The Gross Domestic Product of a country is an economic and monetary measure to indicate the well-being of its citizens. In the Commonwealth of the Bahamas, the government is looking for ways to maintain economic stability. The financial sector has an important function and acts as an intermediary in local and cross-border transactions. A decline in consumer confidence leads to pessimism in the overall state of a local economy and its financial institutions. Governments therefore balance free market initiatives with the regulation of the local financial system.
Free market economies are characterized by supply and demand. Consumers can choose who to work with, and service providers are free to set their own terms and conditions. Protective measures and regulatory frameworks are often needed for markets that have a significant impact on local economies. The financial sector is such a market. It is mandatory for local financial institutions to participate in the Bahamas deposit insurance fund in addition to meeting minimum capital requirements and maintaining a sound financial architecture.
The Bahamas Deposit Insurance Fund is managed by a public corporation, the Deposit Insurance Corporation (DIC) which is accountable to the Minister of Finance. The Board of Management is responsible for the operations of the agency. As well as providing a capped protection of deposits held with supervised member institutions, the Fund promotes and otherwise contributes to the stability of the Bahamas financial system. DIC membership is mandatory for credit unions, and licensed institutions by the Banks and Trust Companies Act that carry on the business of banking and transact in Bahamian currency.
Important Exclusions of Bahamas Bank Deposit Insurance
The Central Bank of the Bahamas provides licenses for resident and non-resident financial institutions. This distinction is important to understand the scope of the protection offered by the local Deposit Insurance Fund. Having resident status allows a bank or trust company to deal only in Bahamian Dollars, whilst foreign currency transactions require exchange control authorization. As a non-resident supervised entity, the bank or trust company is allowed to transact with non-residents and freely in foreign currencies, but not in Bahamian Dollars.
Regulatory designations of financial institutions in the Bahamas have important consequences for account holders. The Deposit Insurance Fund in the Bahamas is funded by annual premiums paid by its member institutions. Non-resident financial institution do not transact in Bahamian dollars and are therefore excluded from DIC membership. It follows that account holders of these non-resident institutions do not hold Bahamian dollar accounts and are not covered by Bahamas Bank Deposit Insurance. The Bank and Trust Companies Regulation Bill however provides for a special resolution framework for banks.
The Banks and Trust Companies Regulation Bill
To ensure public confidence, a solution must be found for banks and trust companies in financial distress. A resolution framework is outlined in the Bank and Trust Companies Regulation Bill and early intervention aims to maintain overall financial stability whilst ensuring the continuation of critical banking services. To safeguard these principles, a statutory administrator or, when the bank must be liquidated, a liquidator can be appointed and orderly resolve the issues of the financial institution in distress.
The objectives of bank resolution and recovery in the Bahamas are to maintain financial stability; protect and enhance public confidence in the stability of the banking system; protection of bank account holders, minimizing the costs of the bank resolution procedures and to avoid unnecessary destruction of value; and the protection of public funds.
A statutory administrator is appointed by the Central Bank of the Bahamas to protect the recovery and resolution plan submitted by the bank or to implement the recommendations by the supervisor. At the same time, a freeze on cash deposits and a block on transactions is implemented. To ensure a swift process, the special administrator takes office for twelve months, which can be extended for another twelve months. Within a maximum of twenty four months a solution for continuation of the activities, or the dissolution of bank via a liquidation procedure must be announced.
Deposit insurance is triggered when the bank or trust company is a member of the DIC and is insolvent or unable or likely to become unable to meet its obligations or is about to suspend payments. Following the decision to liquidate the bank or trust company, winding up procedures include several shareholder and creditor safeguards. The priority of claims follow the standard insolvency hierarchy as known in most other common law jurisdictions.
The Protection of Depositors Act
The Deposit Insurance Corporation of the Bahamas administers and manages the deposit insurance fund that protects and supports bank account deposits in Bahamian Dollar. Minimizing the risk of losses to depositors contributes to the stability of the local financial sector. The DIC was established in 1999 under the Protection of Depositors Act. Together with the administration and management of the deposit insurance fund, the DIC collects annual premiums from its member institutions, making payments of compensation to eligible creditors, and educating the public on the DIC and its operations.
Claim submission is possible after the official announcement by the DIC that the deposit insurance fund is activated for the failed DIC member. Claim submission is open for the period of one year. Claims filed after this period are invalid. Creditors must file their claim form in person or by affidavit. To verify the eligibility of the claim, creditors must provide a proof of debt and proof of ownership. This includes the inspection of the original government issued identification, bank account details such as the account opening and approval letter and the final bank statement, and where the claimant is a legal person the original company documents including an original certificate of good standing and certificate of incumbency not older than three months. Payment is made in Bahamian dollars to a bank account of the account holders with one of the other local supervised financial institutions. More information on Deposit Protection in the Bahamas is available here.
Deposit Insurance Corporation of the Bahamas:
P.O. Box 4868 Nassau, Bahamas