The Banking Regulation Review: Barbados
Barbados has a long tradition of commercial banking, both in a formal sense in terms of international banking institutions and, in a more informal sense, by way of credit unions and provident societies. Commercial bank development has reflected the growth and focus of the island's trade relations. In addition to commercial banks, there are regional and local development institutions that are primarily geared towards long-term lending in some cases, and in others to the financing of risks that are sometimes more development-oriented than commercially attractive.
The Caribbean Development Bank is a regional institution, headquartered in Barbados, and is in the business of financing development of its member countries. The Inter-American Development Bank, another regional institution, is also headquartered in Barbados and has a wider membership encompassing the hemisphere of the Americas. Its loan portfolio is larger and more diversified, and its terms of repayment extend longer than its Caribbean counterpart.
Barbados is also well served by a variety of well-organised and efficiently managed credit unions and provident societies whose activities are restricted to their members, and whose actions are governed by relevant applicable cooperatives legislation.
Offshore banking in Barbados was introduced in 1979 by virtue of the Offshore Banking Act, later repealed and replaced by the International Financial Services Act (IFSA), with the Central Bank of Barbados (CBB) in charge of the general administration of the Act and the Minister of Finance responsible for the issuing of licences. The Act stipulated that a licence may only be issued to an eligible company or a qualified foreign bank engaged in foreign-sourced banking or trust activities.
The regulatory regime applicable to banks
i Recent legislative changes
The IFSA has now been repealed by the Financial Institutions (Amendment) Act 2018 (the amended FIA). A new Guideline applies to licensees previously licensed under that Act and that are transitioning to the amended FIA. Such licensees have been deemed to be licensed under Part IIIB of the amended FIA as foreign currency earning banks (FCB) since 1 January 2019. The amended FIA provides in Part IIIA for the licensing of financial holding companies. Section 41G of the amended FIA contains the transitional provision for companies licensed under Part IIIB and carrying on the functions of a financial holding company. Licence fees continue to be applied at current levels until otherwise advised by the CBB.
Subsequent to the statutorily permitted transition, a six-month grace period commenced in January 2019, during which a licensee's status continued uninterrupted and any legal or regulatory matters that emanated from the transition to the amended FIA (such as filing amended articles with the Corporate Affairs and Intellectual Property Office (CAIPO) or attending to outstanding filings with the Barbados Revenue Authority or the National Insurance Department) could be completed.
In cases where an amendment is needed to the articles of incorporation of an IFSA licensee transitioning to the amended FIA, authority for approval regarding the amendments to the articles of incorporation has been delegated to the CBB under the amended FIA. Section 114 of the amended FIA has been retained so as to provide for any consequential amendments to the Companies Act that may arise from the introduction of the FCB regime. CAIPO and the CBB are expected to collaborate as necessary to establish and communicate a common regulatory position.
Licensees whose ownership or subsidiary structures include entities licensed under repealed statutes, such as the International Business Companies Act, and that transitioned to the amended FIA were required to notify the CBB of any proposed group reorganisations within 90 days of the issuance of the January 2019 guideline. This notification sought to facilitate identification of changes in group organisations or holdings that deviated from what was previously approved, allowing for regulatory review if warranted and also ensured continued effective consolidated supervision.
Regulators are also expected to collaborate with the purpose of enhancing the regulatory regime for regular business companies (RBCs), which have now replaced international business companies (IBCs). These enhancements seek to facilitate the CBB's review of all banking groups that included IBCs but in the future will include RBCs and allow for the determination of any conditions that may be deemed necessary.
ii Savings or grandfathering policy
Section 35 of the amended FIA contains a saving or grandfathering provision for the benefit of licensees. It allows old rules to apply to those entities that opt to be grandfathered. Hence, in spite of the repeal of the IFSA, the rights and benefits conferred upon licensees under the IFSA are saved as provided in the following manner: a licensee holding a valid licence issued prior to 17 October 2017 is entitled to receive the benefits until 30 June 2021; and a licensee holding a valid licence issued on or after 17 October 2017 ceased to be entitled to the benefits after 31 December 2018. The latter licensees will be subject to the arrangements for transitioning to the amended FIA. Furthermore, any obligation or penalties incurred by a licensee under the IFSA during the period of operation of that Act shall not be affected; and any related investigation, legal proceeding or remedy may be instituted, continued or enforced with penalties imposed as if the IFSA had not been repealed. If a licensee wishes to avail itself of the savings or grandfathering provisions, it must advise the CBB of its intent to be grandfathered as provided in Section 35 of the amended FIA. A grandfathered licensee must also amend its articles of incorporation, as applicable, within the six-month grace period.
