My
Opinion – Don Mitchell, CBE, QC
[1] Anguilla
is still suffering from the shock of the 2008 global banking crisis. Economic growth and prosperity has declined
and continues to decline. Unemployment
remains high and income shows little sign of growth. The banking system is paralysed. The Central Bank continues to hold the two
indigenous banks, National Bank of Anguilla (NBA) and the Caribbean Commercial
Bank (CCB), responsible for 75% of the banking business of Anguilla, in a conservatorship. The two international banks in Anguilla,
Scotia Bank and First Caribbean Bank, are not significant players in the
industry. The result is that banking
business on the island has been frozen since mid-2013 when the conservatorship
began.
[2] The
Central Bank is demanding that we reform our laws and procedures related to
banking so that we can move forward. A
certain amount of resistance to their proposed reforms has begun to make itself
heard on the island.
[3] I
have taken the time to read:
(i) the recent circular letter of the
Governor of the Central Bank to members of our regional Houses of Assembly explaining
the proposed reforms;
(ii) the draft Memoranda on the website of
the Central Bank on the proposed reform measures;
(iii) the draft Banking Bill on the Central
Bank website as well as the draft Bill placed on the Order Paper for the Anguilla
House of Assembly and which the government proposes to have passed into law;
and
(iv) Stress Test: Reflections on
Financial Crises by Timothy F Geithner, President Barak Obama’s first
Secretary of the Treasury, in which he describes the nature of the US banking
crisis of 2008-2010, and the measures adopted to resolve it.
[4] The
question is, does the present Banking Act of Anguilla provide an
adequate regime for regulating the indigenous banks? Other questions include, are the other areas
of law and practice surrounding the banking industry working to promote high standards? Are there any real banking regulatory powers? Land valuers, auctioneers and real estate
agents are essential actors in the real estate market and the realisation of
land securities held by banks. How high
are their ethical and professional standards?
How effective is the legal regime governing the realisation by banks of
land securities? Is there any need for
reform in these and other areas related to banking?
[5] Timothy
Geithner has graphically demonstrated that forcing banks to hold enough capital
and liquidity to absorb significant losses is the best defence against financial
crisis. The recommended safe US loan to
capital ratio is 20:1. For every dollar
of capital, a bank is permitted to lend twenty dollars. In the case of NBA, there were at the time
conservatorship began approximately EC$1 billion in loans and other assets and
$30 million in equity. A capital level of
$30 million should have leveraged no more than EC$600 million in loans. An injection of another $30 million would
have restored NBA to a healthy leverage ratio.
Geithner has explained that it is pointless purchasing distressed assets
to try to stabilise overleveraged financial institutions. It is more beneficial for there to be a
direct capital investment to contain a crisis.
That was the mechanism that he persuaded Congress to fund. The result was the return of the US banking
system to a healthy state, with the subsequent sale of government investments
in the banking system resulting in a healthy profit for the US taxpayer.
[6] Some
50% of the loans at NBA are said to be non-performing. This is acknowledged to be due to the
collapse of the island’s economy due to the world-wide economic crisis, and not
to malice on the part of the borrowers. Even
if, in a rescue package, the distressed assets supporting these non-performing
loans were to be purchased, that would not solve the issue of a run on the
bank. To avoid a run, it would be
necessary for either the local government or the ECCB to stand behind the bank
and to guarantee the repayment of every deposit at the bank. This is the only way confidence in the system
could be ensured, so that there would be no run on the bank. With most of the deposited monies tied up in
non-performing loans, whose securities were difficult to realise, the bank
could not have handled a run without such support. However, neither the local government nor the
Central Bank was in a position to offer such support. It seemed to the Central Bank that the dismissal
of the Board of Directors and of the senior management, and the sending in of a
conservator, was the only remedy available if NBA was to be prevented from
crashing.
[7] The
Central Bank is now proposing a number of reforms that it believes are
essential if we are to get out of the hole we are in. The proposed reforms, as listed in the
Central Bank Governor’s letter to parliamentarians, are as follows.
