EXECUTIVE SUMMARY

Belize’s banking system’s weaknesses appear to have diminished since the 2015
Article IV Consultation. Non-performing loans have declined further, while provisioning continues
to increase. The banking system’s Capital Adequacy Ratio (CAR) rose to the highest level in several
years, owing in part to capital injection, sale of asset and modest profits recorded. However, this CAR
continues to mask inflated capital buffers in some banks because of low provisioning.
2. The loss of correspondent banking relationships (CBRs) has taken systemic
proportions. Only two (27 percent of the banking system’s assets at end-March 2016) of the nine
domestic and international banks that had CBRs have managed to maintain at least one CBR with full
banking services. Other banks have so far maintained wire transfer arrangements, including with
nonbank providers of payment services. The Central Bank of Belize lost three of its five CBRs in the
last two years.

3. Global financial institutions’ decisions to withdraw CBRs are driven by a number of
considerations. Generally, they reflect banks’ cost-benefit analysis, shaped by the re-evaluation of
business models in the new macroeconomic environment and changes in the regulatory and
enforcement landscape notably with respect to more rigorous prudential requirements, economic
and trade sanctions, anti-money laundering and combating the financing of terrorism (AML/CFT) and
tax transparency. These factors inform banks’ risk and reputational cost perceptions. Further
pressures to withdraw CBRs may arise where regulatory expectations are unclear, risks cannot be
mitigated, or there are legal impediments to cross-border information sharing. These factors operate
concurrently, with their relative significance varying case by case.

4. Although the most recent data indicate a decline in the value of international
transactions in Belize, available data do not yet allow a reliable inference regarding the impact
of the loss of CBRs, as most CBRs were only lost in late 2015 or early 2016. For example, a major
global bank was providing CBRs with wire transfers to most domestic banks until April 2016, and to
most international banks until the second half of 2015.2 Credit card transactions continue through
banks’ accounts with major credit card companies, though for some banks’ proceeds from such
transactions can only be used through restricted accounts.

5. Nonetheless, the cost and processing time of key international financial transactions
has increased, and deposits in Belize’s international banks have declined sharply, resulting in a
contraction of overall deposits. The cost of wire transfers has increased three-fold in some banks.
The processing times of wire transfers has also increased from “within twenty-four hours” to “several
days.” International banks’ deposits have declined by more than 20 percent in 12 months to March
2016. Whereas the deposits in domestic banks increased at the rate of 6.5 percent at end-March
2016 (y/y), which is close to their historical average growth rate since 2011, the total deposits (in
both domestic and international banks) contracted by 3.7 percent at end-March 2016 (y/y).

6. Updated stress tests suggest that the banking system is more resilient than at the time
of the 2015 Article IV Consultation. Last year, a few banks had their CARs fall below the regulatory
minimum in the baseline. For 2016, under the baseline scenario, which does not assume any
potential direct impact from the loss of CBRs on banks as they are assumed to find cost-neutral
workarounds, no bank would see their CARs fall below the regulatory minimum, reflecting the
slightly higher reported capital buffers at end–2015. Under high stress, the banking system could
have capital shortfalls starting in 2020 as some banks remain weak, particularly a major bank. Last
year, shortfalls were projected to start in 2017.

7. The importance of macro-financial linkages justifies their continuous monitoring, not
only for financial stability but also for overall macroeconomic stability. Both domestic and
international banks play important roles in mobilizing savings for domestic investment and in
facilitating external trade, on which the small open economy of Belize strongly depends. Both also
extend significant credit to the economy. Their exposure to the government appears limited but nonnegligible.
Nonbank financial institutions have significant exposure to domestic banks via bank
deposits.

8. The banking system is facing significant challenges that could have a negative impact
on the wider economy. NPLs remain high and provisioning is still not adequate. The comfortable
levels of the banking system’s reported CARs ratios mask low or inflated capital buffers in some
banks, including a major bank. Government securities represent a non-negligible share of banks’
portfolios, and losses on government securities would wipe out the capital buffers of a few banks.
There is a risk that the loss of CBRs would not be reversed for an extended period of time, which may
durably affect banks’ balance sheets, including through higher financial transactions costs. The
weaker economy and fiscal position could in turn affect borrowers’ ability to repay their debt, which
would further weaken banks and reduce their ability to lend, and thus create a vicious circle that
amplifies threats to the stability of the financial system and the rest of the economy.

9. Under adverse scenarios, the loss of CBRs could have a sizeable impact on Belize’s
economy and financial stability as fewer CBRs, different local banks’ business models, or
stricter due diligence requirements could kick many economic agents out of formal trade and
finance channels. In a scenario that assumes that only 30 percent of the affected transactions find
workarounds, real GDP could drop by 5–6 percentage points annually relative to the baseline during
2016–2021. The banking system’s CAR would fall by close to 9 percentage points but would remain above the prudential minimum of 9 percent, though some banks could become insolvent, including
a major bank.

10. Threats to the financial system, including those related to money laundering (ML) and
terrorist financing (TF), should be tackled on multiple fronts, including through closer
coordination with regional and global public and private partners. Recommendations discussed
during the 2015 Article IV Consultation remain in order. In particular, the true strength of banks’
capital buffers should be assessed through an asset quality review (AQR), and weak banks should be
required to raise more capital. Well-designed capital markets would help banks strengthen balance
sheets more rapidly. The CBR challenge requires closer regional and global coordination to ensure
that home authorities of global banks proactively clarify and communicate their regulatory
expectations, and affected countries continue to strengthen their regulatory and supervisory
frameworks, including those for Anti Money Laundering and Combating the Financing of Terrorism
(AML/CFT) and entity transparency, to meet relevant international standards, with the help of
technical assistance where needed. In extreme circumstances, the public sector may consider the
feasibility of temporary mechanisms to prevent the complete loss of access to the global financial
system. In this context, Belize could seek to address the loss of CBRs through stronger AML/CFT
regulation and supervision as well as mechanisms to ensure entity transparency and make beneficial
ownership available, and understand and mitigate ML/FT risks, especially in the offshore business
sector. Some of the solutions to the CBR challenge proposed in the Caribbean rely upon US private
financial institutions shifting the perceived internal cost-benefit balance of having CBRs with Belizean
banks in favor of restoring them to those banks that have lost their CBRs. This will likely take some
time. Therefore, public sector involvement in addressing the loss of CBRs, such as seeking fast-track
approval for, or fast-track acquisition of a US-licensed financial institution, in conjunction with other
affected countries in the Caribbean, should be seriously considered.

Full Article, click here

IMF (2016). “Belize Selected Issues.” Country Report No. 16/335.IMF (2016). “Belize Selected Issues.” Country Report No. 16/335.

Retrieved from: https://www.imf.org/external/pubs/ft/scr/2016/cr16335.pdf