Provision is also made for exiting the grandfathered status. In cases where a grandfathered licensee chooses to exit its grandfathered status before 30 June 2021, it must notify the CBB. Upon notification and subsequent confirmation of non-objection by the CBB, the licensee is then deemed to be fully licensed under the amended FIA, and the transitioning arrangements shall apply.
The CBB has issued an administrative statement clarifying that licensees that have opted to be grandfathered under the old rules of the IFSA shall not engage in any new lines of business during the savings period that expires on 30 June 2021.
i Relationship with the prudential regulator
The CBB was in the process of implementing the Basel II Capital Framework (Framework) when the global financial crisis emerged in 2007, and several later enhancements to the Framework were made. The implementation roadmap has been reviewed, and focus was initially on the implementation of Pillar II, which emphasises the importance of strong regulatory oversight and strong industry risk-management practices. The CBB's implementation of the Framework has identified three phases, and it is continuing with the implementation of Basel II and Basel III.
The goals of the Bank Supervision Department are facilitated through both on-site and off-site inspections of all licensed financial institutions. During an on-site inspection, bank examiners review the major areas of risk for the institution. The process includes assessments of liquidity, and operational and other kinds of risks, fully recognising that the major risk on a bank's balance sheet in Barbados is often in the area of lending. It is also recognised that any serious causes of banking problems are directly related to poor credit standards for borrowers, poor credit administration, and a lack of attention by the bank to changes in the economy and other factors that may affect borrowers' ability to repay a debt.
Bank examiners also review the strength of corporate governance within banks. Under scrutiny are the structures and relationships through which the objectives of an entity are met, as well as a full assessment of the role of the board of directors, management of the entity, and the strategies, policies and practices that have been implemented. Inspections will also allow for an assessment of the internal control systems of the bank, a factor that is clearly critical for effective bank management and sound operations. Arising from the assessments undertaken, the examiner will determine areas of deficiencies. A report is prepared detailing the condition of the bank's operations and, where necessary, recommendations are made for improvement. The report is ultimately provided to the institution's board of directors.
ii Management of banks
Management of Barbadian banks is governed by the general rules that apply to the prudence and skills criteria of the business director and, by extension, of the corporate enterprise. Typically, banks will also have an audit committee, a risk committee, an investment committee and a human resources committee, depending on the nature of the business areas, risk profile and size of the bank. They are required to have scheduled quarterly board meetings at which reports on the various committees will be considered in detail. The audit committee will often be expanded into or combined with a risk policy committee. At its quarterly meetings, the board will also typically receive a report on capital adequacy ratios, a financial report, a credit portfolio report, a new and large credit review, a watch list of non-performing loans, and a Treasury interbank and country limits review. Other matters will also be considered, such as a litigation review.
iii Regulatory capital and liquidity
By virtue of the FIA, a licence is not issued to a commercial bank unless (in the case of a Barbados bank) the stated capital or (in the case of a foreign bank) the assigned capital is at least Bd$4 million or such other amount as the CBB may in any particular case determine. Banks must not have a capital adequacy ratio of less than the percentage as may be prescribed by the CBB and must be calculated as prescribed. A bank is also required to have a reserve fund, and must transfer a sum of not less than 25 per cent of its net profits, prior to declaring dividends, each year whenever the amount in the reserve fund is less than its issued and paid-up capital. However, this stipulation will not apply to a bank that has satisfied the CBB that its aggregate reserves are adequate in relation to its business. The CBB may also require banks to maintain reserves for bad and doubtful debts of an amount that the CBB deems adequate. A bank may only pay an interim dividend out of the profits or reserves of previous years.
