Why does the new Eastern Caribbean
Currency Union Banking Act give our Central Bank such apparently dictatorial
powers?
[1] Anguilla’s
present Banking Act is a uniform Act,[1] almost
identical to the other Banking Acts across the Eastern Caribbean dollar (EC$)
region. Or, it used to be. All of the six independent States have in
recent months replaced the old Act with the new Banking Act. Only Anguilla and Montserrat have failed to
enact it. The governments of these two
islands face stiff opposition from certain members of the public, based mainly
on what these objectors describe as the dictatorial powers proposed to be given
to the Central Bank. This opposition has
been holding up the passage of this essential piece of legislation for some six
months.
[2] The details
of the so-called dictatorial powers, and the various reasons given for
objection, are not important for this analysis.
What is important is an understanding of why any new Central Bank powers
are being introduced. Why is there any
need for a new Banking Act? Is
the Central Bank power-hungry, and determined to get its way at the cost of our
banking system, as the opponents of the new Act allege? Or, is the Central Bank merely complying with
standards that are required internationally?
A little study and research reveals the answer.
[3] The new Banking
Act is based on the Basel Committee on Banking Supervision’s Core
Principles for Effective Banking Supervision, issued in September 2012.[2] The Core Principles are in fact the
minimum standards applied to judge how sound are the prudential regulation and
supervision of banks and banking systems in all the regions of the world. They are the benchmark for testing the
quality of supervisory banking systems.
The Core Principles are used by the International Monetary Fund
and the World Bank to assess the effectiveness of supervisory systems and
practices all around the world.
[4] There are 29
Core Principles. They are divided
into two areas. Principles 1-13 deal
with the supervisory powers, responsibilities and functions of central
banks. Principles 14-29 deal with the
expectations of banks, emphasising the importance of good corporate governance,
risk management, and compliance with supervisory standards. You can read them for yourself, by following
the link I have provided in the paragraph above.
[5] I summarise
the 29 Core Principles this way:
Supervisory Powers, Responsibilities and
Functions
Principle 1 –
Powers: There must be a suitable legal framework for banking supervision. The Central Bank must be empowered to license
banks, conduct ongoing supervision, address compliance with laws, and take
timely corrective action to address safety and soundness concerns.
Principle 2 –
Independence and legal protection: The
Central Bank must possess independence and autonomy. The legal framework for banking supervision
must include legal protection. That is,
the law must provide protection to the Central Bank and its staff against
lawsuits for actions taken, or omissions made, while discharging their duties
in good faith.[3]
Principle 3 –
Cooperation: The Central Bank must be empowered to collaborate with domestic
authorities and with foreign supervisors.
Principle 4 –
Permissible activities: The permissible
activities of licensed banks must be clearly defined in law.
Principle 5 –
Licensing criteria: The Central Bank
must have the power to set criteria and be able to reject applications for banking
licenses where the criterial are not met.
Principle 6 –
Transfer of ownership: The Central Bank must have the power to impose
conditions on any proposal to transfer significant ownership of banks.
Principle 7 –
Major acquisitions: The Central Bank
must have power to approve or reject major investments by a bank.
Principle 8 –
Supervisory approach: The Central Bank
must have power to assess the risk profile of banks and to take action to
resolve banks in an orderly manner if they become non-viable.
Principle 9 –
Supervisory techniques and tools: The
Central Bank must be given a range of techniques and tools to effect its
supervisory function.
Principle 10 –
Reporting: The Central Bank must collect
and analyse prudential reports from banks and be able to verify those reports.
Principle 11 –
Corrective powers: The Central Bank must
have the power to address unsafe practices and must possess a range of
supervisory tools to make timely corrections.
Principle 12 –
Supervision: The Central Bank must
monitor and apply prudential standards to all aspect of the business conducted
by a bank.
Principle 13 –
Home relationships: The Central Bank
must be able to share information it holds on a foreign bank with the foreign
bank’s home supervisor.
Prudential Regulations and Requirements
Principle 14 –
Corporate governance: The Central Bank
must ensure that banks have robust corporate governance policies and processes.
Principle 15 –
Risk management process: The Central
Bank must ensure that banks have an effective Board and senior management
oversight able to identify and control all material risks on a timely basis.
Principle 16 –
Capital adequacy: The Central Bank must
ensure banks maintain adequate capital in the context of the market in which
they operate.
Principle 17 –
Credit risk: The Central Bank must
ensure banks adequately manage credit risk.
Principle 18 –
Problem assets: The Central Bank must
ensure banks have adequate processes for early identification and management of
problem assets and the maintenance of adequate provisions and reserves.
