by Hensey Fenton, Founder of Bank of Montserrat Ltd.
Hensey Fenton, 1st Manager, Bank of Montserrat Ltd.
As we discuss the impact of the Banking Bill, it is imperative to note that the move to strengthen the banks in the East Caribbean Currency Union (ECCU) is not isolated, but is a continued effort by all Central Banks in the world to meet the framework of the Basel accords. These accords cover the need for bank capital adequacy, stress test, and market liquidity risk. In 1974, there were two major bank closings: Herstatt bank, Germany; Franklin National Bank, New York, for exposures multiple times their capital. In response, the Central Bank Governors of the developed countries established the Basel Committee to “extend regulatory coverage, promote adequate banking supervision, and ensure that no foreign banking establishment can escape supervision.” The Basel accords: Basel I, Basel II; Basel III, are the result of the directive of the Basel committee.
A review of the worldwide financial crisis of 2008 found that the banking sector entered the financial crisis with too much leverage and inadequate liquidity buffers. In addition, there was poor governance and risk management, and this combination created credit and liquidity risk, and excess credit growth. In Basel III, the Committee reached an agreement (a) to strengthen global capital and liquidity rule in order to create a more resilient banking industry, and (b) to improve the industry’s ability to withstand shocks caused by financial and economic stress.
Recognize that although the major world countries endorsed Basel III it was not legally binding unless each member country passed statutes or regulations to implement the accord. In the United States the Dodd-Frank Act, signed into law by President Obama in 2010 was the legislation. The connection between the ECCU and the developed countries is the International Monetary Fund (IMF). The IMF has responsibility for the currency areas of the Euro Area, the Eastern Caribbean Currency Union, the Central African Economic and Monetary Union, and the West African Economic and Monetary Union. In the review of the ECCU in 2014, the IMF encouraged efforts to strengthen the supervision of financial institutions and to enhance the legal and regulatory framework in line with international best practices. We can assume therefore, that these proposed new banking regulations are a direct result of this encouragement by the IMF.
A review of the proposed ECCB banking legislation reveals that it is no more onerous that similar legislation passed by US legislators. Broadly speaking, the legislation will help the ECCB accomplish its regulatory oversight of the commercial banks with a focus on Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk (CAMELS). As with any new piece of legislation, there will be areas of concern and I list some of these below:
- Approval of License: The decision to grant a license to a financial institution should rest with the Regulatory Authority with licensing fees paid to the Authority. The Governments benefit from Seigniorage, Incorporation, and Income Taxes
- Annual Fees: There should be a scaled fee structure as the cost for supervision of Bank of Montserrat would be substantially less than that of say, Bank of St. Lucia
- Paid-up Capital: It is at the Central Bank’s discretion, based on internal assessment, the level of desired capital adequacy. It may however be a coercive signal to the smaller banks that the future is some form of amalgamation. A merger for Bank of Montserrat may be a blessing in disguise but it depends on the procedure. The most desirable alternative would be through a bank holding company that allows the bank to keep its name
- Limit Exposures: Although the legislation exempts Governments and Statutory bodies in this section, an amalgamation that requires a threshold of lending approval at a holding company level would provide a buffer from the individual Government for the local banker.
- Restriction on Outsourcing: This is part of a risk mitigation strategy
- Audited Financial Statements: The sophistication of technology should make it feasible to have financial statements available in three months
- Remedial Action against Directors, Officers etc: The Central Bank’s ultimate responsibility is the protection of depositors’ funds. They should have the ability to take necessary action, in their sole discretion, to protect the integrity of the institution while protecting the interest of the depositor.
These are some of the issues raised but with the exception of the scalable licensed fee structure and the capital enhancement proposal, I see nothing onerous in the proposed legislation.
