Opinion: The Proposed New Banking Act And Its Implications For Montserrat Part 2
By Peter Queeley
In this second part of this article, I wish to examine the proposed new banking Act in the context of OECS Economic Union ie the OECS Single Market and Economy and Single Financial Space and Eastern Caribbean Currency Union. Additionally, I will also address the issue of the benefits to the citizens and residents of Montserrat to be derived from the passing of the Banking Act. Finally, I will end by examining some consequences of the Government of Montserrat (GOM) delay or failure to enact and implement the new Banking Act.
Part 3, of this three (3) part series will be dedicated specifically at looking at the issues surrounding of Bank of Montserrat in the context of the proposed new Banking Act, which has been a highly debated topic locally.
The passage of the new Banking Act is critical to Montserrat participation in the OECS Economic Union.
Recall in its explanatory memorandum regarding the new Banking Act, the ECCB stated that the Banking Bill seeks to establishment of a single banking space within the Eastern Caribbean Currency Union. The implementation of the single banking space is consistent with the requirement of all members of OECS Economic Union including Montserrat to putting into effect the single financial space provisions of Revised Treaty of Basseterre Establishing the Organisation of Eastern Caribbean States Economic Union. This provision is required to be implemented via support of the money and capital market programme of the Eastern Caribbean Central Bank.
Noteworthy, is that the current 1983 Banking Act legally restricts banking activities and services by banking financial institutions to the territory of establishment and licencing. The same means that citizens and residents of Montserrat can only legally access banking and financial services from banking institutions domiciled in Montserrat. Similarly, it is also illegal for banking institutions licence to operate in other ECCU territories to openly solicit cross border banking services from citizens and residents residing on Montserrat.
The new Banking Act creates a single financial space for banking and financial services throughout the entire length and breadth of ECCU by removing the legal barriers to the free flow of banking and financial services across the entire ECCU region including Montserrat. Therefore, under the new Banking Act citizens and residents of Montserrat can openly access financial services and products from any banking institution operating in the ECCU. Similarly banking institutions licence to operate in any territories of the ECCU can openly and legally solicit business from citizens and residents of Montserrat.
Given that the OECS Economic Union seeks to expand cooperation between the member states into new economic activities, with the cornerstone being the OECS Single Market and Economy permitting free of goods, capital, services, and people, known as the “four freedoms”. Moreover, given that the free movement of capital is intended to permit access to financial services, movement of investments such as property purchases and buying of shares between countries. It is extremely difficult for Montserrat to participate effectively and efficiently in the OECS Economic Union and OECS Single Market and Economy, without the passing of the new Banking Act which seeks to permit the free flow of capital and financial services throughout the OECS Region.
The passage of the new Banking Act guarantees greater efficiency in the local and regional Financial Market Place
Citizens and residents of Montserrat stand to benefit from the passing and implementation of the new Banking Act via greater access to a wider array of financial services. Recall above, I outlined that the 1983 Banking Act legally restricts cross border inter ECCU banking activities and services.
With the creation of the single banking space as per the new Banking Act, citizens and residents of Montserrat can now legally and practically have access to financial services “deposits and loan products” from any banking financial institution operating within the ECCU region. Consequently, the new Banking Act has the effect of creating more competition in the financial market place enabling citizens and residents of Montserrat at having access to a wider array of financial products and services, most likely at better prices and interest rates.
An excellent illustration of the above was the recent move by a local indigenous bank to unceremoniously close the savings accounts of local corporate banking customers which were attracting an interest rate of 3.0%. Simultaneously, the local indigenous bank offered the same corporate banking customers what can be described as an insulting rate of interest on a new product known as business savings account. Under the provisions of the new Banking Act local corporate banking clients would now have the advantage of options regionally in terms of doing business as opposed to being confined to the local banking financial market.
Improved Banking Regulation and Supervision
Finally and perhaps most critically, the new Banking Act, seeks to correct many of deficiencies in the old Banking Act as it relates to the regulation and supervision of banking financial business with the ECCU region. The ECCB in its explanatory memorandum to the new Banking Act states that the banking bill seeks to provide for the regulation and supervision of banking business and in particular to address issues related to 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. The non-correction of these extremely important regulatory and supervisory issues leaves the banking system at by extension the entire financial system at serious risk.