Under the IFSA and the amended FIA, a licence for an international bank or FCB may be issued to a company that accepts third-party deposits if the stated or assigned capital of the company is at least Bd$4 million and, furthermore, does not accept third-party deposits if the stated or assigned capital of the company is at least Bd$1 million. The CBB also reserves the right to determine a different amount of stated or assigned capital in any particular case.
Additionally, a bank must always maintain a capital adequacy ratio of less than the prescribed percentage, which is currently 8 per cent. Assigned capital in this context refers to the portion of the capital of a company represented by such unencumbered assets as are approved by the CBB and specifically assigned by the company to its local branch operations. A bank is mandated to maintain a reserve fund and, out of its net profits each year and before any dividend is paid, to transfer to the fund a sum equal to not less than 25 per cent of those profits wherever the amount of the reserve fund is less than the stated capital of the licence, or indeed such other sum as is prescribed. Yet again, this requirement will not apply to a licensee that has shown to the satisfaction of the CBB that its stated capital and aggregate reserves are adequate in relation to its business.
The CBB had previously indicated its intention to adopt the Basel II methodology for the calculation of capital adequacy in 2009 for licensees regulated under the FIA and the IFSA. As part of the process, the CBB issued the first round of guidance and reporting forms to the banking industry for comments and feedback in 2009. In view of lessons learned from the 2007–2009 financial crisis and the revisions to Basel II, and the emergence of Basel III, the CBB has deemed it prudent to adjust its approach to the implementation of Basel II.
Papers issued by the Basel Committee on Banking Supervision (BCBS) and other entities that opined on the financial crisis have focused on the need to improve risk-management processes and techniques within the banking industry and to strengthen the regulatory framework. The importance of Pillar II of the Framework has therefore assumed special significance. In particular, 'Enhancements to the Basel II Framework', issued by the BCBS in July 2009, considered several of the risk-management weaknesses that were revealed during the financial crisis, and reinforced the ways in which banks should manage and mitigate risks identified through the Pillar II Internal Capital Adequacy Assessment Process (ICAAP). The CBB has issued a guidance note to banks indicating its expectation that they will improve and strengthen their risk-management processes. It indicated that the draft ICAAP guidance that was issued for comments should be used as a guide by banks.
The CBB is therefore using a phased approach to the implementation. It is focusing initially on the qualitative aspects of Pillar II and, in that regard, on gaining a better understanding of the risk profiles of licensees. It has proposed an implementation of Basel II in three phases. Within the first phase, the emphasis will be on strengthening the qualitative aspects of Pillar II, while the second phase will take into account the implementation of the Market Risk Amendment. It is proposed that Pillars I and III will be implemented in the third phase.
Phase I recognises the need to strengthen compliance with Pillar II by re-examining important risks and factors not covered under Pillar I because Pillar II requires that banks assess the capital that is required to support all their material risks. Banks are therefore required to explore weaknesses and gaps in their risk-management framework, and to use better risk-management techniques in monitoring and managing risks. The procedures used to remedy these areas are generally subsumed under the nomenclature of an ICAAP, namely a process to more adequately link capital allocation to the risks inherent within a bank's operations. During Phase II, the CBB proposes implementing the Market Risk Amendment. In this regard, banks will be required to implement a standardised approach for the calculation of the market risk capital charge. The CBB will consider use of the more advanced internal models approach. The third phase will involve implementation of Pillars I and III.
The CBB's Pillar III reinforces Pillars I and II by way of increased disclosure requirements that impose market discipline on financial institutions. Banks will be required to make core and supplementary disclosures, which will allow market participants to assess important pieces of information on the scope of application, capital, risk exposures, risk assessment processes, and therefore the capital adequacy, of the institution. Banks will also be required to publish information on their approach to risk management, thereby raising the overall standards of transparency within the jurisdiction.
