Alwyn Jordan: Monitoring and assessing risks to financial stability in
the Caribbean
Remarks by Mr Alwyn Jordan, Deputy Governor of the Central Bank of Barbados, at the
Financial Stability Report (FSR) Peer-to-Peer Workshop, Bridgetown, 16 October 2024.
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On behalf of the Central Bank of Barbados, it is my great pleasure to welcome you to
this peer-to-peer exchange seminar. I'd like to extend a special welcome to Dr. Petr
Jakubik from CARTAC, whose initiative has brought us together for this important event.
This is not just another training seminar - it is a dynamic platform for the exchange of
ideas, the sharing of expertise and the building of frameworks for future collaboration. In
today's rapidly evolving global landscape, where financial stability and economic
resilience are increasingly intertwined with central bank regulation, peer exchanges like
this are vital. They help us remain agile, informed and equip us with the latest
knowledge and best practices to meet the challenges we face as central bankers and
regulators.
It is therefore a pleasure to be here today to discuss this issue with you, which is at the
heart of economic development in the Caribbean. We all know that at first glance,
financial stability may seem like a dry, technical topic, but for us in the Caribbean, it is
central to safeguarding our economic well-being. As the global financial system
becomes more interconnected, our economies are exposed to a variety of risks - both
natural and man-made. Today, I want to highlight why financial stability is crucial for our
region, with particular emphasis on challenges such as climate change, external
shocks, and the evolving financial landscape. I will also shed some light on the
difficulties faced by Caribbean central banks and other regulators in preparing
comprehensive Financial Stability Reports.
We all know that financial stability is about ensuring that various entities such as banks,
insurance companies, financial markets, and payment systems operate smoothly
without triggering major disruptions. When financial stability is maintained, businesses
can secure credit, households can borrow and save, and governments can finance
development. It is therefore the backbone of economic resilience.
For the Caribbean, the stakes are particularly high. We are a region of small, open
economies that are highly dependent on external trade, tourism, and foreign
investment. Our economic structure makes us extremely vulnerable to external shocks,
whether they are related to global financial conditions, natural disasters, or geopolitical
events. Any significant disruption to the financial system, whether from internal
weaknesses or external shocks can therefore quickly lead to a financial crisis. The
resulting economic hardship can take years, or even decades, from which to recover. A
very good example of this phenomenon was seen during and after the Global Financial
Crisis.
Vulnerability to Climate Change
But let me start by addressing one of the major external risks to Caribbean economies,
namely the climate crisis. Our region is one of the most vulnerable to the impact of
climate change. Indeed, when we refer to climate vulnerable economies, Caribbean
countries are always the highest ranked by any measure. Rising sea levels, more
intense storms such as hurricane Beryl, which caused significant damage to a number
of Caribbean islands in late June, prolonged droughts, and flooding have become our
unfortunate reality. These climate-related risks have a direct bearing on financial
stability, as these systems don't just devastate homes and infrastructure, they can also
have adverse effects on the financial system.
For example, the destruction of infrastructure can lead to loans becoming
nonperforming, as businesses and households may default on their debt. Banks and other
large financial entities in turn, may face liquidity problems, which can trigger a systemic
crisis. Furthermore, as governments attempt to rebuild after the event, this often leads
to an increase in public debt, which puts further strain on their ability to finance
essential services and infrastructure. Imagine the strain on our resources that would
have occurred had any of our islands been hit by the back-to-back hurricanes that
recently devastated Florida and other states along the US South coast.
Climate-related risks are particularly challenging to manage because of their
unpredictable nature and the difficulty in quantifying their economic impact. Caribbean
regulators must therefore continuously monitor these risks and implement
forwardlooking policies to mitigate their effects on the financial system.
The Impact of Global Economic Shocks
In addition to climate change, external economic shocks pose another serious risk to
financial stability in the Caribbean. Our economies are heavily reliant on global trade,
tourism, and remittances. Any disturbance in the global economy such as a recessions
in our major trading partners or sudden changes in commodity prices can ripple through
our financial systems. Take, for instance, the fallout from the COVID-19 pandemic,
which brought the world to a standstill in 2020. It was an economic shock of
unprecedented proportions for the Caribbean. Indeed, our tourism sector, a lifeline for
many economies, came to a grinding halt, leaving governments and businesses
scrambling to stay afloat.
Central banks in the region had to take swift action to ensure liquidity in the financial
system, lower interest rates, and support government stimulus efforts. But the
pandemic highlighted an ongoing challenge: our financial systems are vulnerable to
global crises, and the lack of diversified economies in the region makes recovery more
difficult. Regulators must therefore constantly balance the need to maintain stability,
while responding to these shocks in an agile and effective manner.