Specifically, in terms of Montserrat one of the major accomplishments of the new Banking Act is the full independence of the banking supervisory and regulatory functions from the GOM. As it stands currently, the GOM due to the fact that the Minister of Finance needs to be consulted on certain regulatory and supervisory issues such as the issuance and revocation of banking licences remains involve in banking regulatory and supervisory matters. This is not in keeping with the international standards governing financial regulation and supervision which requires independence of the same from the central Government.
Moreover, the GOM is the major and controlling shareholder in BOM, which sets up a classic regulatory and supervisory conflict of interest position for the GOM. It is regulatory and supervisory deficiencies like the above that the new Banking Act seeks to correct. Non passing or a delay in the passing of the new Banking leaves the state of affairs unresolved.
Montserrat’s delay in passing the new proposed Banking Act threatens the viability of the OECS Economic Union in its new dispensation.
One critical issue that has dogged the wider 15 member Caricom grouping was that of enforcing decisions taken at the Heads of Government level. The original Treaty of Basseterre suffered the same faith as decisions taken by the OECS Heads of Government level was not legally binding on member states. The Revised Treaty of Basseterre Establishing the Organisation of Eastern Caribbean States Economic Union seeks to corrects that flaw by creating a governance structure that makes decisions taken by Heads of Government having a legal and binding effect throughout the sub-region.
It is noteworthy that one of main tenants of the Revised Treaty of Basseterre Establishing the Organization of Eastern Caribbean States Economic Union is the free movement of capital via support of the money and capital market programme of the Eastern Caribbean Central Bank. The implementation of the same is accomplished via the provisions of the new Banking Act, which establishes a single banking and financial space in the OECS region.
In this regard, it would be fair to conclude that the posture of the Government of Montserrat in delaying the timely passing and implementing the provision of the new Banking Act may threaten the very viability of the OECS Economic Union in its new dispensation. One can only speculate as it relates to the posture of the other regional ECCU area governments as a result of Montserrat’s non-compliance with a decision taken that was legal and binding throughout the OECS sub-region.
Montserrat’s delay in passing the new proposed Banking Act threatens the viability of the country’s participation of the Eastern Caribbean Currency Union.
Montserrat is small open economy operating in an economic and monetary union under a fixed exchange rate regime. This translates into a single central bank (ECCB) exercising common monetary policy and financial regulatory policy throughout the entire currency union that are now legally binding. Therefore, it is impossible and impractical for an individual country within the currency union to adopt or request without a specific timeframe for compliance a particular accommodation in respect of financial regulatory and supervisory policy when one is operating under such an arrangement.
On this particular matter, I would urge the GOM to immediately engage the principles of BOM into producing a detail, specific, technical and realistic time bound plan demonstrating how BOM Shareholders and Board of Director plans to achieve compliance with the new paid up capital requirement in the new Banking Act within a medium term timeframe. The same should be agreed upon by the ECCB.
In terms of a theoretical and practical example one notes the posture of the United Kingdom of only to be a part of the European Union, but not a part of the European Monetary Union. The reason for this is because the United Kingdom desires independence in its conduct of monetary policy and financial regulatory policy. This desire by the United Kingdom cannot be accommodated under a monetary union arrangement.
In terms of Montserrat, from an economic and financial standpoint, retreating from its long standing currency union arrangement with the OECS is not an option which the GOM has at its disposal. The same will have extremely serious economic, financial and perhaps political consequences.
Montserrat delay in passing the new Banking Act has the potential to Disadvantage the Royal Bank of Canada Group (RBC)
Under the current Banking Act, branches of the same financial institution operating in the various different member territories of the ECCU are considered and treated as separate institutions. In respect the new Banking Act, it is proposed that all branches of a licenced financial institution across the ECCU will be deemed to be one licence institution. The latter is more applicable to Canadian international financial institutions such as Royal Bank of Canada (RBC), Bank of Nova Scotia (BNS) and First Caribbean International (FCIB). RBC as it stands at this moment operates in Montserrat and six other ECCB Area territories. Accordingly, the treatment of RBC branches across the Eastern Caribbean Currency Union as one bank is delayed due to the fact that RBC Montserrat from a corporate structure standpoint remains isolated legally from the RBC other operations across the ECCU due to Montserrat’s non passing of the new Banking Act. This can have implications for RBC corporate structure, management structure, licences fees and taxes. To make matters worse, this comes against the background of RBC recent announcement of massive losses across the region.
Peter D. A. Queeley is an Economic and Financial Analyst. He is also Managing Director at the St. Patrick’s Cooperative Credit Union