Presentation on theme: "Challenges for Regulatory/Insolvency Regimes to Address Resolution"— Presentation transcript:
1 Challenges for Regulatory/Insolvency Regimes to Address Resolution Specific Reference to the Caribbean Region13th IADI Annual Conference“Updated Core Principles to Strengthen the Financial Stability Architecture”October 22-23, 2014Antoinette McKain, CEOJamaica Deposit Insurance Corporation
2 Outline Key elements for an effective resolution regime for Banks Overview of the banking system in the CaribbeanBank resolution/failures - last 3 decades in selected Caribbean countriesResolution and insolvency frameworks in the Caribbean:OverviewChallenges/ GapsRecommendations to enhance the frameworks
3 Financial Stability Board International Standards: Key Elements for an Effective Resolution Regime1. Mechanisms for early detection and timely intervention/prompt corrective action2. Special resolution regime3. Designated authority (ies) for exercising resolution powers4. Broad range of resolution options & powers5. Cooperation among relevant authorities - domestic & cross borderIADI/BCBSCore Principles for Effective Deposit Insurance Systems (2014)Financial Stability BoardKey Attributes of EffectiveResolution Regimes for Financial Institutions (2011)Basel Core Principles of Banking Supervision (2012)
4 Overview of the Banking System The financial system in the Caribbean is largely bank-based (onshore and offshore banking)Offshore banking is the largest subsector in the financial system (Barbados , Bahamas, BVI, ECCU & Belize)Non-bank financial institutions consist of credit unions; insurance companies ; and securities firms
5 Table 1: Structure of Financial System: Total Assets (US$ millions) ECCUBarbadosBahamasBVI*Jamaica**T&TBelizeGuyanaBanks9,5096,24012,1002,5008,72417,8911,3191,590Local4,2325,6702,800D.N.A.5,226449D.N.AForeign5,2775709,3003,498870Offshore banks2,40242,638582,900n/a301Credit Unions6828423005261,52430621Insurance Companies6371,52125114,76897157Securities firm4,674Total13,23057,480597,80016,43524,1832,0231,768D.N.A. – Data not available, n/a. – Not applicableSource: IMF WP/13/175 and country authorities
6 Overview of the Banking System Total assets in the banking system as a percentage of gross domestic product is a measure of financial depth of an economyTotal assets of the Banking system (excluding off-shore) represents approximately 91 percent of regional GDPTotal assets of the financial sector (excluding offshore banks) amounts to 124 percent of the regional GDP(IMF Working paper 13/ Financial Interconnectedness and Financial Section reforms in the Caribbean)
7 Table 2: Structure of Banking System: Total Assets to GDP (%) ECCUBarbadosBahamasBVIJamaicaT&TBelizeGuyanaBanks17613615026868738964Local7912335D.N.A.4130D.N.AForeign98121152759Offshore banks459287220n/a20Total22110647370109D.N.A. – Data not available, n/a. – Not applicableSource: IMF WP/13/175 and calculations from country authorities
8 GDP to Bank Assets – Global Comparison Overview of the Banking SystemGDP to Bank Assets – Global ComparisonCountryBanking Assets as a Percentage of GDPBarbados*136%Bahamas150%Canada214 %Jamaica68 %Trinidad & Tobago*73%United Kingdom463%United States88 %*IMF WP/13/175, country calculations 2013
9 Overview of the Banking System Interconnectivity and dominance of regional banks: Royal Bank of Canada, Canadian Imperial Bank of Commerce, Republic Bank and Scotia BankForeign banks account for approximately 60% of banking assets in the region (primarily Canadian banks)Most banks are connected to non-bank financial institutions in the investments/securities, insurance and real estate sectors through common ownership.
