By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian financial institutions were yesterday ordered not to bail-out financially stricken parents or affiliates as part of the “recovery plans” they have to submit to the Central Bank by mid-2023.

The regulator, issuing draft guidelines on plans banks and trust company licensees, as well as credit unions, must draw up for combating a solvency crisis and pulling themselves back from the brink, said the health of Bahamas-based institutions must be placed ahead of the wider group’s.

“Where the local entity requires capital and the group is sound, the Central Bank expects, but does not require, a contractual commitment that the group will recapitalise its subsidiary. If the deficiency is small, and the supervised financial institution remains well above its regulatory capital requirement, then local actions such as reduction or suspension of dividends, or steps to improve profitability, may prove sufficient,” the Central Bank said in outlining its expectations.

“Where the group is weak but the local entity is sound, the Central Bank expects the local Board and management to ensure that the local entity’s position is not weakened to support the group. Among other things, any form of capital reduction - including through a return of capital or extraordinary dividend - will require prior approval from the Central Bank.

“Where both the group and the local entity suffer from capital deficiencies, the local management and Board should also take care that the Bahamian entity does not subsidise the group in any capital support sense. As with capital, supervised financial institutions will need a liquidity recovery plan for the scenarios of weak local entity and strong parent, weak parent and sound local entity, and both the local entity and the parent suffering liquidity challenges.”

Bank and trust companies have been given until March 31, 2023, to submit their recovery plans while credit unions have an extra two months until May 31, 2023. Explaining its rationale for requesting the plans, the Central Bank said the law had given it “enhanced resolution powers... to address potential bank failures in the financial system”.

It added: “A thorough and detailed recovery plan is a vital component of a strong crisis management process. The recovery plan should produce a high-level plan fully understood and endorsed by senior management and the Board of Directors.

“These guidelines specifically address a supervised financial institution’s responsibility in developing and testing its own recovery plan as part of their risk management framework, and should be designed to apply well before a supervised financial institution gets into a crisis situation, in effect enabling the supervised financial institution to prevent a crisis rather than to respond belatedly to one.

“The objective of the recovery plan is to enable a supervised financial institution to restore itself to financial soundness and compliance with all regulatory requirements in a timely and credible manner following adverse shock affecting a supervised financial institution’s capital, liquidity or operational capacity. This process is to be commenced at an early stage in the emergence of financial stress,” the Central Bank continued.

“A supervised financial institution’s recovery planning process should enable it to continue to operate as a going concern, recovering from adverse but non-fatal shocks to restore its capital, liquidity or operational capacity to an acceptable level. Recovery planning may improve a supervised financial institution’s understanding of its risks arising from severe but plausible scenarios.”