By Peter Queeley
For some time now there has been a raging debate in Montserrat regarding the proposed new Banking Act, with individuals taking various positions based on nationalism, philosophy and individual situations. In my opinion, much of the discourse has occurred without any real analysis as it relates to the economic and financial implications of what the proposed Banking Act seeks to accomplish. This article represents a three part series in which I propose discuss the main issues in the proposed new Banking Act and its implications. In this first part however, I wish to summarize the various contentious tenants of the new Banking Act, while at the same time providing some analysis and implications of the same as it applies to Montserrat.
From the onset, I wish to state that the proposed new Banking Act does not pertain to a single financial institution and its particular circumstances. Nor does the propose new banking act pertain to a particular OECS territory or its particular circumstances. Rather, the new Banking Act pertain the conduct of banking business and the regulation and supervision of the same in the OECS region. Therefore, it is irrelevant for one to state that at particular institution non- performing loans is less than 5.0%, or the liquidity situation surrounding a particular institution is strong or that other territories indigenous banks are in trouble and in Montserrat that is not the case.
One cannot wait for situations to happen for action to be taken. The necessary safeguards must be put in place to mitigate the various risks. The situation confronting a financial institution or a particular territory can change overtime and sometimes in the twinkle of an eye. History has shown us in Montserrat that we have had our troubling times such as the case which led to the ECCB intervention in Bank of Montserrat (BOM) in 1992. That particular situation was localized. History has also shown us that regional situations such as the collapse of the CL Financial Group can also have local and regional effects. The same pertains to the other territories in the OECS Region.
Brief Summary of the Issues Surrounding the Proposed New Banking Act
According to a Communiqué regarding the 81st Meeting of the Eastern Caribbean Central Bank (ECCB) Monetary Council held on February, 24 2015, at the ECCB in St Kitts and chaired by the Hon. Ralph Gonsalves, Prime Minister of St Vincent and The Grenadines, the ECCB Monetary Council inter alia resolved:
Council agreed to pass the following legislation by 27 March 2015 and to the drafting of legislation for foreclosure and deposit insurance by 31 May 2015:
a. Amendments to the ECCB Agreement;
b. The Banking Bill; and
c. The Eastern Caribbean Asset Management Corporation (ECAMC) Agreement and Bill;”
Council members attending the meeting were as follows:
1. Dr The Honourable Ralph Gonsalves, Prime Minister and Minister for Finance, St Vincent and the Grenadines (Chairman)
2. Honourable Hubert Hughes, Chief Minister and Minister for Finance, Anguilla
3. Honourable Gaston Browne, Prime Minister and Minister for Finance, Antigua and Barbuda
4. Honourable Roosevelt Skerrit, Prime Minister and Minister for Finance, Commonwealth of Dominica
5. Dr The Right Honourable Keith Mitchell, Prime Minister and Minister for Finance, Grenada
6. Honourable Donaldson Romeo, Premier and Minister for Finance, Montserrat
7. Dr The Honourable Timothy Harris, Prime Minister and Minister for Finance, St Kitts and Nevis
8. Honourable Dr Kenny D Anthony, Prime Minister and Minister for Finance, Saint Lucia
In its explanatory memorandum regarding the new Banking Act, the ECCB states that the Banking Bill seeks to provide for the regulation and supervision of banking business, the establishment of a single banking space, the ownership structures for licensed financial institutions, the licensing of financial holding companies, the corporate governance of licensed financial institutions, the framework for the official administration of licensed financial institutions and for incidental and related matters.
To date, six member countries of the ECCB Monetary Council to include, Antigua and Barbuda, Dominica, Grenada, St Lucia, St Kitts and Nevis and St Vincent and The Grenadines have passed the new Banking Act, with some slight modifications to account for local realities. Montserrat and Anguilla, despite being in attendance and having agreed to the passage of the New Banking Bill have not yet done so. Montserrat’s position is perhaps more aggravated given that Montserrat is a full member of the Organisation of Eastern Caribbean States Economic Union. Anguilla on the other hand is an associate member.
