Anguilla’s Banking Crisis 2013-2015 and
the new ECCB Banking Bill, 2015
[1] Listening to
the talk on the radio shows these days, one gets the impression that some
Anguillians are confusing Anguilla’s banking crisis with the new draft Banking
Act, 2015. In fact, the one has practically
nothing to do with the other. Let us
keep the two issues completely separated in our discourse.
The
new ECCB Banking Bill 2015
[2] We know how
the new Banking Act came into existence.
It is in no way derived from the Anguilla banking crisis. It pre-dates the Central Bank take-over of
National Bank Ltd (NBA) and Caribbean Commercial Bank Ltd (CCB). To repeat what I have written elsewhere, the
new Act is the result of the region’s international obligations reflected in
the Basel Committee on Banking Supervision’s Core Principles for Effective
Banking Supervision, issued in September 2012.[1] The Core Principles are 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 used by the IMF and
the World Bank for testing the quality of supervisory banking systems.
[3] The new Banking
Act, and the ECCB Agreement Amendment from which it comes, have a
regional reach. They establish a single
banking space within the Eastern Caribbean Currency Union. Unlike as under the old Banking Act, a
bank licensed in one State will now be able without restriction to open a
branch in another State.
[4] The Central
Bank is under an international obligation to implement the Core Principles in
our region. It is required to ensure
that the regulatory framework, ie, the standards it demands of itself, the
banks it regulates, and the financial arrangements of the governments who make
up its board of directors, the Monetary Council, meet the minimum standards
established by the Core Principles.
[5] I have
explained elsewhere that the draft Banking Act is a product of these
international and regional obligations.[2] The new Act provides a regime which
international regulators will recognise as belonging to a well-regulated
banking system. It was drafted long
before the Central Bank moved in on NBA and CCB.
[6] We have been
warned that the deadline for passing the new Banking Act in every State
in the Eastern Caribbean runs out at the end of December 2015. Failure to pass the new Act in Anguilla on
schedule will not only affect indigenous banks, but will poison the
international banking environment for the international banks that do business
in Anguilla.[3]
Banking
crisis
[7] In August
2013 the Central Bank sent in a conservator for the two indigenous banks in
Anguilla. They are, the NBA with assets at
the time of about EC$1 billion, and CCB with assets of about EC$700
million. The explanation given by the
Central Bank at the time was that the two banks were illiquid and there was a
concern they might fail and that the depositors’ funds would all be lost.
[8] At some
point, it was suggested that there was a hole of some EC$600 million in NBA’s
assets. It has never been clear to me what
shortfall there was in CCB’s assets.
Additionally, of the EC$1 billion in loans, some 50% were non-performing
and of doubtful value, given the depressed market that exists for their
securities. Because of the Aliens
Landholding Regulation Act (ALRA), there is in practice no market in the
region or internationally.[4] Under the new regime, ALRA is about to be
amended or repealed.
[9] So that, if
all NBA’s depositors came to the bank and demanded their funds back, and if the
conservator could sell all the loans and other investments, then, from what we
are being told, there would be a shortfall of some EC$500 million of
depositors’ money. Some EC$500 million
might be raised, but there would be EC$500 million short to be repaid. Indeed, if there was a run on the bank, given
that most of the depositors’ funds are tied up in loans, we were told that the
bank would soon run out of cash and would have to close.
[10] This was the
banking crisis that the conservator was allegedly sent in to solve in August
2013. We were told at the time that the
idea was to find a solution to the liquidity problem, and that as soon as the
banks were returned to good health things would be returned to normal. No one seems to have realised that in recent
weeks this promise has been brushed under the carpet.
The
Resolution
[11] The Chief
Minister of Anguilla has, in repeated broadcasts on radio over the past two
weeks, explained that he has decided on the resolution of the banking
crisis. He is going to transfer all the
bad loans (allegedly some 50% in both banks) to a new regional corporation to
be established by Act of Parliament in each of the States and Territories
giving effect to a regional Treaty. This
regional company will be known as the Asset Management Company Ltd (AMC). This company will renegotiate with defaulting
borrowers and, as a last recourse, sell their securities, locally, regionally
and internationally, with ALRA amended or repealed. The participating governments will share in
the profits of AMC pro rata. We in
Anguilla have no further interest in the bad loans sold, transferred or given
(it is not clear which) to AMC.
[12] Then, the
Chief Minister is going to merge the two banks, NBA and CCB. Lawyers know what the merger of two companies
involves. Typically, and in this case
essentially, it involves the formation of a new banking company, let us call it
the National Caribbean Bank of Anguilla Ltd (NCBA). The conservator will transfer all the
remaining assets of NBA and CCB, including the existing customers and
depositors, to the new bank, NCBA. These
assets will presumably include the profitable subsidiary companies of NBA and
CCB. The new bank will have one
shareholder, the government of Anguilla.
The government will be either borrowing a large sum of money to invest
in the new bank or putting up a large guarantee to stand behind the depositors,
it has not been made clear which. There
will be no other local shareholders in NCBA.
