bahamas may have impaired the Central Bank's "independence" in regulating the troubled institution, the IMF has reported.

The International Monetary Fund (IMF), in its just-unveiled Article IV and financial sector assessment reports on The Bahamas, raised a concern that many Bank of The Bahamas shareholders and other observers have expressed over the eight years since the BISX-listed institution first came under heavy scrutiny.

"The Central Bank of The Bahamas has been heavily engaged in the recovery efforts of one of its largest domestic banks, which is majority state-owned," the IMF said, not naming the institution although all will know it can only apply to Bank of The Bahamas.

"Although it has successfully made use of several corrective measures over the past ten years pertaining to this supervised financial institution (SFI), state ownership of the bank may have hindered the operational independence of the Central Bank in the past."

The IMF chose its words carefully, as it produced no evidence to prove that the Central Bank's regulation of Bank of The Bahamas was compromised by the government's majority ownership, which has currently resulted in it - via a combination of the Public Treasury and National Insurance Board - holding around 82 percent of its equity.

John Rolle, the Central Bank's governor, did not reply to Tribune Business's phone, text and e-mail messages seeking comment to this and other questions raised by the IMF report, which praised the regulator's banking sector supervision as "effective overall". Yet the fund's statement on Bank of The Bahamas aligns with the perception many hold.

"Strengthening the Central Bank's governance and independence, in line with international best practices, would enhance its operational effectiveness," the IMF's Article IV report added. "Staff advocated the immediate adoption of the planned amendments to the Central Bank law, designed to strengthen the Central Bank's governance and independence, clarify its operational objectives, and limit lending to the government.

"In this context, staff welcomed the progress towards the establishment of a debt management unit in the Ministry of Finance. A debt management strategy consistent with the Fiscal Responsibility Act is important to reduce reliance on Central Bank lending to the Government.

"A comprehensive public debt management strategy would facilitate the deepening of the domestic debt market; for example, through using issuances through regular and pre-announced auctions and efficient communication channels with market participants."

The IMF backed the Central Bank's strategy to reduce its holdings of government securities as a means to absorb the high surplus liquidity in the domestic banking system, which currently stands at over $1.8bn. These holdings had fallen from 6.1 percent of GDP in 2016 to 4.2 percent as at end-2018, and the Fund called for further reductions.

The IMF's solvency stress tests, meanwhile, conducted on the Bahamian commercial banks and other financial institutions, also highlighted Bank of The Bahamas continued vulnerability to external shocks such as hurricanes or US recessions.

The Fund's report revealed: "While a short period of stress caused by a major hurricane would weaken banks' performance, but not below the 17 percent target capital ratio, a US recession scenario would cause one bank with large non-performing loans and weak profitability to become undercapitalised." Again, such a description can only apply to Bank of The Bahamas.

Elsewhere, the IMF also urged the Central Bank to "impose corrective actions" on one of the two largest Bahamian credit unions which is currently below the 10 percent ratio requirement for unweighted capital.

"Sensitivity tests for the two largest credit unions reveal significant vulnerability to credit risk," the IMF's financial sector assessment revealed. "They become undercapitalised under moderate stress due to current weak capital buffers (one credit union is broadly compliant; the other is currently under the 10 percent unweighted capital requirement and Central Bank should impose corrective actions) and non-performing loans above 10 percent.

"The credit unions are more resilient to credit concentration and interest rate risks than banks given their larger exposure to short-term consumer loans."

While backing the Central Bank's plan to introduce a digital version of the Bahamian dollar as a means to improve financial inclusion, the IMF warned it to be vigilant against potential risks to the financial system.

"Staff acknowledged that innovative technologies can help bridge gaps in the financial landscape," the Fund added. "However, the issuance of e-currency can also pose risks to financial stability, cybersecurity, and in the anti-money laundering/counter terror financing sphere.

"Staff recommended investment in human capital and technological capabilities to ensure that the pilot - and the full-scale adoption of a general purpose Central Bank digital currency - is compatible with, and complementary to, the existing financial infrastructure."

The IMF, in its overall conclusion, added: "The Bahamas appears to be resilient to current threats to its financial stability, but action is needed to safeguard against potential weaknesses.

"There is a large stock of problem assets that needs to be dealt with from a variety of perspectives: systemic risk monitoring, banking supervision and crisis management. Vulnerabilities to natural disasters and external economic contagion heighten this need."