Vanuatu Banks Meet Capital Requirements, But Room for Improvement

A recent assessment by the Reserve Bank of Vanuatu (RBV) has found that local banks are largely compliant with capital requirements, but there is still room for improvement in certain areas.

Compliance with Capital Requirements

According to the RBV’s assessment, all eight percent of the consolidated group and stand-alone basis of which at least four percent must be Tier 1 capital have been met. This indicates a high level of compliance with capital requirements.

However, it was noted that no provision has been made for market risk, although this exposure is currently negligible.

Credit Policies

In terms of credit policies, Vanuatu banks were found to be compliant with RBV guidelines on loan classification and provisioning for impaired assets. The guidelines require banks to:

• Classify lending assets into standard, substandard, doubtful, and loss categories
• Maintain a prudent level of general provisions against losses not yet identified

The RBV also found that banks are required to establish and adhere to adequate policies, practices, and procedures for evaluating the quality of assets and the adequacy of loan-loss provisions and reserves. This includes:

• Maintaining general provisions for possible losses at prudent levels
• Establishing specific provisions against reasonably anticipated losses on poor-quality assets

Large Exposure Limits and Connected Lending Requirements

The RBV assessed Vanuatu banks’ compliance with large exposure limits, finding that they have management information systems in place to identify concentrations within their portfolios and set prudential limits to restrict exposures to single borrowers or groups of related borrowers.

Additionally, the assessment found that banks are compliant with connected lending requirements, which prohibit them from extending facilities on an unsecured basis in excess of Vt 500,000 or one percent of capital to related parties, as defined.

Areas for Improvement

While overall compliance is high, the RBV noted that there is still room for improvement in certain areas. Specifically:

• It would be desirable to incorporate market risk into the calculation of capital requirements at some stage.
• Banks may need to establish more robust systems for reviewing their asset quality and managing risks.

Conclusion

The RBV’s assessment is a key part of its supervisory framework, which aims to ensure the stability and soundness of Vanuatu’s financial system. By monitoring banks’ compliance with capital requirements and other prudential standards, the RBV can help mitigate the risk of financial instability and protect the interests of depositors and other stakeholders.

Key Takeaways

• All eight percent of the consolidated group and stand-alone basis of which at least four percent must be Tier 1 capital have been met.
• No provision has been made for market risk, although this exposure is currently negligible.
• Banks are largely compliant with credit policies and guidelines on loan classification and provisioning for impaired assets.
• Banks have management information systems in place to identify concentrations within their portfolios and set prudential limits to restrict exposures to single borrowers or groups of related borrowers.
• Connected lending requirements are generally complied with, but there may be room for improvement in this area.