An analysis of bank liquidity in the Bahamas,2001-2012

This paper provides an analysis of liquidity trends in The Bahamas over the 2001-June 2012 period. The study finds that the significant build-up in domestic liquidity observed over the last four years, also occurred in a number of countries, both developed and developing, and reflected several economic factors. Specific to The Bahamas, the accumulation in liquidity was driven by a slowdown in credit demand and the adoption of more cautious approaches to lending by the banks, due to heightened loan delinquencies. In addition, the contraction in output and the expansion in Government borrowing—particularly from external sources—have all played a major role in the significant augmentation in both excess reserves and excess liquid assets in the domestic banking system. The paper showed that the build-up in liquidity is likely to persist in the near-term and conditions should moderate gradually, as the economy recovers. Moreover, the Central Bank’s use of securities such as Treasury Bills may be effective in producing changes in liquidity over the short-term.