Barbados’ two major financial sector regulators noted that in 2020, insurance companies and credit unions faced increased risk exposure from commercial banks as both segments increased the level of their deposits in these institutions.
Addressing the issue of contagion, the Central Bank of Barbados and the Financial Services Commission (FSC) who produced the recent report Financial Stability Report 2020 on the impact of contagion in the system, noted: “Contagion of the financial system can occur when the failure of one section of the financial system can spread through its interconnected enterprises, thus creating disruptions that may have a negative impact on financial stability.
“The risk of contagion arises from both direct and indirect links. Exposures in direct links occur when financial balance sheets are exposed through interbank markets and connection failures of nonbank financial institutions.
According to regulators, they used network analysis to help them assess the exposure of other financial institutions to commercial banks, finance companies and trust companies, relative to their assets.
“Given their centrality in the payment system, commercial banks have remained the main source of interconnectivity in the domestic financial sector, as financial institutions held substantial assets in the banking system in 2020,” the FSC revealed and the Central Bank.
However, regulators pointed out that “exposure to commercial banks was reduced from the previous year as all financial institutions held smaller balances except credit unions.
The credit union sector has become the subgroup most exposed to commercial banks, as they have increased their deposits, while finance and trust companies have significantly reduced their holdings of deposits compared to 2019.
“For deposit finance companies and trust companies, insurance companies and credit unions have increased their exposures through higher deposits with these institutions. “
Meanwhile, in the commentary on the Barbados Financial System Report, regulators revealed that by 2020, financial system assets grew by 3%, to 285% of GDP.
In addition, asset growth was recorded in all segments of the financial system except finance and trust companies.
Deposit-taking institutions recorded a marginal decline for the year. On the other hand, commercial banks and credit unions continued to dominate the increase in assets, with larger cash balances resulting from increased deposits and weak demand for credit.