This paper examines the extent to which the banking sector in Trinidad and Tobago is
exposed to the local housing market. The period under review is Q2:1995 – Q2:2014. We
analyze various indicators of exposure and credit risk stress-testing results. Further,
cointegration analysis is employed to assess the relationship (if any) between exposure and
key macroeconomic variables. We find that exposure to the housing market in the banking
sector increased in recent years. With respect to mortgage lending, exposure grew to 26.6 per
cent (in terms of total net loans) as at June-2014 from 16.3 per cent at the end of 2008.
However, stress test calculations for the commercial banking sector (the main sub-sector
involved in mortgage and real estate related-lending) show that the capital adequacy ratio is
likely to fall by 3.2 per cent to 18 per cent (well above the 8 per cent regulatory requirement)
in the event of an adverse shock to house prices – indicating a low level of attendant risks.
Therefore, financial stability risks arising out of exposure to the housing market to date
appear to be small at least over the short-term.