10 Table 3: Financial Sector Connectivity in the Caribbean Deposit Taking InstitutionsRelated Non-Banking OperationsCountriesNumber of CountriesBank of Nova Scotia LtdInsurance, InvestmentsAnguilla, Antigua and Barbuda, Aruba, Bahamas, Barbados, Belize, British VI, Cayman, Dominica, Dominican Republic, Grenada, Guyana, Haiti, Jamaica, St Lucia, St Kitts, St Vincent and the Grenadines, Trinidad & Tobago, Turks and Caicos, St Maarten20RBC Royal Bank LtdInvestments & InsuranceAntigua, Aruba, Bahamas, Turks & Caicos, Barbados, Bonaire, Cayman Islands, Curacao, Dominica, Montserrat, St Kitts, St Lucia, St Maarten, Suriname and Trinidad & Tobago.14CIBC FirstCaribbean Bank LtdInsurance, Investments, Real EstateBarbados, Cayman, St Lucia, Jamaica, Trinidad & Tobago, Netherland Antillies, Bahamas, and Turks and Caicos8Republic Bank LimitedSecuritiesBarbados, Cayman, Grenada, Guyana and Trinidad & Tobago5Sagicor Bank JamaicaInsurance, Investments, Property Services & Employee Benefits AdministrationJamaica, St Lucia, Cayman and Costa Rica4CitiBank N.A.Bahamas, Barbados, Cayman, Dominican Republic Haiti, Jamaica and Trinidad & Tobago7
11 Bank Resolution over the last 30 years in Selected Caribbean Countries CountryBankResolution MechanismApproximate Cost to the SystemJamaicaFinancial Sector Crisis, 1990’s – included several banks and non-banksThe Financial Sector Adjustment Company Limited (FINSAC) was created on January 29, 1997 to treat with financial sector problems. Resolution strategies for Banks included temporary management, capital injection in exchange for equity/assets; purchase and assumption; divestment; mergers and acquisitions.40% of GDP/ US$9.7 billion (1998)Bank of Credit & Commerce International 1991Operations of Jamaican branch suspended by the MOF, following the Bank of England's directive. Deposits were fully repaid and operations closed.Not availableBarbadosBank of Credit & Commerce International (BCCI) 1991Central Bank of Barbados intervened and seized BCCI. In 1993, Mutual Bank of the Caribbean Inc. was set up by the Central Bank to manage the sale of BCCI. (In 1991 Bank of England ordered the bank to close its global operations)
12 Bank Resolution over the last 30 years in Selected Caribbean Countries CountryBankResolution MechanismApproximate Cost to the SystemTrinidad and TobagoSeveral banks during the periodA combination of resolution strategies were employed, including liquidation.Not availableCLICO Investment Bank 2009Central Bank intervention and Liquidation. Depositor reimbursement by DICTT & government guaranteed paymentsOver US$3 billion to date -CLICO GroupAntiguaBank of Antigua (owned by Stanford Financial Group) 2009ECCB intervened through recapitalization and liquidity support. ECCB’s intervention facilitated the acquisition of certain assets and liabilities of BOA by Eastern Caribbean Amalgamated Bank in 2010 which is currently in operation.Not available.ECCB loan to Govt. of Antigua and Barbuda – approx US$33 million
13 Bank Resolution over the last 30 years in Selected Caribbean Countries - Causes Inadequate regulation and enforcement/ supervision on the part of bank supervisors and regulatorsUnsound banking practicesPoor corporate governanceWeak legal framework, judicial and criminal investigation systemRapid expansion of companies within conglomerates and complex group structures
14 Overview of the Current Legal and Supervisory Framework for Banks Some common features of the current legal and supervisory framework for banks in Bahamas, Barbados, Bermuda; British Virgin Islands, Jamaica, Trinidad and Tobago and OECS:The legal framework is generally clear on responsibilities and objectives for each authority involved in the supervision of banks (Supervision devolved - Central Bank; Monetary Authority; The Financial Services Commission)Banking laws confer powers on bank supervisors to prescribe prudential and other requirements; take corrective and sanctioning actionsAs between the Supervisors and the DI there are a range of respective intervention and resolution powers and at times resolution powers are also vested in the Cabinet Minister responsible for the financial affairs of the country.Where it exists the legal framework is generally clear on the responsibilities of deposit insurers
15 Insolvency Laws Governing Banks in the Caribbean There are no special insolvency regime for banks in the countries examined.The general insolvency framework for companies and administered by the court is applicable for winding-up insolvent banks.Deposit Insurers (in T&T, Jamaica, Barbados and Bahamas) may act as liquidator or receiver for the winding-up of banks however only when advised or guided by the Central Bank and /or the Minister of Finance; or the courts as is the case for the respective country.
16 Insolvency Laws Governing Banks in the Caribbean Bermuda monetary authority has proposed a framework for a special resolution regime for banks licensed in Bermuda.The Bill seeks to provide the authorities with the necessary stabilisation powers to transfer part or all of a failing bank’s business to a private sector purchaser, assume control of part or all of a failing bank’s business through a bridge bank and acquire temporary public ownership of a bank where required.
17 Overview of the Legal and Supervisory Framework for DTIs in Selected Caribbean Countries CountryLead Authority Responsible for Supervision of DTIsAuthority to Wind Up BankBahamasCentral Bank of the Bahamas- Office of Inspector of Banks (Inspector)The Governor after advising the Minister applies to the Supreme CourtBarbadosThe Central Bank of Barbados through its Supervision DepartmentThe Central Bank after notifying the Minister, applies to the High CourtBermudaBermuda Monetary Authority (BMA)BMA through a Special Resolution Regime (SRR) in conjunction with the Minister. Where public funds are involved, then the Govt will take control.
