The International Monetary Fund (IMF) has called for the Bermuda Monetary Authority to have more "direct intervention tools in the event of impending bank failure".

An IMF report on the Island's Financial Sector Supervision was released last Friday after assessment visits were carried out by the international organisation last summer.

While the IMF makes the call for more powers to intervene in local banks as one of eight "key recommendations" of its report, it also highlights the general overall health of the local banking industry and praises the BMA's work with banks and insurers affected by the US sub-prime crisis, which has lead to almost unprecedented turmoil and decline in banks around the world and major markets.

Bermuda does not have deposit insurance, which is common in other countries like Canada and the United States, but local banks have said deposits are safe due to the higher capitalisation required for Bermuda banks.

Despite two of the Island's four banks and a number of locally-based insurance companies — most notably financial guaranty companies — suffering from exposures to the sub-prime crisis, the report found these exposures do not represent a "systemic threat".

In looking at the banking structures on the Island overall, however, the IMF urged that Bermuda put in place new laws to provide the BMA with "more direct intervention tools in the case of a troubled bank".

Of the Island's four licensed banks, the report noted that two are locally controlled — Butterfield Bank and Capital G - while Bank of Bermuda is owned by HSBC and Bermuda Commercial Bank is controlled by a Curaçao bank.

With $24 billion in combined total assets — over four times Bermuda's GDP — the IMF said the banks have focused on serving the international business sector and foreign assets account for 80 percent of the total, "an indirect indication of the reliance of banks on commercial operations targeted to international business".

Affected banks appear to be weathering the worst of the sub-prime crisis, it noted: "The two Bermudian banks holding some sub-prime related assets in their investment portfolios have suffered mark-to-market declines in value, resulting in stepped up scrutiny from the BMA. The assets are higher rated tranches of asset-backed credits, representing 10 to 15 percent of their investment portfolios, and are held-to-maturity investments.

"As a result, the banks and their auditors are of the view that there has not been permanent value impairment. The BMA is reviewing portfolio details on a monthly basis and holding meetings with management to monitor portfolio management."

Butterfield Bank and Capital G both have some exposure on sub-prime.

In August, Butterfield Bank announced a loss of $16.5 million for the second quarter, resulting from combined losses totalling $50 million on a write-down in the value of mortgage-backed investments and support in its Money Markets Fund.

Butterfield Bank said yesterday that it would be releasing its third-quarter results next week but was vague on whether another loss announcement is inevitable, saying only this portfolio is "performing as expected".

"Our held-to-maturity investment portfolio is well diversified and investments therein that have exposure to the US residential mortgage market are performing as expected," a Butterfield Bank spokesman said. "Butterfield Bank continues to be well capitalised, in sound financial condition, with a strong balance sheet and excellent business franchise."

Capital G yesterday said its exposure is "minimal as a percentage of our total investment portfolio and as a percentage of total assets" and that it was not anticipating a write-down.

"All holdings are currently in good standing with regard to interest payments and we currently do not expect to experience any impairment which would lead us to recognise or make provision for write-down," said senior bank vice president, marketing Michael DeCouto, adding that a substantial portion of these assets are investment grade and Capital G intends to hold them to maturity.

Local banks are not under current threat — with the IMF report noting that the capital to risk-weighted assets was 16.8 percent in March, "well above the ten percent minimum ratio required by the BMA and up from around 15 percent at end-2005".

The report also recognised that Bermuda has taken steps towards implementing the Basel II capital adequacy framework, which is intended to create an international standard of how much banks should put aside to offset financial and operations risks — at the moment the target is eight percent — and to create uniform standards of supervision.

The BMA intends to have Basel II in place by 2009.

However, the report said that the liquidity position of local banks, while still considered comfortable by rating agencies, has deteriorated.

"Liquidity, as measured by the loan-deposit ratio, deteriorated to 35 percent at end-2007 from 24 percent at end-2004, it said.

On the call for more direct intervention powers, the BMA said it would review the recommendations.

"The Authority currently has a wide range of intervention powers for banks," it said in the report's section on responses to recommendations.

"We will, however, review the detailed recommendations in this area to assess whether further enhancements are required."