OVER-REGULATION OF BANKING

Brian Francisby Brian Francis

 

For many years, we in the Eastern Caribbean have boasted of a relatively strong and stable financial system as one of the foundations of our financial and economic successes to date.

Given the vast changes taking place in business environments regionally and internationally, there is a growing awareness among many leaders in the financial sector that it cannot be business as usual and that changes have to be made in our strategic approach to decision-making.

In an October 17, 2000 speech on “The Role of the Eastern Caribbean Central Bank (ECCB),” Governor, Sir K Dwight Venner, said:

“The role of central banks has changed from being highly secretive and mysterious institutions to open, transparent, and in some cases, predictable organisations. This has been the result of two trends.

Firstly, the almost compelling understanding that independent and accountable central banks are able to deliver low rates of inflation which has now become a significant public good. Secondly, a convergence of theory and practice in which increased access to information, or as we say in economics, the decrease in information asymmetries, leads to better decision-making and positive outcomes.

These changing circumstances have led to a number of new paradigms in the philosophy and operation of not only central banks but most institutions in both the public and private sectors. We are now in the era of governance and accountability.”

If 15 years ago, as the Governor concluded, financial institutions were functioning in an era characterised by governance and accountability as well as lower degree of informational asymmetry, then today, we all should expect less regulations of these vital institutions by the ECCB, allowing our financial leaders to create and implement ideas that will not only protect their shareholders’ interests but also earn the blessings of their customers.

However, for that to happen, financial institutions operating within the region must be governed by legislation that is consistent with the changing conditions to which the Governor referred.

As noted above financial leaders recognised that it cannot be business as usual. Therefore, it was anticipated that practitioners would have been given reasonable time to review the recent changes to the new Banking Act and make meaningful input.

Feedback suggests that adequate time was inexplicably not given and indeed the new Banking Act rushed through Parliaments in the region in March and April this year.

Without doubt, the sweeping changes to the regulation of banks operating under the supervision of the ECCB will have far-reaching implications on the banking sector and, more importantly, the end users who are already saddled with high fees.

Indeed, according to news reports from Antigua, where bankers went on strike to protest the new Banking Act. In St. Kitts, strong objection to several aspects of the Act by the new Opposition should have made everyone think twice, but unfortunately these concerns were unaddressed.

Also, some Parliamentarians in St. Lucia and Antigua raised eyebrows on the fact that the new Act was presented within hours of the voting, not allowing anyone to carefully read and analyse the 150-odd page document.

But why was there such strong opposition to aspects of the new Act?




The answer to that question rests with some of the main areas in the new act:

(i) increase capital requirements for the banks and non-banks financial institutions,

(ii) removal of powers from the local governments and centralising all authority within the ECCB,

(iii) draconian rules for directors and the ability of every licensed institution to now operate in all the ECCU countries.

Let’s address these three (3) areas:

Boosting capital requirements for the banks is overall a welcome concept that is in line with global regulatory changes. It will, however, negatively impact smaller banks that may not be able to meet the new requirements.

In order for this caveat not to inadvertently cause consolidation within the financial or banking sector, then small banks should be granted some flexibility even on case-by-case basis.

Centralising power in the hands of the ECCB is a dangerous notion.

Local governments should have a say in who is operating in their Island States. While the ECCB member countries may share some commonalities, there are specific characteristics in each Island. For instance, Montserrat and Grenada will have different needs from the financial system as their economies are driven by different economic factors.

In relation to the rules governing directors, allow me to relay a recent story. A participant in a recent bankers’ workshop in St. Lucia told me the Governor who was addressing some questions from participants (mostly bank directors) said, “I wouldn’t want to be a bank director today.”

Whether or not this assertion is correct, the draconian requirements will invariably discourage highly qualified professionals from accepting invitations to join boards as directors.

Directors are critical in the corporate governance of the banks and therefore a review of the rules is warranted at the earliest in order not to scare away eligible candidates who would otherwise wish to serve as directors.

In this writer’s opinion, the new Banking Act amounts to over-regulation of our banks in a time when we continue to maintain that our financial system is healthy and stable. Over-regulation of the banks will ultimately lead to higher operating costs which, of course, will all be passed on to the end users – the customers.

So if we are concerned about the high lending rates, and high transactions costs, imagine what would be the implications of a 20% increase in banks’ service charges!

Ultimately, it will be very difficult for virtually every licensed institution to operate in all the ECCU countries unless there are revisions along the lines suggested. In the end, one must wonder: what was the ECCB so afraid of that it failed to properly communicate with and consult the public on this new Banking Act?

(Dr. Brian Francis, a former Permanent Secretary in the local Ministry of Finance, is currently a Senior Lecturer in the Department of Economics at the Cave Hill Campus in Barbados of the University of the West Indies)

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