A few technocrats locally and regionally have raised issues with the new Banking Act, the major of which are summarized as follows:
1. The new Banking Act removes the respective Governments via the Minister of Finance from involvement in the issuance and revocation of banking licences.
2. The new Banking erodes away the Governments revenue base in the sense that licence fees are now payable to the ECCB as opposed to the respective country Ministry of Finance.
3. The new Banking Act raises the minimum capital requirement to start or operate a banking institution from up $5.0M to $20.0M.
4. Section 82 and 33 in the proposed new Banking gives the ECCB the power to take administrative actions against banking officials for a particular issue even though they may have been exonerated by a Court of Law from a criminal matter related to the same issue.
5. In the event of bank administration, receivership and liquidation, the new Banking Act provides for the payment of necessary and reasonable expenses of official administration and the receivership, including payments to the Central Bank prior to the wages and salaries of employees.
My personal take on the new Banking Act is that apart from a few cosmetic changes required to bring the Act in line with the Montserrat Labour Code, and perhaps the quantum in terms of minimum paid up capital to start and operate a bank, the new Banking Act is a comprehensive piece legislation which has the following twin features:
1. Correcting the various regulatory and supervisory flaws that exist in the 1983 Banking Act.
2. Implementing the provision of the Revised Treaty of Basseterre Establishing the Organization of Eastern Caribbean States Economic Union relating to the free movement of capital (via support of the money and capital market programme of the Eastern Caribbean Central Bank). That is the creation of a single financial space in the Eastern Caribbean Currency Union (ECCU).
In terms of the major banking regulatory and supervisory flaws addressed by the proposed new banking Act, the following are noted:
a. The issue of Government having some input in financial regulatory and supervisory matters is not in keeping with the current international standards, which require independence of the regulatory and supervisory body and regime from Government. This is to avoid political interference in regulatory and supervisory process. Locally in Montserrat, this situation is exacerbated into a conflict of interest position given that the GOM owns controlling interest in the BOM, notwithstanding the same occurred by default given the bailout in 1992.
b. Accordingly, the licence fees payable by financial institutions should be paid directly to the regulatory and supervisory body conducting regulatory and supervisory matters as part of the income to offset the expenses involved in these tasks. The member governments will still continue to share in a percentage of the profits of the ECCB based on percentage of currency in circulation. Hence there revenue position is not entirely aggravated.
c. The issue of capital adequacy and capital standards is an ever evolving regulatory and supervisory issue with recent studies by the Basel Committee on Banking Supervision, the international financial standard setter relating to banking regulation and supervision recommending the increase in capital requirements for banking financial institutions. Most national regulatory and supervisory bodies have responded by raising the level of minimum common equity (paid up capital) required to operate a banking institution.
d. The issue of the need for an effective and proper framework for the official administration troubled financial institutions was borne out by the difficulties at BOM leading to intervention in 1992 and the recent ECCB intervention in banks in Antigua and Barbuda and Anguilla.
e. Corporate Governance changes proposed in the new Banking Act are well in line with the current international prescribed standards, given the many issues related to anti-money laundering, related party exposures and director’s ability to function effectively and independently.
f. Related to the corporate governance matter is the issue of Central Bank power to take administrative actions individuals as outlined in Section 82 and 83 of the new banking act, notwithstanding exoneration by a Court of Law. On this particular issue, it is fair to say that in the practice of banking, there are some matters especially involving the extension of related party credit and certain investments and contractual decisions that may be legal in terms of decision making, but non ethical in terms of banking practice. In this regard, the Regulator and Supervisor must be empowered to take action, where such circumstances are detrimental to the interest of depositors and impair general public confidence in the banking institution.
The Minimum Paid Up Capital Requirement.
The Hon Premier and Minister Finance, Mr Donaldson Romeo announce on public radio that the Government of Montserrat (GOM) as delayed bring the new Banking Act to Parliament and has instead written to the ECCB seeking accommodation for BOM primarily in light of the new paid up capital requirement. This new capital requirement is outlines in Section 44 of the proposed new Banking Act whereby the ECCB is proposing to increase the paid up capital requirement to establish or operate a bank in the ECCU from Five (5) million dollars to Twenty (20) million dollars. As it stands at this moment, the paid up capital of BOM is approximately $8.8 million.
