Financial Crime World

Aruba’s Banking System Faces Challenges Amid Tourism-Dependent Economy

Overview

Despite having a Loan-to-Deposit Ratio below 70 percent, Aruba’s banking system remains vulnerable to external shocks and systemic risks. The country’s dependence on tourism, which accounts for over 90 percent of its GDP, makes it susceptible to volatility.

Conservative Standards and Shadow Banking Risks

The Central Bank of Aruba has implemented conservative standards, with a loan-to-value ratio of 60-80 percent for local mortgage buyers. However, non-bank financial institutions are increasingly competing in the mortgage market, and shadow banking activities pose risks to credit risk monitoring.

Key Areas of Focus

  • Household lending accounts for approximately 55-60 percent of private sector lending, making it a key area of focus from a macroprudential perspective.
  • Aggregate data may conceal vulnerabilities in certain segments, such as low-income households.

Concentration Risks and Exposure to Real Estate and Tourism

Banks’ exposure to real estate and tourism-related industries has increased significantly since the Global Financial Crisis (GFC). The “real estate and renting” sector now accounts for 38 percent of commercial lending, while hotels and restaurants have more than doubled their share. This concentration risk could pose a threat if the tourism industry experiences a downturn.

Single-Name Concentration Risk

Aruba’s small size also makes it susceptible to single-name concentration risk, with large borrowers accounting for a significant portion of banks’ lending portfolios. However, banks have sufficient capital buffers to withstand the potential default of their largest borrowers, according to stress tests run by the Supervision Department.

Challenges and Solutions

  • The lack of a diversified financial market and the absence of credit registers in Aruba create challenges for credit risk monitoring and pose risks to the banking system as a whole.
  • The Central Bank has drafted consumer protection legislation to address these concerns.

Conclusion

As Aruba’s economy remains heavily reliant on tourism, its banking system must navigate these challenges to maintain stability and ensure the country’s financial well-being.