Separate Annual Report 2021

11 BARBADOS PUBLIC WORKERS’ CO-OPERATIVE CREDIT UNION LIMITED | SEPARATE FINANCIAL STATEMENTS 2021 Stress testing of the financial sector A stress testing exercise was conducted relative to runs on deposits in the various deposit-taking institutions (DTIs) given the level of reduced economic activity. Where appropriate, simulations sought to determine whether capital adequacy buffers were adequate to absorb market shocks and focused primarily on liquidity, credit, interest rate risk and large exposures. Liquidity Risk Given that DTIs are largely funded by deposits, maintaining adequate levels of deposits is of utmost importance in the event of a run on the institution. Previously and during the pandemic the financial system was marked by excess liquidity. Commercial banks, finance and trust companies held upwards to 26.5 percent in liquid assets (cash equivalents and tradeable securities) on their balance sheets. The low prevailing interest rates between demand and time deposits, have minimized the penalties for early withdrawal. The Financial Services Commission (FSC) conducted a review of the potential impact on credit unions, of a 5.0, 10.0 and 15.0 percent run on all domestic-currency deposits (demand and time deposits) assuming that 95.0 percent of all liquid assets were fully convertible to cash on any given day. Credit Unions Requiring Liquidity Support upon runs on Members Savings At 5.0% At 10.0% At 15.0% Day 1 0 0 0 Day 2 0 0 2 Day 3 0 1 4 Day 4 0 3 4 Day 5 1 4 4 Source: Financial Services Commission The above results for credit unions showed that at daily deposit runs of 5.0 percent one credit union would require liquidity support at day five. While at daily runs 10.0 percent and 15.0 percent respectively, four credit unions would require liquidity support at day five. In the previous year, the daily runs testing at the 15.0 percent level showed that seven of the largest credit unions required liquidity support. Credit Risk As stated in the 2020 Financial Stability Report, the credit union sector’s current rate of provisioning for NPLs is 23.4 percent and the capital adequacy ratio for the industry stood at 10.5 percent. The seven largest entities in the sector accounted for more than 93.0 percent of total assets and three of these entities were below the regulatory benchmark of 10.0 percent before any shocks were applied for stress testing. Domestic Economic Conditions Barbados’ tourism product was hardest hit as the country experienced declines in all its major economic industries, except for agriculture. There was a 70.0 percent fall-off in tourism which stemmed from lower visitor stay-overs and cruise arrivals. The rate of inflation slowed, indicating lower fuel and electricity prices combined with discounts offered by retailers. The economic downturn was especially sharper during those periods where the economy was on lockdown for extended periods. The economy showed signs of a gradual recovery towards calendar yearend 2020, but by the start of 2021 the country experienced a second wave of COVID-19. This second wave impacted the first quarter of 2021 and triggered further business closures and curfews. Consequently, there was a 20.0 percent decline in real GDP when compared to the first quarter of 2020. Overview The financial year 2021 has been like no other; we faced unprecedented challenges on a global scale, as well as right here in our own country. The COVID-19 pandemic has had a major impact on all lives and has touched our membership in various ways. Nonetheless, throughout these challenging times the Barbados Public Workers’ Co-operative Credit Union Limited has shown resilience and strength, and has stood out as a beacon of hope and a lifeline for its members through its active commitment to member well-being. Membershp