Monday, November 09, 2015

Banking Reform in Anguilla, 2015

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.
[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.
[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.
[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]
[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.
[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.
[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.
[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.
[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.
[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.
[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.
[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.
[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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