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The simulations are performed in two steps. Second, the analysis also includes a liquidity (liability) shock, which could take place in a scenario of systemic liquidity pressures triggered by the originating bankruptcy, which then leads to asset fire sales causing further capital losses, and potentially additional bankruptcies.
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Potentially, a chain of other bankruptcies can occur as exposed institutions are defaulted by the failing bank and thus suffer an asset and capital loss. The simulations then look at the propagation of that shock in the banking system as determined by their bilateral net exposures. First, a lending (asset) shock, which reduces the value of bank’s portfolio into insolvency. Two types of shocks are run based on the methodology in Espinosa-Vega and Sole (2010). The key risk under analysis is the extent to which the failure of an individual bank could trigger a chain of bank failures in the system through inter-bank bilateral exposures. ECCU jurisdictions share a common central bank – the Eastern Caribbean Central Bank (ECCB) 2 – and a common currency which has been pegged to the U.S. Vincent and the Grenadines, and two British Overseas Territories: Anguilla and Montserrat.
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1 The ECCU include six independent states: Antigua and Barbuda, The Commonwealth of Dominica, Grenada, St. This paper uses bilateral net asset exposures in ECCU locally-incorporated banking system to analyze the risk of contagion or shock propagation among banks. This, combined with robust deposit growth propelled excess liquidity in the banking sector. Limited availability of bankable projects, coupled with tight underwriting standards – a legacy of the GFC – has restrained credit growth. Provisioning, however, has remained insufficient. While well above the region’s tolerance limit of 5 percent, NPLs had declined significantly from the peak of 19 percent in mid-2014. At end-2017Q3, banks’ NPLs stood at 11 percent of total loans. While some foreign institutions are linked to the same parent entity, many banks are also interconnected through interbank lending.įollowing the global financial crisis (GFC), ECCU banks experienced substantial financial distress, as reflected by high non-performing loans. Moreover, ECCU commercial banks display significant linkages within- and across jurisdictions, partly driven by the joint operating environment within a single currency and a shared central bank. The Eastern Caribbean Currency Union (ECCU) financial system is large relative to the size of their economies, and is dominated by banks, with assets ranging from 100 to near 300 percent of GDP, depending on the jurisdiction.