The new board of directors will be appointed in the usual way by the
sole shareholder. Let us call them the
government directors of NCBA.
[13] No one is
giving any thought to what is to happen to NBA and CCB after the merger. NBA has some 3,500 shareholders and CCB some
75 shareholders. Their boards of directors
have already been dissolved by the Central Bank, and do not exist anymore. Their shareholders remain on the books,
hoping that one day someone will tell them what is to happen to them. Well, I am prepared to tell them now, based
not on anything anyone has informed me, but on what little I know of mergers
and acquisitions.
[14] Until
approximately one week ago, I harboured a faint hope that the second recognised
way to carry out a merger of the two banking companies was being
contemplated. That occurs when one of
the two banks buys up the assets and takes on the liabilities of the
other. There is then said to be an
acquisition, and the two banks are merged by one having purchased the other. It happens every day. But, over the past week I became
disillusioned about that solution. It
was clear that, with the AMC purchasing all the bad debts of the two banks,
there was no plan to accomplish the merger by purchase. That left only merger by selling the assets
of both banks to a new bank.
[15] The only
sensible way this resolution can work is, after the bad loans have been
transferred to the AMC, and the good loans have been transferred to the NCBA, to
simply abandon the old banks. They serve
no further purpose. After a year or two,
the Registrar of Companies will strike them off the Register for non-compliance
with the Companies Act requirement for filing of annual returns. That will be the end of them. The old banks will fade away into the sunset.
Red
herring
[16] The controversy
in the media over the new Banking Act is a red herring obscuring the sad
fate of the two local banks and their many thousands of shareholders. The only bank the new Banking Act will
regulate is the new government-owned bank, NCBA. The old shareholders in NBA and CCB will have
no interest in the new bank. The two old
banks will never be regulated by the new Banking Act. The new Act will never in any way affect NBA
or CCB.
[17] The
shareholders and directors who are presently campaigning against the new Act, on
the basis that its provisions are draconian, are misled. The fact that the new Act bars injunctive
relief against the Central Bank, as they complain, is irrelevant. The fact that the new Act bars the right of
anyone to sue the Central Bank is irrelevant.
Only the new shareholder of NCBA (the government) and the new government
directors have any reason to complain about the contents of the new Act. There is no provision in the new Act that
will affect the present shareholders, or the old directors, or their old banks,
the NBA and the CCB. The new shareholder
and the government directors are the only ones who will be affected by the new
Act. They are not complaining. For this reason, the demands of the old
shareholders to have the new Act amended are misplaced.
[18] What is
incontrovertible is that the passage of the new Banking Act into law is
a necessary pre-condition for the creation of the new bank which is intended to
be licensed under the new regime. And,
the formation of the new bank is urgent.
The deadline is rapidly approaching.
The Eastern Caribbean Currency Union is, it seems, at risk of falling
off a cliff if the new standards are not put into law before the deadline.
[19] Meanwhile,
Anguilla’s corresponding banking relationships are at risk. The new bank will not be able to enter into
any corresponding banking relationships with European and North American banks
unless the new Banking Act is in place.
Indeed, if the new bank is not put in place in a matter of days, we are
told that the existing international banks providing banking services in
Anguilla (Scotia Bank and First Caribbean Bank) will likely lose their existing
corresponding banking relationships. All
relations between Anguilla’s banks and international banks will cease. It seems that this is the principal reason
for the haste with which these measures are being put in place. It is a pity that nothing was done during the
past two and a half years.
[20] It may be
unfair to suggest that another reason why nothing was done in the past two and
a half years is that both the past government and the present government were
concerned that all hell would break loose if the Anguilla public (most of whom
are shareholders in one bank or the other) were given enough time to absorb the
consequences of the resolution of the banking crisis that is now being put into
effect.
[21] As I have
written elsewhere,[5]
it is unfortunate that no sufficient effort was put into rescuing the two
existing banks. An insertion of new
capital, and a dilution of the existing shareholders’ equity, as was done in
the USA and the UK, would have been immensely fairer.
[22] And, finally
a word of caution. All the explanation I
have given above of what the Chief Minister is going to do to the old banks and
to the new bank is based on pure speculation and on what is reported in the
media. But, having practised for many
years, mainly as a corporate lawyer, and having been involved in the merger of several
companies over the years, I know how it is done. There may still be some surprises.
[23] Whatever
happens, it is essential that the new Banking Act be put in place in
Anguilla without amendment and at the earliest possible time. The consequences of our failure to do so will
be nothing short of catastrophic, not just for Anguilla but for the region.
[24] Indeed, the
British Government, we are told, have warned our government in writing that if
the banking crisis is not resolved, and the new Banking Act in place
before mid-Autumn, they will move in and by Order in Council impose a solution
that will be immensely more drastic than anything that the ECCB proposes. We have mere days left to act.
[1] 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] Peter Queeley of Montserrat is a banker,
which I am not. He has explained it all
clearly in this article: http://www.discovermni.com/2015/11/opinion-the-proposed-new-banking-act-and-its-implications-for-montserrat-part-2/
