BRADES – Minister of Finance the Honourable Premier Donaldson Romeo says he will await the feedback from local financial institutions before his government makes a decision on the new Eastern Caribbean Central Bank (ECCB) Act .
The premier, members of Cabinet and the Opposition have been briefed on the contents of the new act which many consider would make the central bank more powerful than individual governments.
Michael Joseph, General Manager of the Bank of Montserrat provided Discover Montserrat with more clarification on the contents and implications of the new law, which all governments within the Economic Union would be expected to pass into law.
“The entire world-wide banking system is under threat. Coming out of the 2008/2009 financial crisis, jurisdictions the world over are strengthening their legal frameworks in a bid to avoid a repetition of the last financial meltdown,” explained Joseph. “The Eastern Caribbean Currency Union (ECCU) Banking system is plagued with:
1. High bad debts – in some territories almost 50%;
2. High cost of funds, as the minimum savings rate still remains regulated;
3. Fragmentation – many small banks all competing for the same market share;
4. Poor corporate governance structures in some banks; and
5. Mismanagement in some banks.
“Despite all these issues the Eastern Caribbean Central Bank as the main regulator of Banks did not have the legislative framework required (the present Banking Act is weak in terms of arming the ECCB with powers) to intervene in those troubled banks quickly enough, in order to protect the depositors. It is against this background that it became necessary to strengthen the Banking Act.
However there are a few contentious areas in the Proposed Act says the BOM manager. These are :-
1. Increase in the paid up capital required from $5M to $20M. Under the proposed Act, banks who do not have the required amount of capital will be given a period of 450 days to remedy the deficit. Most of the smaller banks will NOT be able to satisfy this deadline. The penalty for non-compliance is $1M, plus $100K per day for each day the bank remains non-compliant;
2. The proposed Act will require banks to obtain the ECCB’s approval if it wishes to outsource “any of its functions to any other person…” – which could be considered micromanaging the banks;
3. The proposed Act will give an Official Administrator (in the case of a re-structuring of a failed bank) the right to convert a customer’s deposits to shares in the institution.
4. The new annual licence fees will increase from $25K on Montserrat to $80K and will now be payable to the ECCB, instead of to the local government.”
Joseph said there are a few questions which governments and individual institutions should consider as it relates to the new central bank law:
1. Will more Banking Laws make for a safer financial system?
“We need to remember that part of the problem in 2008/2009 was the CLICO/BAICO fiasco. Insurance regulations are also weak. Even if we strengthen banking regulations and insurance companies are allowed to ‘do as they please’ the whole financial system can come crashing down again. We need stiffer laws for insurance business. Insurance companies should not be allowed to do banking business, as did CLICO and BAICO.
2. Will more laws make it more difficult and more costly for consumers to access banking services and finance?
“As regulators ‘raise the bar’ banks’ natural reaction would be to raise their loan underwriting standards – customers will be required to ‘step up’. This is NOT necessarily a bad thing, for as we develop as a people and a country, we must also improve our standards. It will become more difficult for the average consumer to access commercial bank credit. The “un-bankable” population will increase and create a niche for a “new type of financial institution”.”
Local banks, insurance companies and other affected organisations will be able to give feedback to the policy makers before the local version of the Act is completed and brought to the legislature for enactment.