The CBB is also making amendments to strengthen the framework for Basel III. Hence, it is conducting an assessment and impact study of the additional requirements introduced under Basel III, such as liquidity requirements and the redefinition of regulatory capital. It will therefore amend the plan as deemed necessary. It also recognises that further changes to the framework may be required, and has undertaken to consider the materiality of those updates on a case-by-case basis to determine their impact and applicability to the implementation process. It has assured the banking industry that it will be kept informed of any updates to the roadmap, and that the CBB will seek feedback and comments from the industry.
iv Recovery and resolution
The procedures for the resolution of failed banks are well documented through the interplay of the banking legislation and the modern corporate legislation that Barbados borrows from the Ontario and Delaware statutes. The jurisdiction has also benefited from very effective regulation and, as a result, has had no bank failures. In the case of the global Bank of Credit and Commerce International collapse in the 1990s, Barbados as a jurisdiction put together a rescue plan, as a result of which no depositors suffered, and the book of business was taken over by another banking institution.
Conduct of business
The conduct of banking business is governed by the applicable banking legislation and the many other statutes that govern areas related to fraud, criminal prosecution and the like. Similarly, precedent and case law in areas such as misrepresentation, negligence and confidentiality are fully entrenched jurisdictionally. The leading case of Tournier v. National Provincial and Union Bank of England 2 is still relevant to the subject of the implied contract between the banker and customer. Hence, as in most jurisdictions, the Tournier principle has been modified by the plethora of anti-money laundering legislation, which imposes a countervailing obligation on the part of banks and financial institutions generally. In this regard, Barbados has both an Anti-Money Laundering Act and a Proceeds of Crime Act.
To the degree that most of the Barbadian banks are subsidiaries or affiliates of foreign banks, the matter of funding will seldom raise a concern to be considered. Given the stringent requirements in the setting up of a bank, the matter of funding is a moot issue.
Control of banks and transfers of banking business
i Control regime
The issue of individual control in banking business is not a matter likely to raise problems, since all commercial banking institutions are generally owned and controlled by institutions, and are not closely held. As regards FCBs (previously international banks), the CBB has indicated very clear criteria that minimise the potential harm of any individual bank control.
The CBB has identified four categories of acceptable international banks.
First, it welcomes reputable, adequately capitalised and well-managed local companies with a proven track record.
Second, it encourages well-established financial institutions or international banks, including branches or subsidiaries and affiliates of international banks or financial institutions, which have a proven track record and are the object of effective consolidated supervision. In the case of such a bank, the prior written outward authorisation of the parent supervisory authority is a requirement.
Third, it has identified wholly owned subsidiaries of well-established international non-bank corporations with activities limited to intergroup treasury operations and with operations that are consolidated in the published financial statements of the parent company. In such cases, the issued bank licence indicates that the bank will not accept deposits from third parties.
Finally, the CBB has allowed for banks where the beneficial ownership rests with individuals of high net worth. However, owners must submit an audited statement of net worth or other documented evidence that is acceptable to the CBB. In such circumstances, the banking licence is also granted on the condition that the bank will not accept deposits from third parties.
However, the FIA states that no person shall directly or indirectly hold any significant interest in a licensee without the approval of the CBB. A significant interest is considered 10 per cent of the value of the capital of the licensee or 10 per cent of any class of shares of the licensee. Furthermore, each licensee must submit to the CBB at the beginning of each year a list of shareholders on its register who hold shares of a value of 5 per cent or more of its stated capital. Under the IFSA, no person shall acquire or hold shares of more than 10 per cent of the stated capital of an international bank without the approval of the Minister of Finance.
ii Transfers of banking business
A bank may transfer its banking business to another existing and licensed banking institution, or it may engage in the sale of its banking business simpliciter.
Certain steps are necessary in this first category of amalgamation. The bank will be required to apply to the CBB for approval to merge with the amalgamated entity to carry on business under a specific legal entity name. Certain documents must be filed in support of the application:
- a draft amalgamation agreement;
- the proposed articles of amalgamation;
- a business plan for the merged entity;
- an operational migration plan;
- an undertaking to return the two licences on completion of the amalgamation; and
- the amalgamating companies' draft shareholders' resolutions or directors' resolutions.
