Tuesday, November 17, 2015

Anguilla's Banking Crisis

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/