:: THE CENTRAL BANK OF SAMOA | Banking Systems | Supervision

Prudential supervision, which is conducted mainly on an off-site basis, concentrates primarily on detecting early signs of weaknesses. This is carried out through regular analysis of financial information and reports provided by the commercial banks. These figures are compared against prudential standards and previous performance to highlight any significant trends in the financial positions of the commercial banks. Regular dialogue with the commercial banks is prompted once any issue of concern arises.

The Central Bank continued to develop its capacity to conduct on-site examination of banks' operations during 2000. To this effect, an on-site visit was carried out for one commercial bank early this year. This was done in conjunction with the commercial bank's final audit by its external auditors. From the Central Bank's perspective, the joint visit with the commercial bank's external auditors served the following purposes:

to verify the accuracy and correctness of information as furnished by the commercial bank throughout the year and evaluate the commercial bank's risk management system;
provide the opportunity to develop and strengthen the relationship and understanding between the supervisors and auditors, given their respective statutory responsibilities under the Financial Institutions Act 1996; and
to continue with the development of the ability of supervisors to carry out effective and productive on-site visits. These visits are strategically focused on the main areas where the commercial banks are inherent major risks.

With reference to prudential issues, special emphasis was focused on capital adequaency, credit risk and liquidity management.

Capital provides an essential buffer to absorb losses that might arise in banking business. It is therefore one of the key tasks for bank supervisors to monitor. A risk-based minimum capital requirement of 15.0 percent must be maintained by the banks at all times. At the end of 2000, the banking system remained strongly capitalized in comparison to the Central Bank's minimum capital adequacy requirement, recording an aggregate ratio of 24.5 percent. Refer to Graph 9

The Central Bank consults closely with any commercial bank which proposes a capital reduction, to ensure its ability to comply with the minimum capital requirement is not hindered over the longer run.

In terms of credit risk, the Central Bank places greater emphasis on banks internal management to monitor and provide adequate controls on credit to reduce possible losses. As loans increase in size, the risk and complexity of loans condition also increases. Such is the cause of asset quality problems if poorly managed. Supervisors, on the other hand, must ensure that adequate level of provision is maintained by the commercial banks to cushion problem loans.

For the year under review, the commercial banks' combined level of arrears and non-performing loans amounted to $4.4 billion. This was comfortably provided for by the total provision of bad and doubtful debts which reached $8.5 million and represented 3.4 percent of total lending respectively high level of provisions partly reflected a dynamic provisioning approach being adopted by the commercial banks which estimates the level of credit losses inherent in the loan portfolio based on their risk grading system. Refer to Graph 10

Proposals in managing liquidity are pending since the Liquid Assets Requirements (LAR) was phased out in May, 1999. At the moment, however, the Central Bank relies on the commercial banks to manage their day-to-day liquidity to meet daily demand, as as for handling unexpected strains on their cash flows. Total liquid assets as a percentage of total domestic deposit liabilities stood at 15.5 percent ($39.5 million), a decrease from 20.2 percent (46.5 million) when compared to the same time in 1999.