THE ECCB AGREEMENT
[8] When
the Central Bank was originally set up, the regional governments did not agree
that the Central Bank would have the power to effectively regulate local
banks. The politicians kept that power
for themselves. At most, in a worst
case, the Central Bank could take over a failed bank and sell it, but it could
not intervene to ensure the bank did not arrive at that end by insisting on
high standards of financial probity or sound business practice. Even today, it has no power to provide
financial assistance to prevent the collapse of a failing bank. The Central Bank lacks power to restructure
the business, undertaking and capital base of a failing bank. It has no power to penalise a bank that fails
to maintain the required reserves.
[9] In
my view, there is a need to amend the Agreement to give the Central Bank power
to take all steps it considers necessary to protect the interests of depositors
and creditors, as the Central Bank is requesting. The Agreement needs to be updated to give the
Central Bank power to do all these things.
ASSET MANAGEMENT COMPANY
[10] There
is no institution in place that can acquire and manage a collapsed bank or any
of its assets. One needs to be put in
place if banks that are put in conservatorship are not to remain in that
unproductive position for an unduly protracted period of time. The Central Bank proposes such a company.
FORECLOSURE
[11] The
regime for selling loan securities is unduly restricted when it is land in
those states and territories that have a Registered Land Act. At present, the lending bank is obliged to
sell the charged property by public auction at the full market value. There is no power to foreclose, as
foreclosures have been abolished by the Registered Land Act. When land values collapse, as has happened in
Anguilla in the period 2008 to the present, a lending bank is reluctant to risk
a law suit if the security is sold at what is perceived to be a price below the
fair market value. The result has been
that land securities remain unsold for years at a time. In my opinion, if the bank could take
possession of land securities and sell them by private treaty as well as by
public auction for the best price it is able to achieve, the present choke-hold
on the realisation of securities would be eased.
[12] Additionally,
the Aliens Landholding Regulation Act (ALRA) limits the sale of a land
security in Anguilla to another willing Anguillian purchaser. A foreign purchaser cannot buy unless he is
prepared to go through an expensive and time-consuming process of attending at
a public auction in person or through an agent and is willing to submit to the
procedures and obstacles placed in his way to obtain the necessary licence from
the political directorate. The result is
that a bank can sell land securities only to a local Anguillian, who might be unwilling
to face the inevitable hostility that will be created when a distressed home is
purchased. I have previously explained
why this ALRA is completely discredited, and should be repealed.[1]
INSOLVENCY
[13] There
is no modern insolvency law in Anguilla.
The present Bankruptcy Act is an old Leeward Islands Act. Its provisions are so arcane that no Anguillian
creditor to my knowledge has ever dared to test its provisions by having a
court declare a debtor bankrupt and appoint a trustee in bankruptcy. In my opinion, there is a need for the
insolvency law of Anguilla to be updated so that insolvent businesspersons can
have a line put under their indebtedness and be able to move on with their
lives, as the Central Bank is demanding.
DEPOSIT INSURANCE
[14] There
is no deposit insurance in Anguilla, nor can the Central Bank insist on
provision for it. Essentially, if a bank
goes under in Anguilla it is feasible that all depositors will lose their
money. In my opinion, deposit insurance
would give relief up to a guaranteed ceiling.
We should enact the needed legislation as the Central Bank is demanding.
CREDIT BUREAU
[15] There
is no professional body to whom a lender can turn for a dependable credit
report on a prospective borrower. The
result is that arbitrary and unfair criteria are applied to applicants for
loans, with the undeserving and risky borrower who has good contacts in the
bank having an advantage over a more credit-worthy borrower who has no such contact. In my opinion, there is a need to establish a
professional credit bureau on which banks can depend for quality investigations
and reports, as the Central Bank is demanding.
REGULATION OF APPRAISERS
[16] The
only so-called land valuers in Anguilla are those public servants appointed
under the Valuation and Rating Act to value houses for the purpose of
property tax. Such valuations as they
produce are notoriously suspect. Land
surveyors, auctioneers and real estate agents are ready and willing to issue a
valuation to anyone who will commission them.
If you are selling, some may be willing to put a high value on your
property. If you are purchasing, they may
be willing to underestimate the value.
There is no professionally qualified, licensed and regulated appraiser
in Anguilla subject to disciplinary proceedings and liable in tort or in
contract to an employing banker. The
Central Bank is demanding that there be a law regulating appraisers, and in my
opinion they are correct.
