The Central Bank of The Bahamas was established on 1st June 1974, to carry out the independent monetary policy and financial sector supervisory functions entrusted upon The Bahamas after political independence from Great Britain in 1973.
Prior to the establishment of the Bank, there was the Currency Board set up in 1919 which was restricted mainly to issuing currency. The Currency Board era spanned the early evolution of The Bahamas' emergence as an international banking centre during the 1960s, and the corresponding challenges posed by the inadequacies of legislation to properly regulate and supervise these activities. Although some relief was provided by the Banks and Trust Companies Regulation Act (1965), which enjoined stringent licensing and operating requirements on banks, it was felt that a more substantive institutional authority was required to oversee the rapidly expanding banking sector.
This need for an alternative institutional arrangement with statutory powers became even more apparent amid the turbulent developments in global financial markets, marked by the 1967 devaluation of the Pound Sterling, to which the local currency was linked. Based on the emerging strong trade linkages with the United States, the Government de-linked the Bahamian dollar (formerly the pound) from its peg with the Pound Sterling, and established the currency on par with the United States' dollar. This action, however, resulted in massive exchange rate losses for banks which, in the absence of alternative domestic investment opportunities, held most of their assets in sterling balances.
These events led to the demise of the Currency Board, which gave way to the establishment of the Bahamas Monetary Authority (BMA) in 1968. The Authority assumed the aggregate foreign exchange risks of the country by redeeming domestic banks' surplus foreign currency balances for Bahamian dollars, instituted a voluntary system of reserve requirements for clearing banks, and began auctioning Government Treasury bills as an alternative domestic investment for financial institutions.
Despite having an expanded role, including supervisory authority, a serious shortcoming of the BMA was the absence of the legal authority to employ active monetary policy measures. This fundamental weakness came into sharp focus during the late 1960s, when the Authority was unable to exercise control over domestic credit expansion in order to correct the worsening balance of payments position. A decade later in the 1970s, the deficiency was further heightened, when the global economy battled the worldwide recession, brought on by the OPEC oil crisis. These and other developments led to the eventual establishment of a Bahamian central bank.