Navigating the New Financial Landscape
But this is not the only challenge facing us as regulators, as the financial landscape is
also evolving rapidly. The rise of fintech, digital currencies, and shadow banking, has
created new opportunities for financial inclusion and innovation. However, it also
presents new risks. Digital currencies, while offering the potential for greater financial
inclusion, bring concerns about regulatory oversight, cybersecurity, and monetary policy
transmission. Caribbean countries have been the pioneers in developing digital
currency frameworks, but it still requires careful consideration of the impact on financial
stability.
Shadow banks - non-bank financial intermediaries that provide similar services as
traditional banks - such as payday lenders or firms offering "buy now, pay later" options
for buyers, are another concern. Given that these entities generally operate outside the
regular regulatory framework, they are often opaque, and central banks may lack the
tools to properly oversee their activities. They can, therefore, pose systemic risks
without the safeguards that apply to the formal financial sector. If these institutions fail,
the resulting financial contagion could spread quickly throughout the economy.
Developing effective regulatory frameworks for shadow banks is therefore critical to
ensuring financial stability in our region.
The Value of Financial Stability Reports
It is against this backdrop that Caribbean central banks face the herculean task of
monitoring, assessing, and mitigating these risks. One of the key tools at their disposal
is macroprudential policy, which is still in its initial stage of implementation in most
Caribbean economies. However, central banks have made significant improvements in
communicating the risks to the public via their Financial Stability Reports (FSR). These
FSRs, as you all know, provide a comprehensive assessment of the financial system's
health and highlight any emerging vulnerabilities. However, preparing a comprehensive
FSR is a very challenging exercise, especially in the Caribbean context.
One of the most significant challenges is the lack of comprehensive and timely data.
Many countries in the region struggle with collecting and analysing the necessary data
to fully assess financial risks. Without high-quality data, it is difficult for central banks to
make accurate forecasts or take pre-emptive action. Improving data collection and our
analytical capabilities must therefore be a priority for the region, if we are to produce
meaningful and effective reports.
Moreover, we know that preparing a high-quality FSR requires specialised knowledge in
areas such as macroprudential policy, risk modelling, and scenario analysis. Given the
complexity of financial systems and the fast-paced evolution of risks, Caribbean
regulators must therefore invest in training and development, to ensure that they have
the expertise required to produce comprehensive reports.
In our context, the Financial Stability Report of Barbados has evolved over the years,
reflecting the growing complexity of the financial landscape in the country. I'd like to
highlight some of the key milestones that have shaped this journey, all of which have
been implemented as a result of our partnership with our sister regulator, the Financial
Services Commission (FSC) and our collaboration with CARTAC (Caribbean Regional
Technical Assistance Centre).
A major accomplishment was the introduction of stress testing in 2016, as this allowed
us to simulate how our banking sector would perform under adverse shocks. This
tool gave the Bank, as a policymaker and regulator, a clearer understanding of the
vulnerabilities that might emerge during a financial crisis, helping us better prepare for
potential disruptions. This was a crucial step in ensuring that our banks and financial
institutions remain resilient, even in the face of global uncertainties.
As our financial system grew more diverse, it became essential to extend our focus
beyond traditional banks. In 2018, the FSR began to include a detailed analysis of
nonbank financial institutions (NBFIs) such as insurance companies, pension funds, and
credit unions, though our collaboration with the FSC. This was a key milestone because
non-bank financial institutions are integral to our economy, and their health is equally as
important as that of the banking sector. By broadening the scope of the FSR, we now
have a more comprehensive picture of the overall financial system.
The next significant development occurred four years later in 2020, when we made an
important breakthrough in acknowledging the significant risk that climate change poses
to our financial system. With the inclusion of climate-related financial risk analysis, the
Central Bank aligned Barbados with the global efforts to manage climate-related
financial risks, underscoring our commitment to resilience.
The results of this work, led by Dr. Saida Teleu and her team, were incorporated in
Barbados' 2023 FSR. With the invaluable assistance of the Coastal Zone Management
Unit, we've implemented a climate stress test, focusing on projecting damage to the
accommodation sector, which is deeply intertwined with our tourism industry. This
collaboration has allowed us to assess the potential impacts of climate-related risks on
financial stability in a more data-driven and precise manner.
In the most recent FSR, the Bank has also successfully undertaken a significant
revamp of its publication, with improvements that underscore our commitment to both
innovation and comprehensive risk management. One of the key upgrades has been
the introduction of a dynamic balance sheet approach to stress testing. Unlike
traditional methods, this approach allows us to incorporate explicit macroeconomic
scenarios and extend our stress testing over a longer horizon. This dynamic
perspective offers us deeper insights into how our financial system would respond to
shocks in a changing economic environment. Additionally, we've developed a
nonperforming loan satellite model, giving us a more accurate assessment of credit risk in
our financial system.