Principle 19 –
Concentration risk: The Central Bank
must ensure banks have adequate policies and processes to deal with concentrations
of risk in a timely basis.
Principle 20 –
Related parties: The Central Bank must
prevent abuse in transactions with related parties and ensure banks take
appropriate steps to control the risk of dealings with related parties.
Principle 21 –
Country risk: The Central Bank must
ensure that banks have adequate polices and processes to deal with country risk
and transfer risk in international activities.
Principle 22 –
Market risk: The Central Bank must be
able to ensure banks have an adequate market risk management process.
Principle 23 –
Interest rate risk: The Central Bank
must ensure banks have adequate systems to deal with interest rate risk on a
timely basis.
Principle 24 –
Liquidity risk: The Central Bank must be
able to set prudent and appropriate liquidity requirements for banks, and
ensure that banks have a strategy for prudent management of liquidity risk and
compliance with liquidity requirements.
Principle 25 –
Operational risk: The Central Bank must
ensure that banks have an adequate operational risk management framework.
Principle 26 –
Internal control and audit: The Central
Bank must ensure banks have adequate internal control frameworks including
independent internal audit and compliance.
Principle 27 –
Financial reporting and external audit:
The Central Bank must ensure banks maintain adequate and reliable
records and comply with accounting practices that are internationally
recognised, and annually publish their accounts bearing the certificate of an
independent external auditor.
Principle 28 –
Disclosure and transparency: The Central
bank must ensure banks regularly publish information that fairly reflects their
financial condition, performance, risk exposures, risk management strategies,
and corporate governance policies and processes.
Principle 29 –
Abuse of financial services: The Central
Bank must ensure that banks have strict customer due diligence rules and
policies and processes that prevent banks from being used for criminal
activities.
[6] In addition to the Core Principles, the
Report deals with the related issues of the need for:
sound macroeconomic
policies of governments;
a modern system of
business laws, including corporate, bankruptcy, contract, consumer protection,
and private property laws;
an efficient and
independent judiciary;
comprehensive and
well defined accounting principles;
a system of
independent external audits;
the availability of
competent accountants, auditors, and lawyers working to high technical and
ethical standards and enforced by official or professional bodies consistent
with international standards and subject to appropriate oversight; and
credit bureaus to
make credit information on borrowers available;
as well as a number
of other relevant issues that are not relevant to this study.
[7] Anyone who has
ever done business in Anguilla knows how lax our professional standards
generally are. The only professions and
trades that are legally regulated are food handlers, liquor licence retailers,
land surveyors, physicians, and lawyers.
All others operate on a caveat emptor basis. Anyone may call himself an architect,
engineer, land valuer, real estate agent, auctioneer, accountant, or
banker. None of these is subject to any
form of professional licensing or regulation.
[8] Since we in
Anguilla do not seem capable of or interested in correcting our professional
and ethical deficiencies, it is hardly surprising that external agencies will
force internationally recognised standards on us.
[9] In any
event, as we have seen above, so far as banking is concerned, it is clear that
the Governor of the Central Bank is not unilaterally imposing anything on us. The Governor of the Central Bank is merely
demanding that Anguilla live up to the standards the Monetary Council, or Board
of Directors, of the Central Bank, has mandated the Central Bank to impose and
enforce. Only Anguilla and Montserrat
seem intent on holding on to the old, inadequate, and no longer acceptable banking
standards.
[10] Put another
way, far from being arbitrary and dictatorial in insisting on our passing the
new Banking Act, the Central Bank is trying to reassure the
international banking community that Anguilla complies with the minimum banking
standards expected of us. It is at the
same time trying to persuade the international community that it, as our
Central Bank, is meeting the high standards expected of a regional banking
supervisor. Our resistance to passing
the Bill is stymieing the Central Bank’s efforts on both counts. The question is, will we in Anguilla succeed
in remaining a pariah banking community, while at the same time making our
Central Bank appear to be an ineffective regional regulator? This is a result that we should strive to
avoid at all costs.
[11] In
conclusion, the new Banking Act is designed by its drafters to make our
Central Bank and its member banks compliant with international standards. There is no evidence it is an irresponsible
and unreasonable new law, drafted by power-hungry lawyers and bankers in the
Central Bank, as is being suggested by some of the objectors to it.
[1] Chapter B010 of the 2010 Revised
Edition of the Laws of Anguilla.
[2] This 85 page document can be found
on the website of the Bank for International Settlements here: http://www.bis.org/publ/bcbs230.pdf
[3] At pages 22-24.
