Barbados’ financial system remains robust and well-capitalised, but faces mounting threats from global economic uncertainty, rising protectionism and climate risks, the Central Bank warned in its latest Financial Stability Report.
Deputy Governor Alwyn Jordan launched the 2024 Financial Stability Report (FSR) during a roundtable panel of financial experts to discuss the findings of the 62-page document.
In an overview of the report’s findings, Jordan disclosed that the island’s economic expansion continued in 2024, supported by robust credit growth and stable household and corporate balance sheets.
But the deputy governor warned of pending threats to the country’s financial sector.
“Looking ahead, global economic uncertainty, rising protectionism, and elevated interest rates may pose increased financial stability risks, particularly if they lead to weaker external demand, inflationary pressures, and tighter financing conditions,” he cautioned.
“Stress testing confirms that the financial system remains sound under baseline conditions, but highlight material vulnerabilities in scenarios involving severe external shocks, including tariff escalations and heightened geopolitical instability.”
Jordan reported that under an adverse scenario, non-performing loans peaked at 6.2 per cent, with four institutions falling below the threshold of eight per cent capital adequacy, requiring recapitalisation equivalent to 1.2 per cent of GDP.
“Liquidity stress tests show moderately lower resilience compared to 2023, with more banks and credit unions needing liquidity support under higher deposit withdrawal scenarios. Large exposure stress testing indicates a modest improvement in capital resilience under moderate provisioning assumptions, but vulnerabilities persist under extreme loss scenarios,” he pointed out.
The Central Bank official said that physical climate risks remain a systemic concern for the financial sector, particularly in banking, insurance and pensions, while transition risks are currently assessed as moderate and non-systemic.
“A simulated one-in-100-year storm surge,” Jordan reported, “could reduce GDP by 7.1 per cent and significantly increase loan defaults in coastal tourism and real estate portfolios. Transition stress testing identifies moderate credit risks in agriculture, accommodation and food services, and government-linked sectors under delayed decarbonisation pathways.
“While cyber risk is increasing with greater financial digitalisation, scenario-based assessments suggest limited capital impact, and commercial banks remain resilient.”
Jordan continued: “Increased electronic transactions and interlinked payment systems have heightened exposure to cyberattacks, raising the risks of service disruptions, liquidity stress, and reputational damage. The Central Bank of Barbados and the Financial Services Commission (FSC) continue to engage licensees on compliance with requirements of the Technology and Cyber Risk Management Guidelines that were issued by the regulators in 2023 and 2024, respectively.”
He stressed that although profitability declined among deposit-taking institutions, credit quality strengthened and capital buffers remained comfortably above regulatory minimums.
Jordan explained that declining profitability reflected lower provision write-backs and rising operating costs.
He said: “Notwithstanding, the sector’s profitability remained solid as core lending and investment income supported earnings. Credit quality improved modestly, with NPL ratios declining across household and corporate portfolios. Capital adequacy ratios remained well above regulatory minimums at 21.2 per cent for banks and 19.5 per cent for finance companies, providing buffers against credit and market shocks.
“However,” he pointed out, “rising mortgage exposures and real estate loan concentrations signal the growing importance of the sector for financial stability and warrants continued monitoring.”
Jordan contended that preserving financial stability will require sustained proactive risk management and enhanced macro- and micro-prudential oversight.
“The evolving risk landscape, shaped by global economic trends, sectoral credit concentrations, and emerging cyber and climate risks, calls for strengthened credit risk monitoring, deeper integration of climate and cyber risk into supervisory frameworks, and contingency planning,” he said.
Jordan pledged that the Central Bank and the Financial Services Commission will continue to prioritise measures to address sectoral vulnerabilities, support sound lending practices, and reinforce systemic resilience under its macroprudential mandate.
He announced that key regulatory actions include enhanced climate risk mapping, further development of climate risk assessment, promotion of national instant payments, discussions on ways to improve resilience in the general insurance sector, and improvements in data collection and analysis. (EJ)
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