Ewart S Williams: The future of the financial industry after the crisis
Opening address by Mr Ewart S Williams, Governor of the Central Bank of Trinidad and
Tobago, at the 14th Caribbean Business Executive Seminar, Caribbean Centre for Money
and Finance, Port of Spain, 30 April 2010.
* * *
Let me first thank the Caribbean Centre for Money and Finance for inviting me to make a few
opening remarks at this their 14th Business Executive Seminar. Given the CCMF's mandate,
the theme of your conference "The Future of the Financial Services Industry after the
Crisis" is most timely. Let me also congratulate CCMF on assembling a most impressive
cast of speakers, who could be expected to bring diverse perspectives and unique insights
into how our financial sector is likely to evolve over the next few years.
Since the international financial crisis, governments and central banks in both developed and
developing countries have been giving serious thought to the future of the financial services
industries in their respective economies. In particular, a lively debate continues to rage on
about the regulatory response to the crisis and on the measures needed to avoid a repetition.
The causes of the financial crisis have been well-documented and analysed and I don't plan
to review that discussion here. Suffice it to say that there is widespread agreement that the
legacy of the crisis will be long-lasting with significant changes expected in the global
financial landscape going forward. There is perhaps less consensus on what shape the new
landscape will take.
In respect of the advanced economies, where the crisis originated, and which suffered most
from the ravages of the crisis, the good news is that the near-term outlook for the
financial sector has improved significantly. In the United States (US), bank stocks have
rallied and those of the four largest banks have been among the best performers in the
S&P 500 since the market hit bottom in March 2009. This month, four of the largest financial
institutions in the US, JP Morgan Chase, Bank of America, Citigroup and Goldman Sachs
reported healthy first quarter earnings.
Despite these indicators, there continues to be serious risks to financial stability in these
economies, arising from the withdrawal of government support, continued write-downs to
compensate for further asset deterioration and funding pressures, as institutions seek to
reduce leverage and raise capital and liquidity buffers.
In these advanced economies, debate is still raging on the long term financial sector outlook.
For example:

The optimal size of financial institutions - many experts expect that financial
institutions will seek to scale down their global ambitions, focusing more on specific
market segments, in which they have particular comparative advantage. In this
context, the future of the investment bank is in doubt.

Some analysts project that long term returns from banking would face a structural
decline as banks reduce leverage and build up their deposit bases to reduce their
dependence on wholesale markets.

There are proposals for a return to basics as customers steer clear of the
nontransparent exotic products that precipitated the crisis.

And then there is the much publicized issue of compensation packages in the
Here, the future is likely to see a shift away from pay incentives structures
industry.
that encourage excessive risk taking and reward short-term profits. Instead, there is
the proposal that compensation packages be tailored more to long term
performance, rewarding sound risk management.
There is also intense debate going on in the US on regulatory reform. Two main issues
here are a proposal to force banks to spin-off their risky derivatives business to reduce
systemic risk, and whether future resolution strategies should specifically preclude
government bailouts.
As regards the Caribbean, you may recall that we suffered only a limited contagion from the
international financial crisis largely because:

Like in most developing countries credit expansion in our banks is based on deposit
mobilization rather than on inter-bank borrowing or overseas borrowing.

Our banking systems tend to be generally conservative and for the most part, were
not exposed to the sub-prime mortgages or to the exotic derivative instruments that
were standard fare for banks in the advanced countries.
Of course, our regional financial system was more affected by the international recession
that ensued and by the collapse of two regional institutions - the Stanford Bank in Antigua
and the CL Financial conglomerate, which is headquartered in Trinidad and Tobago but with
financial subsidiaries throughout the Caribbean.
Notwithstanding the limited contagion, the international financial crisis and our own regional
financial distress have set in motion a new dynamic that is bound to lead to important
changes in our financial landscape. It is difficult to be certain about what these changes
would be. I would, however, like to hazard a few thoughts about the possible evolution of our
financial landscape, based in part, on measures already in train, and the likely reaction to the
distress that has left deep scars.
I expect that the recent financial crisis would lead to:

Greater consolidation of the financial system - currently three large foreign
banking groups dominate banking activity in the region (accounting for about 45 per
cent of total banking assets). The remaining assets are held by smaller locally
owned banks including a few state-owned banks. I would expect bank concentration
in the region to intensify over the next few years. As part of this consolidation, I
would expect the trend towards the disappearance of merchant banks, which are
being absorbed into universal banking structures, to intensify.
 I would expect a similar trend towards consolidation in the insurance industry,
though, led by regional insurance firms. In Trinidad and Tobago, for instance, the
proposal in the draft Insurance Act for a significant increase in regulatory capital will
certainly tend to promote consolidation.
The crisis could also provide impetus for greater recourse to:
 - the general perception is that (apart from the
Technology and innovation
expansion of ATMs) the region has not come close to maximizing the use of
technology to increase efficiency and reduce banking spreads. It is therefore
reasonable to expect that competition and the drive to maintain profitability will
provide the necessary impetus to the greater use of technology.
 As regards innovation, I do not anticipate our relatively small conservative regional
banking system will establish a market for exotic derivatives. I, however, expect an
expansion in the markets for basic hedging instruments and the continued evolution
of new banking products designed to facilitate greater credit expansion to the energy
sector, to small businesses and to agriculture.
 Greater attention to customer service - this is an emerging trend which will
become more commonplace over time. Financial institutions will continue to
increase their interaction with their customers through more active use of web-based
social networking such as facebook and twitter. This will be extremely useful as
institutions attempt to rebuild the trust and confidence that were eroded by the
financial crisis.

Rise in information portals - the increasing sophistication of customers and the
availability of a wider array of financial products will lead to the expanding use of
financial information portals.
There would also be important changes in the regional regulatory environment as a result of
the international financial crisis.
Basically, as is now happening in several of the advanced economies, we in the Caribbean
are likely to see a change in our regulatory philosophy. For years, we have been taking a
"soft touch" approach to regulation, aligned to the philosophy of the market mechanism. In
the Caribbean, as elsewhere, this approach has led to the excesses, which caused the crisis.
In the post crisis environment, I would expect regulation to be more comprehensive and
much more intrusive, designed to include a macro-economic perspective.
If there is anything that the crisis in the CL Financial Group underscored it was the critical
importance for updated legislation and regulation to match, as much as possible, the rapidly
evolving of the operations of the financial institutions. As you know, the favored form of
organization for the large financial institutions in the Caribbean is the conglomerate or
holding-company structure. Unfortunately, up to now, most regional regulators do not have
supervisory authority over bank holding companies. The lesson is that, in the future, systems
should be in place to adjust the regulatory perimeter as needed and to ensure that legislation
keeps abreast of developments in the financial sector.
In addition to the regulatory gaps, our recent experience also made it clear that poor
corporate governance, weak risk management practices, and inadequate management
information systems also contributed significantly to the excesses that led to the difficulties
faced by the CL financial group.
We in Trinidad and Tobago are involved in a comprehensive review of our financial
legislation. We have recently completed a new Financial Institutions Act (FIA) and are well
underway to completing a new Insurance Act (IA). Both pieces of legislation raise the bar
with respect to the respective roles of Boards of Directors, external auditors and in the case
of the insurance sector, actuaries. I would expect that all regional regulators will increase the
focus on corporate governance in much the same way as is being done in Trinidad and
Tobago and in the advanced economies.
The increasing complexity of investment products will require that financial institutions pay
more attention to rigorous risk-management practices. In the region, this will require a
as well as the hiring of individuals with the requisite expertise and
change in mind set,
knowledge. Going forward, companies will need to make greater use of stress-testing in
order to better identify and manage risks.
Financial institutions in the region are beginning to recognize
the crucial role of adequate
and properly designed information systems. These are necessary tools for management
as well as the basis for oversight by Boards of Directors and the regulators. Robust
information systems could add significantly to the company's costs. However, they invariably
represent monies well spent as they could facilitate major improvements in the company's
operations.
Finally, in the post-crisis world, I expect to see more attention being paid to compliance and
sanctions. New legislation and upgraded regulations will have limited effect unless there are
provisions for meaningful sanctions and unless there is certainty that sanctions will be levied
for non-compliance. In many cases, it is more efficient to rely on sanctions in the form of
fines and other penalties administered by the regulator, than to depend entirely on recourse
to the Courts which could be time-consuming. Also, Courts sometimes fail to grasp the
seriousness of the breaches of financial regulations. Enforcing compliance with financial laws
in the Caribbean will need a change in regulatory culture and a strengthening of political will.
I am hopeful, however, that this will happen since the high cost of the recent crises
(particularly CL Financial), has clearly provided ample rationale needed for much stricter
enforcement of financial legislation.
This is what comes from my crystal ball. In the course of your deliberations today there
would be other views to which I anxiously look forward.