jwala rambarran : financial stability issues in trinidad and tobago remarks by mr jwala rambarran, governor of the central bank of trinidad and tobago, at the presentation of the financial stability report, port of spain, 14 january 2013. * * * macroeconomic risks to financial stability let me begin with a brief overview of macroeconomic risks to financial stability. the global recovery remained fragile throughout 2012. the economic recovery in the us lost momentum by mid - june 2012, while the euro area slipped into recession in the third quarter. growth prospects in a few large emerging market economies weakened and most caribbean countries were affected by weaker global growth prospects and high public debt levels. perhaps the most serious threat to global financial stability in 2012 came from the sovereign debt crisis in europe, which renewed financial turbulence, weakened investor confidence and threatened to derail the fragile world recovery. on - going weaknesses in the balance sheets of some banks and governments in the euro area will continue to dominate global financial stability concerns in 2013. in the united states, fiscal uncertainty surrounding the “ fiscal cliff ” heightened over the past year, especially as 2012 came to a close. although us lawmakers passed a bill by january 1st 2013 to avert the automatic spending cuts and tax rises due to take place, the situation was not fully resolved. instead, three mini fiscal cliffs have been created that would impact risks to global financial stability in 2013. reflecting the sentiment in global financial markets, the us volatility index, more popularly known as the vix peaked in june 2012, following the downgrade of several spanish banks and the request by the spanish government for bailout funding to recapitalize the banking system. subsequently, the vix trended downward following actions taken by the ecb and other central banks to calm markets. market anxieties were also reflected in the roller coaster performance of global equity and bond markets in 2012. financial stability issues in trinidad and tobago ladies and gentlemen, this brings me to my second point. while there is an immediate focus on rekindling economic growth in trinidad and tobago, the central bank is mindful of the threats that a turbulent global setting, sluggish domestic economy and persistently low domestic interest rates pose to the performance and profitability of local financial institutions. banking system notwithstanding these difficulties, banks which dominate the financial system in trinidad and tobago remain very well capitalized, highly liquid and profitable. at the end of september 2012, commercial banks ’ regulatory capital to risk - weighted assets stood at

redress as soon as possible. all told, as important as the solvency assessment the exercise provides is the detailed information furnished on each bank. in particular, the asset quality review offers significant data on the potential shortcomings of the way in which the financial information disclosed by banks reflects the risk they assume. here it can be seen, once again, that there is no widespread material understatement of risk, in the form of valuation failings or provisioning shortfalls. but there are european banks where the asset review has evidenced shortcomings of some significance. in the case of spanish banks, the analysis has offered fairly satisfactory results. in particular, the asset quality review situates spain as the country where fewest failings have been detected in proportion to the sector ’ s aggregate assets. in other words, according to the exercise, the balance sheets published by spanish banks reflect, on average, the risks arising from their investment with greater rigour than that seen in the other jurisdictions, with fewer valuation flaws or provisioning shortfalls being detected as a result. this is a particularly positive outcome as it arises from the application of a methodology – common to all the banks analysed – based on objective observations and which, unlike the stress test, does not depend on the design of debatable macroeconomic scenarios or working hypotheses. in any event, the stress test also provides positive results for the spanish banking sector which, in virtually all cases, exceeds fairly comfortably the minimum capital thresholds set. only one bank evidenced a very small capital shortfall as at 31 december 2013, and this has now been more than covered following the capital increase made by the bank in the first half of 2014, which gives it a solvency level in line with the sector average. accordingly, spanish banks may be said to have comfortably passed the test, evidencing both high quality of disclosed financial information and considerable resilience to adverse macroeconomic developments. naturally, there is no room for complacency, and the results should not be taken as conclusive proof of the unquestionable and generalised health of our banks. the challenges are manifold, and i shall refer to some of them later. however, it would seem fair to say that the exercise has validated the collective efforts made to overcome the huge impact that the international and european financial crisis and the harsh macroeconomic bis central bankers ’ speeches conditions – linked in part to the collapse of the real estate sector –