By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

PROPOSED legal reforms will give Bahamian depositors “preferential treatment” while providing the Central Bank with “discretion to depart” from equal treatment of “similarly-ranked creditors” following a bank failure.

Stacey Benjamin, the Central Bank’s top legal counsel, told yesterday’s financial services industry briefing on the recently-unveiled legislative amendments package that the changes - if passed into law - would rank Bahamian depositors and their funds ahead of other “senior unsecured creditors” in any payout and recovery following an institution’s liquidation.She also explained that the proposed “discretion” in creditor treatment, which would be a departure from long-standing international and local norms, will only be exercised if the Central Bank feels it is necessary to “prevent contagion” in the Bahamian financial system or maximize the “value” of a failed/collapsed institution and its assets. 

“The proposed amendments also seek to ensure depositors receive preferential treatment and a mechanism to protect public funds during resolution,” Ms Benjamin said. “Depositor preference and flexibility in creditor treatment.”

Reform of the Banks and Trust Companies Regulation Act in 2020 had incorporated provisions “for shareholder and creditor safeguards” should any of the Central Bank’s licensees fail, “and to allow for greater flexibility in developing resolution options in line with international standards”.

However, with the latest proposed changes, Ms Benjamin added: “These amendments will introduce provisions that will give the Central Bank discretion to depart from the pari passu (equal) treatment of similarly-ranked creditors either to prevent contagion in the financial system or to maximize the bank’s value.

“The proposed amendments also introduce depositor preferences that will place depositor funds in a more senior position than other unsecured creditor claims. That will require an independent valuation of assets and liabilities to inform the Central Bank’s resolution actions”.

Ms Benjamin told financial services executives that proposed changes to the Protection of Depositors Act are designed to prevent ‘bank runs’, where depositors suddenly withdraw funds en masse for a particular institution because they perceive it is about to fail or collapse - an event that can turn belief into reality.

She explained that the reforms will give the Deposit Insurance Corporation, which fully insures all deposits up to a maximum of $50,000 at its member institutions, access “to a dedicated pre-arranged emergency credit line” from the Central Bank to ensure it has sufficient cash and liquidity to fulfill its obligations should a bank ever fail.

“The proposed amendments are intended to strengthen the framework and capacity of the Deposit Insurance Corporation,” the Central Bank’s in-house counsel explained, “by ensuring Bahamian depositors are always protected irrespective of the financial balance in the Corporation’s funds.

“This will facilitate confidence in financial institutions, the absence of which may lead to preemptive runs on weak but otherwise solvent institutions. To achieve this, the proposed amendments make provision for the Deposit Insurance Corporation to have access to a dedicated pre-arranger emergency credit line from the Central Bank that is sufficient to meet liquidity needs.

“These emergency funds will be supported by government guarantees and repaid to the Central Bank from asset recoveries or levies on member institutions of the Deposit Insurance Corporation.” 

John Rolle, the Central Bank’s governor, in March this year, revealed that 580,000 Bahamian bank accounts, representing 96 percent of the total, were fully protected against their institution’s possible collapse as at year-end 2024.

He suggested the Deposit Insurance Corporation would take another “two to three years” to reach its $130m target size, having amassed $101.5m at year-end 2024 - some $29.5m shy of this goal. However, it was already well within international benchmarks, standing at 3.6 percent of insured deposit values after enjoying an average 11 percent growth rate over the previous five years.

“As at the end of 2024, the size of the Deposit Insurance Fund was $101.5m (3.6 percent of insured deposits’ values),” Mr Rolle said on March 31, 2025. “There were approximately $2.8bn of insured deposits within 18 member institutions. In this regard, the number of fully insured accounts was approximately 580,000, which is a coverage ratio of 96 percent of the accounts.”

Ms Benjamin yesterday said the reforms also include protections around the use of Bahamian taxpayer monies to address the fall-out from bank failures and collapses. “The proposed reforms will also place appropriate safeguards on the use of public funds for bank resolution,” she added.

“So the legislative proposals make provision for the Central Bank to make advances to the Deposit Insurance Corporation only for the purpose of maintaining financial system stability and supporting a resolution measure undertaken for a member of the Deposit Insurance Corporation. 

“In doing so, the Government must guarantee repayment in writing and the Central Bank must be satisfied that such loans are necessary to prevent systemic risk posed by a member of the Deposit Insurance Corporation.” 

Ms Benjamin added that while the reforms will “empower” the Deposit Insurance Corporation to provide funding that supports “resolution” for troubled institutions as the Central Bank “may determine”, the sums involved will be limited to “the amount paid out to depositors in a liquidation” and there will also be a “maximum” on what can be used.

She also disclosed that the changes planned by the Central Bank while also allow it to appoint a statutory administrator for a troubled bank’s holding company or affiliates - especially those that “perform critical functions or services for the bank” to ensure they continue to be provided.