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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 commerical 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 supervisiors 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
commerical 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 capitalised 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 commerical 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
approch being adpoted by the commericial 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.
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