18 Overview of the Legal and Supervisory Framework for DTIs in Selected Caribbean Countries CountryLead Authority Responsible for Supervision of DTIsAuthority to Wind Up BankBritish Virgin IslandsThe Financial Services CommissionThe Financial Services Commission by Court OrderJamaicaThe Central Bank through its Governor.The Central Bank through a Supervisory Committee determines whether a member institution is insolvent.The Central Bank through Supervisor of banks and after consultation with the Minister of FinanceOECSEastern Caribbean Central Bank (ECCB) - Monetary Authority for a group of eight members/island economiesThe Minister, acting on recommendation of the Central BankTrinidad and TobagoThe Central Bank of Trinidad and Tobago – Inspector of Financial InstitutionsThe Central Bank of Trinidad and Tobago on the recommendation of the Inspector of Financial Institutions.
19 Challenges Structure of Banking System Small number of banks account for the majority of market shareInterconnectedness and concentration of banking systemFramework for cross border sharing of information among regulators still a work in progressImpact of a bank resolution may be exacerbated by the relatively small size of the financial systemLegal and Judicial FrameworkCourt proceedings are not handled quickly enough to restore confidence in the banking sector and maximize/preserve the value of bank assetsInsolvency laws and laws governing the winding up of banks not harmonized through out the regionThe current insolvency frameworks in the region are not well suited to deal with serious cross-border problems
20 ChallengesOnly 4 countries in the Region have a Deposit Insurance Scheme (Bahamas, Barbados, Jamaica and Trinidad and Tobago. BVI is in the process of establishing a DIS.)Inadequate regional collaboration among authoritiesFinancial literacy - low levels may impact financial system confidence in a crisisPolitical implications of a bank resolution may delay timely decision makingAvailable resources for bank supervision/ resolution:Retention of key technical expertise/human resources by authorities;Small pool of skilled professionals in the region may give rise to conflict of interest in the resolution of a bank e.g. auditors; liquidator.
21 Recommendations 1. Establishment of deposit insurance schemes DIS within all the territories will strengthen the regional financial sector; better harmonize the protection of depositors and lessen the propensity for runs on banksThe deposit insurer should be operationally independentEstablish regional DIS resource pool (funding & technical expertise to enhance prompt bank resolution)Deposit insurance agencies should have statutory powers to act as liquidator or receiver and should be expressly designated the resolution agent
22 Recommendations2. Enhance collaboration among financial system safety net partners (FSSN) – domestic and regionalThe roles and responsibilities of the FSSN within each country should be clearly definedCollaboration should be enhanced among the FSSN specifically for cross border banking groups/regional financial conglomeratesWhere a deposit-taking institution has branches in other Caribbean regions, the relevant authorities should clearly and in advance establish (i) which jurisdiction is responsible for providing deposit insurance coverage to the depositors of each branch, and (ii) the rules governing insolvency.
23 Recommendations 3. Establish Legal powers for effective resolutions There should be a set of clearly defined rules based or statutory trigger mechanisms for intervention and resolution of banksResolution powers and options for banks should be clearly outlined in legislationThere should be a designated/lead resolution authority and/ or agent
24 Recommendations4. Create special resolution regime for insolvent banksAssess adequacy of general insolvency laws/ framework for the timely resolution of banksLaw should allow for designated resolution authority/agent which should have power to enter into cross-jurisdictional arrangements.Regulatory intervention and resolution actions should be largely administrative and expressly have primacy over court process. Laws should clearly allow for Set-off, netting, the finality of payment and settlement and the prohibition on acceleration of termination rights .
25 Recommendations4. Create special resolution regime for insolvent banks cont’dNational laws and regulations should not discriminate against creditors on the basis of their nationality, the location of their claim or the jurisdiction where it is payableThe statutory mandate of a resolution authority/agent should allow for cooperation with foreign resolution authorities/agents and the treatment of assets in cross border insolvency should be understood in advanceThe treatment of creditors and ranking in insolvency should be harmonized across borders and adequately disclosed to depositors, insurance policy holders and other creditors. Equity holders should bear first losses
26 Recommendations5. Establishment of crisis management plans at various levels:Institutional level – Individual Banks should develop internal recovery strategies for crisis timesRelevant authorities (supervisor, ministry of finance, deposit insurer etc) - Crisis Management PlanNational level – FSSN PartnersRegional level – authorities should have the power in governing legislation to share information. Establish MOU with regional authorities.