We also recognised the growing importance of the real estate sector, and so we've
enhanced our analysis of this sector. Real estate is not only a critical component of
household wealth, but also a significant driver of lending and investment activity,
making it essential to the stability of our financial system.
As the financial landscape changes, so too must our approach to assessing risks. In
this regard, the 2023 FSR also incorporated the risks posed by digital financial services,
fintech, and cybersecurity and issued a survey to the industry to gather vital data. This
addition was particularly important given the rapid rise of cyber-crime and the
increasing use of online financial services, and the recent publicised cyber-related
breaches at the Barbados Revenue Authority and one of our credit unions give
testament to this fact. As a country, we are keen to embrace innovation, but it is equally
important that we understand and manage the risks that come with these technological
advancements.
These most recent advancements significantly upgraded our report. Indeed, the Bank's
FSR has now become, in our humble opinion, the regional benchmark for integrating
climate change into financial stability assessments. However, we are keen to share our
insights with our regional colleagues and we thank CARTAC for sponsoring two
peer-topeer missions, including this one, which serve to further strengthen financial stability
efforts throughout the Caribbean.
Each of these milestones reflects our Bank's commitment to ensuring a resilient
financial system. From stress testing and climate risk analysis to the inclusion of cyber
risks and more robust data analytics, we are continuously improving the tools and
strategies we use to safeguard financial stability.
But our work doesn't end here. The financial system is always evolving, and we must
stay ahead of the curve. By building on these achievements and addressing new
challenges, we will continue to protect the financial well-being of Barbados, ensuring
that we are resilient in the face of both local and global uncertainties.
I am honoured to also explore some of the significant milestones achieved by two of our
regional counterparts - the Financial Services Commission of Turks and Caicos and the
Central Bank of Aruba - in their efforts to enhance their financial stability reporting.
Let me begin with Turks and Caicos. Your financial system plays a vital role in your
country's economy, particularly in your banking and offshore sectors. In collaboration
with CARTAC, the FSC made great strides in developing its stress testing framework,
which is very similar to the one we recently implemented, as a multi-factor and
multiperiod macroeconomic-stress test that can account for both domestic economic shocks
such as a downturn in tourism and external shocks like global financial market volatility.
By extending the horizon and refining the scenarios, the FSC is now better equipped to
gauge the potential vulnerabilities within its financial system.
We know that the Central Bank of Aruba does not currently publish a Financial Stability
Report. However, the Bank does perform stress tests on its banking sector, the results
of which are usually discussed with the banks individually via bilateral meetings. In
2023, the Bank conducted a stress test on the banking sector, with a key focus on
concentration risk. This scenario analysis was driven by the developments in the US
banking system that took place that year.
We will hear directly from these two institutions about their journey to enhance and
assess financial stability in their respective jurisdictions. Over the next few days, you
will participate in a diverse and robust line-up of sessions that promise to deepen our
understanding and sharpen our capabilities.
I encourage all of you to actively participate in these discussions, as the true power of
peer-to-peer learning lies in the collective wisdom and shared experiences of those in
this room. Each of us brings a wealth of knowledge and experience, and together, we
have the opportunity to generate innovative solutions that can strengthen the financial
stability of our institutions and economies.
I commend CARTAC, and Petr specifically, for hosting these peer-to-peer exchanges,
which provide unique value to our professional growth. While we are all experts in our
respective areas, there is tremendous strength in collaboration. This seminar is
therefore a perfect opportunity to foster connections, engage in thought-provoking
discussions, and together, to drive the innovation and progress that our institutions and
economies need to thrive.
I would like to take a moment to recognise and thank the organising team, especially
the Financial Stability Unit led by Saida, who have worked tirelessly to put together this
exceptional event, as well as Karen, who has done an excellent job in coordinating this
event. Your dedication and efforts are deeply appreciated.
I would also like to extend a special thank you to our speakers, including those from our
sister regulator, the FSC, and our colleagues from the Turks & Caicos and Aruba, who
have prepared valuable content for us. We look forward to the knowledge and insights
you will bring to the table.
In closing, I urge each of you to take full advantage of the opportunities this seminar
provides. Whether through the formal sessions or during informal conversations during
the coffee breaks, I encourage you to use this time to build stronger networks,
exchange ideas, and learn from one another. Once again, thank you all for being here. I
look forward to the meaningful discussions and practical takeaways that will
undoubtedly emerge over the next few days and I wish everyone a productive and
successful seminar.
Thank you.