1. The Trinidad Experience” Panel Discussion: “Revisiting the Financial Conglomerate Model - The Trinidad Experience” Catherine Kumar President Bankers Association of Trinidad & Tobago LimitedMay 28, 2009 3rd Biennial International Conference on Business, Banking & Finance

2. 2 Road Map 1.Regional Financial Landscape – The Background 2.Previous Financial Business Models 3.Major Risks Inherent in the Model 4.Expected Benefits of Expansion 5.Expansion Options 6.Financial Conglomerate Structures 7.Attendant Risks 8.Moral Hazard 9.Financial Critical Success Factors 10.Institutions Act 2008 11.The Way Forward

3. 3 Regional Financial Landscape-Background Has its moorings in plain vanilla commercial banking dominated by small local subsidiaries of large Canadian Banks Nationalization of these subsidiaries closely followed Product suite was limited and capital markets were still a concept Provided the impetus for the transformation of the regional financial landscape to go beyond commercial banking and to include activities such as:- o Merchant Banking o Investment Banking o Trust Services o Stock and Fixed Income Security Brokerage and Trading o Financial Advisory o Insurance and Pension Funds

4. 4 Previous Typical Financial Business Models Basic Business models:- Banks:Deposit taking institutions which earn profits principally from the lending of funds Insurance Companies: Life Insurance: Insurance premia (net of statutory fund requirements) generally invested in long term assets General Insurance: Net premia invested quality short term assets Pension Funds: Both insured and deposit administration contracts and investments in long-term assets Banks and Insurance Companies were generally stand alone entities

5. 5 Major Risks Inherent in these Models Liquidity risk –arising from asset/liability mismatch Credit risk – both from a loan portfolio and investment book perspective Concentration risk – markets were small and exposure to key credits were becoming significant –Continued growth in profitability was capped by limited market size and emerging signs of saturation.

6. 6 Expected Benefits of Expansion Presented regional financials with a new realm of opportunities namely:- o Ability to grow balance sheet o Ability to diversify revenue streams away from the vagaries of domestic or home markets and reduce concentration risk o Ability to expand product suite to include previously untraditional business lines e.g. brokerage, capital markets, high end real estate and commodities etc. o Regional financials were able to pursue comparatively higher return investments, thereby enhancing revenues and profitability

7. 7 Expansion Options Mergers and Acquisition –Successfully used by a number of indigenous and regional financial institutions during their expansion phase. Portfolio investments –Utilized as a stepping stone into a new market without attracting the initial start-up costs Establishing a greenfield “mortar and bricks branch” in the new market

8. 8 Financial Conglomerate Structures Can be subdivided into:- –Pure Financial Conglomerate Consists of a group of financial companies providing a variety of near to full range of financial services –Mixed Financial Conglomerate Group of companies with different business lines i.e. financial and non-financial Group is usually headed by a non-financial entity that is not regulated by a financial services regulator Financial companies are imbedded within the structure

9. 9 Attendant Risks Business Risk: – Understanding of varied businesses in the Group Corporate Governance Risk: Increasing complexity of the conglomerate structure may be too great for risks to be managed. – Brings to bear issues such as:- Human Resource Does the organization possess the necessary wide skill set at the Board and/or operational level to fully understand the type or level of risks involved? Processes Does the organization have systems and procedures which reflect its complexity and allow for convergence into one platform, where necessary? Legal and Reputational Risk.

10. 10 Regulatory Risk: –The Regulators also face challenges in the relevance of its structures, monitoring and regulatory approach with similar emphasis on its HR skill set and processes. –Regulators encounter challenges given that conglomerates span over a number of industry sectors, some of which are not actively regulated or not regulated at all. –Regulatory Arbitrage. Attendant Risks Attendant Risks Cont’d

11. 11 Contagion Risk: –Created by the diverse and wide geographical reach of the conglomerate structure –Exacerbated by the regional integration and interdependence of our markets Attendant Risks Attendant Risks Cont’d

12. 12 TOO BIG TO FAIL Moral Hazard

13. 13 Financial Institutions Act 2008 Type of RiskFIA 2008 Response Corporate Governance RiskRequires the establishment of policies and procedures for transactions with connected parties and employees. Mandates the establishment and maintenance of information on credit exposures Regulatory RiskCapital Adequacy, solvency requirements are applicable to the licensee on an individual basis and on a consolidated basis where the licensee has subsidiaries or companies over which it has significant control Establishment of a financial holding company. Contagion RiskBanks restricted to banking and business of a financial nature Restriction on assets that can be held by licensee including:- –No more than 25% of the capital base in property development companies –No more than 10% of the capital base in insurance companies Restriction on the activities of financial holding companies Represents the regulatory response in part to the risks attaching to the financial conglomerate model

14. 14 Critical Success Factors The financial conglomerate model has worked where there is:- o Strong corporate governance o A clear understanding of the business risks within the group o Robust enterprise-wide risk management o A long term organization view (as supported by culture) of creating value as opposed to reaping short term gains o The ability of organization to quickly assimilate acquisitions and realize promised benefits and synergies o The maintenance of positioning within one’s respective area of core expertise o Minimized exposures to connected parties o Understanding of the risks associated with new markets and the mitigation of same

15. 15 The Way Forward Roll out new legislation for the regulation of the insurance, pension funds, credit union sectors and securities industry throughout the region. Require the cross-border sharing of information and resources by all regulators in the region. Silo financial activities from non-financial activities by restricting the ability of financials to depart from their core area of expertise. Cap the exposure to connected parties within a financial group. (FIA 2008 recommends 10% of capital base). Secure experts/highly skilled resources for the Regulatory Authorities. Continue the discussion on the pros and cons of an integrated supervisor with a view to arriving at a regional position. There has been much discussion throughout the region on convergence of financial legislation and regulations but the industry awaits some feedback to the many comments provided to date.

16. 16 Thank You