REGULATION OF REAL ESTATE AGENTS
[17] Anyone
can set himself or herself up in Anguilla as a real estate agent. There is no qualification and no
regulation. Unprofessional conduct such
as charging both the purchaser and the seller a commission, and pocketing a
portion of the purchase price, is rife.
In the absence of any training or professional qualification, standards
and ethics in the industry are low. The
banks need to know which real estate agents are properly qualified and
regulated to be able to confidently place business in their hands. The Central Bank is demanding that a law be
passed to enforce the required standards, and they are undoubtedly correct.
REGULATION OF RECEIVERS
[18] There
is no mechanism in Anguilla for qualifying, certifying or regulating receivers
of distressed properties in the case of a defaulting loan. In my opinion, there is a need for these
mechanisms to be put in place so that a lending bank can be confident that, if
it is obliged to send in a receiver of a business which has failed, the asset
will be professionally managed and the rights and obligations of the bank and
the borrower honoured. The Central Bank
is demanding such a law.
COMMERCIAL COURT
[19] At
present, the High Court Judge must juggle criminal cases, matrimonial disputes,
guardianships, admiralty matters, constitutional motions, and commercial cases
as best she can. In my opinion, there is
a need for a commercial court to be established so that commercial cases can be
given the priority that the banking system needs if it is to function in the
smooth and seamless way that is intended.
The Central Bank is demanding this reform.
BANKING ACT
[20] The
present Banking Act does not permit the Central Bank to take pre-emptive
action during a financial crisis. It is
the local Minister of Finance, not the Central Bank, who issues banking
licences. In my opinion, it is not
appropriate that a Minister of Finance be the licensing authority for a local
bank. Such a figure is a politician, and
not necessarily qualified to inspect and regulate the local banks. Political considerations are not appropriate
when it is a matter of licensing an institution to take deposits from members
of the public. There is need to give
this responsibility to the Central Bank and to provide it with the tools that
will permit it to encourage the development of safe and sound banking
institutions and to protect the depositors’ funds. The draft new Banking Act that is
shortly to be placed before the House of Assembly introduces this change in the
law and deserves to be passed without amendment.
CONSOLIDATION OF THE TWO BANKS
IN ONE
[21] There
are said to be some 40 commercial banks, 161 insurance entities, 57 credit
unions, and an unknown number of other credit, mortgage, and finance companies
in our region. The Central Bank proposes
to consolidate the various indigenous banks and other financial institutions in
our region into one or two enlarged banks.
They propose to do this to NBA and CCB in Anguilla. They have expressed an intention to do the
same with the local finance, mortgage and insurance companies, and credit
unions. The argument proffered is that
the resulting enlarged entities will be better able to withstand financial
shock.
[22] This
Central Bank argument is not convincing.
A well-managed small bank is clearly safer than a badly managed bigger
bank. In my opinion, it is more likely
that the regulators in the Central Bank, sensitive to their regulatory failings
in the recent banking crisis, wish to reduce their exposure to criticism by
limiting the number of companies they have to oversee.
[23] The
Central Bank seems to be unaware of the role that competition for customers
among our various financial institutions has played in the growth of our island
economies. We, the consumers, on the
other hand are only too aware of what the resulting inefficiencies will be when
the mini-monopolies that the Central Bank aspires to are put in place. In my opinion, this is the one area of reform
proposed by the Central Bank that appears flawed and objectionable.
[24] On
22 September 2015, the House of Assembly passed a resolution that “the
Honourable Minister of Finance appoint a committee of the whole House to deal
with the issues which affect the indigenous banking sector and ensure that all
relevant information including proposals for the resolution of the issue be
made available to the committee.” Yet, the
government has now attempted to introduce a new Banking Act in the House
of Assembly without even a hint of an attempt at carrying the people with
them. This may well be seen as an
example of arrogant paternalism, and a failure to build trust and community of
purpose, the very essence of which is missing in Anguilla, and why so much is
going wrong. Hopefully, the Chief
Minister’s withdrawal of the First Reading of the Bill in the face of public
hostility from the gallery of the House is the start of a real discussion on
the future of the banking system of Anguilla.
Whatever he does, it is essential that he honour the resolution of the
House as well.
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