Summary: Establishing a stable financial system with a sound oversight framework is critical for an offshore financial center such as Turks and Caicos Islands (TCI)—a British Overseas Territory. Although the economy relies mostly on tourism, the financial system’s (largely offshore) assets amount to about 450 percent of GDP. TCI is home to a large number of small, niche U.S.-based reinsurance companies, but banks account for a large part of the system’s assets. The FSC is an integrated supervisor overseeing all financial institutions. The territory uses the U.S. dollar and does not have a central bank. TCI recently suffered from major domestic financial distress, highlighting the unique challenges of the territory. The severe recession that started in 2009 led to a sharp increase in nonperforming loans (NPLs). In this context, a large indigenous bank failed, and depositors have so far recovered 40 percent of their claims. Furthermore, in 2014 a local insurance company was liquidated, a delayed consequence of the failure of a large regional insurer. Branch-based operations in TCI made it difficult to adequately protect TCI policyholders, who have recovered 20 percent of claims so far. Contagion to the rest of the financial system was limited. In the near term, TCI banks on aggregate seem to have the capacity to withstand a range of adverse scenarios, but one bank shows signs of weak governance. Banks are foreign owned and operate a traditional business model with high capital buffers. While legacy nonperforming loans (NPLs) remain high and credit has been contracting since the crisis, demand-side issues appear relatively more relevant: the contraction is concentrated in the construction sector, and banks have sufficient capital to write off most of the existing NPLs. Stress tests underscore the importance of credit and concentration risk together with real estate collateral valuation, and most banks have sufficient capital to withstand a range of adverse shocks. Regarding liquidity, key risks are from customer deposits and, for some, intragroup funding. Since most of liquid assets are claims on group affiliates, ensuring their continued availability is the key for managing liquidity risks. Weak governance in one large bank is an important vulnerability, so the FSC should remain vigilant.

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