Business

Concern about impact of excess liquidity on lending activity

The Central Bank of The Bahamas (CBOB) released its Financial Stability Report on Friday, which revealed no “pressing” risks to the financial stability of The Bahamas, though the report and Governor of CBOB John Rolle noted that excess liquidity in the banking system continues to pose the threat of commercial banks taking on risky lending activities in the medium-term.

As he addressed the media during the central bank’s quarterly economic briefing, Rolle said CBOB is interested in unwinding the excess liquidity in the system through controlled credit growth via the impending credit bureau.

“Capital levels are comfortably in excess of our minimum requirements and more than adequate to absorb extreme, surprise loses that the average bank might encounter from severe shocks,” Rolle said.

“Continuing to tolerate such excesses, in the central bank’s view, would only increase the medium-term likelihood that lending institutions would take on riskier activities to generate comfortable returns on these surpluses.

“At the same time, the central bank is tasked with managing a gradual reduction in bank liquidity, as these surpluses could potentially fuel too rapid a pace of credit growth in the future, which could eat into the external reserves.

“Our stated approach is to continue to sell off the central bank’s holding of government debt, which would reduce the excess liquidity in the system. Also, we continue to progress the establishment of the credit bureau, which would generate information to help banks make sound lending decisions.”

Rolle said the domestic banking sector is expected to continue experiencing high levels of liquidity while the foreign reserves, which are more than $1.5 billion, are expected to continue to “increase at a mild pace”.

“When the medium-term credit delinquency rates are taken into account, the banking sector is only expected to begin to recover its total lending to the private sector at a gradual pace,” said Rolle.

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Chester Robards

Chester Robards rejoined The Nassau Guardian in November 2017 as a senior business reporter. He has covered myriad topics and events for The Nassau Guardian. Education: Florida International University, BS in Journalism

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