Before the corporate amalgamation process is completed, the following additional documents are usually required: a copy of the regulatory approval from the CBB for the amalgamation and a copy of the no objection letter from the foreign regulatory body in cases where the merging banks are foreign affiliates, even though they may be registered in Barbados as external companies to be able to carry on business locally.
In the latter case, a sale of a banking business will also require the approval of the CBB and, in this regard, the buying bank will need to satisfy the CBB in many respects. First, it will need to be one of the four types of banking institutions favoured by the CBB and identified in Section VII.i. Second, it will be required to follow certain established procedures, which will vary according to whether it is a qualified foreign bank or, to the contrary, one of the other three types of applicant. In both cases, the following submissions are required:
- the name of the proposed bank;
- the proposed date for the commencement of business;
- the proposed address of the place of business;
- the name and address of the attorney-at-law in Barbados who is or may be engaged with the formation of the company;
- the name and address of the proposed auditor in Barbados;
- the name, address and telephone number of the person or persons to whom the CBB should refer in connection with the application;
- the approval of name reservation by the registrar of companies;
- a draft of the bank's articles of incorporation or articles of organisation for entities organised under the Societies With Restricted Liability Act;
- a certified copy of the parent company's articles of incorporation;
- a profile of every shareholder at the date of commencement of business; the number of shares, of all kinds, and the amount payable thereon; and the particulars of any loans with conversion or voting privileges that are to be allotted to each shareholder;
- a current financial statement of any person who, directly or indirectly, will possess or control 5 per cent or more of the voting power or 10 per cent or more of the non-voting shares of the proposed bank;
- particulars of any proposed or existing agreements dealing with the voting of shares or management of the affairs of the proposed bank, and of any agreements providing for the issue of options to acquire shares for a consideration other than cash;
- a complete corporate chart showing the relationship of the proposed bank to other affiliated companies, subsidiaries and partnerships, wherever resident;
- a confidential statement prepared by every individual shareholder and every person who is proposed to be appointed at the date of commencement of business as a director or executive officer;
- an outline of the business of the proposed bank and its general objectives, as well as the needs of the clients it intends to serve from Barbados, including copies of proposed policies on matters such as investments, loans, and asset or liability management;
- a projected financial statement containing a balance sheet income statement, and capital adequacy calculations prepared in the usual way for banks for the first three years of operation of the proposed bank, and outlining the method of assumptions that are used;
- the prospects of the proposed bank as an employer with information as to the number of persons likely to be employed in management and staff positions at the end of the three years, and the anticipated requirements for specially qualified personnel who are not resident in Barbados;
- the particulars of any pending application in Barbados or any other jurisdiction by the principals of the proposed bank, or by any affiliates, associates or other related companies; and
- a letter certifying the accuracy of the submitted information.
The year in review
The Barbados economy remained subdued in 2019 while international reserves increased substantially assisted by the suspension of payment of external sovereign debt and the assistance of the International Monetary Fund programme. Real economic activity contracted by an estimated 0.1 per cent and there were signs of modest recovery in the last six months of the year. As regards the tourism sector, long-stay visitors' arrivals increased by 3.5 per cent over the previous year as a result of more intensive marketing and increased airlifts. However, construction activity declined by 4.7 per cent due to the delay of certain projects. It is expected that, during 2020, construction and manufacturing activity will show very significant increases, particularly since there is a resurgence of investor confidence and many new projects are in the 'build-out' stage.
Further to the legislative changes outlined in this chapter, Barbados has incorporated legislative changes to its companies, insurance and income tax legislation. Of interest, Barbados now has a corporate income tax for entities that are governed by the amended FIA and that have not been grandfathered under the IFSA, as seen in the table below.
|Taxable income||Rate (%)|
|Up to Bd$1 million||5.5|
|More than Bd$1 million and up to Bd$20 million||3|
|More than Bd$20 million and up to Bd$30 million||2.5|
|More than Bd$30 million||1|
Outlook and conclusions
With the CBB sitting at the apex of its banking structure and regulating rigorously, Barbados continues to balance the needs of commerce and development with the requirements of business sobriety and holistic growth.