It appears to me that the Hon Premier and Minister of Finance, his advisors and the principals of BOM were caught off guard when Sir K Dwight Venner played a forceful hand when he doled out the new deck of cards to govern banking in the ECCU. In what can be described as killing two birds with one stone, Sir K Dwight Venner purposefully increased the paid up capital requirement for the establishment or operation of a banking financial institution from five (5) million dollars to twenty (20) million dollars. To add insult to injury, Sir K. Dwight Venner gave the affected institutions, to include BOM, 450 days subsequent to the passage of the new Banking Act to achieve compliance with this new paid up capital regulatory requirement.
It is fair to conclude, that apart from strengthening the ECCU region banking capital adequacy regime, Sir K Dwight Venner action was also aimed at whipping the flagging small banks into shape, especially those who were revolting against his one strong regional indigenous bank agenda.
In my humble opinion one can argue that the new minimum level in terms “paid up capital” to operate a banking institution ie EC$20.0M) ($US7.4M) set by the ECCB warrants some debate. However, the financial regulatory and supervisory enthusiasts will simply postulate that a stronger capital regime is better than a weaker one. Nonetheless, the actions of Sir K Dwight Venner in terms of increasing the minimum paid up capital to operate a banking institution in the ECCU region are justifiable based on the following reasons:
1. The issue of capital adequacy has plagued financial institutions to include banks, credit unions and insurance companies locally and regionally since the 2008 financial crisis. Moreover, regionally, the collapsed of the Stanford Financial Empire, coupled with the crumbling of the CL Financial Group added further financial distress to an already fragile situation. It is now widely accepted that banking financial institutions require further enhance capital base to absorb losses especially in times of cyclical economic and financial shocks. This is due to the various risk dynamics confronting the institutions and to accommodate for further growth and development.
2. The Basel Committee on Bank Supervision, which is the international standard governing banking regulation and supervision, has moved to increase the amount of common equity required by banking financial institutions capital adequacy calculation as part of Basel III, third capital accord. In response, most national regulators, including the ECCB, have responded by raising the minimum paid up capital for establishment and operation of banking financial institutions in their respective domain.
3. Thirdly, Sir K Dwight Venner, has long postulated his position that the amalgamation of the region’s banks is necessary in order to create more efficiency and stability within the financial system. According to Sir K Dwight Venner, there are currently over three dozen banks listed across the OECS region where individual countries hold responsibility for licensing banks in their respective territories. Sir K Dwight Venner has described this situation as “banking overload” and has accordingly indicated that a strong case exists for amalgamating banks across the ECCU which has a population of just over half a million.
Locally, from as far back as 2012, former premier Reuben T Meade has been emphasizing the need for financial institutions including BOM to increase its paid up capital, while at the same time attempting to divest GOM of the majority its ownership stake in BOM. The latter proved to be unsuccessful, while the former bore little dividends in 2013, when BOM issued a public share offering. Whilst Reuben T Meade would have been right as far as the desired outcome on both accounts, in my humble opinion if the GOM was desirous of disposing its equity position in BOM by sale of its shares, the sale of such shares would only yield a positive benefit to BOM if it made BOM become part of a larger well capitalized financial entity, such as what Governor Sir K Dwight Venner is proposing.
However, I suspect Reuben T Meade given his financial prowess realized that Sir K Dwight Venner wanted to simply exchanged GOM shares in BOM for a small shareholding position in the larger proposed regional indigenous banking entity as opposed to actually purchasing the shares outright in cash. Knowing Reuben T Meade and the fiscal maneuvers he practiced, he would have preferred to sell BOM shares thereby generating much needed fiscal revenues for the GOM, whilst at the same time divesting GOM from a long standing conflict of interest shareholding position in BOM. As luck would have it however, GOM did not divest of its shareholding position in BOM, but experienced the effect of slight dilution of its shareholding position with the purchase of new shares by current and new shareholders.
Peter D.A. Queeley
Economic and Financial Analyst