Ewart S Williams: Some reflections on the regional banking system
Luncheon address by Mr Ewart S Williams, Governor of the Central Bank of Trinidad and
Tobago, at the Financial Institutions Conference "General Financial Sector Issues and
Policies", Bridgetown, Barbados, 3 November 2011.
* * *
I would like to thank Governor Worrell for his invitation to address this Seminar. I would also
like to congratulate the Central Bank of Barbados for organizing this Seminar which, based
on this morning's proceedings is an excellent forum for the exchange of views and for
building trust between the Central Bank and the financial sector.
Governor Worrell invited me to speak on whatever topic I wished. Accordingly, I think it is
only fair I state at the onset that "the views expressed do not necessarily reflect those of
my Host."
It's no secret that the last few years have been a difficult time for the financial services
industry all over the world.
In the US, some four years after the financial system faced the greatest crisis in close to a
century and after a significant official support, including bouts of quantitative easing, banks
are still in the process of repairing their balance sheets (and remain very vulnerable).
In the Eurozone, sovereign risks have spilled over to the banking system as contagion
spread from Greece to Ireland and Portugal and more recently to Spain, France and Italy.
Many European banks that are holding risky and volatile sovereign debt are now facing
major difficulties.
An agreement reached among EU members late last week calls for banks to accept a
50 per cent principal haircut on Greek sovereign debt with EU Governments providing up to
euro 100 billion in loans to help re-capitalize weak banks.
You may have seen that yesterday a major financial institution had significant exposure to
EU, sovereign debt went belly-up, underscoring the close links between the US and
European banks and the vulnerability of US banks.
And then there is the "Occupy Wall Street" movement which began in New York and has
since spread to 70 major US cities as well as throughout Europe. What started as an
expression of discontent with income inequality and corporate greed has now expanded into
a more general concern about all the ills plaguing the US economy and other advanced
economies. Dissatisfaction with the banking industry stands at the heart of the protests.
Banking corporations are seen as being increasingly insensitive to the plight of the average
customer and overly focused on their bottom line.
Some of you may have read that in September, Bank of America decided to charge
customers US$5 per month to make purchases via debt cards. Viewed as a source of
customer irritation, client reaction was swift and decisive with large numbers of customers
moving their accounts to institutions with less onerous fee structures, such as credit unions.
Fortunately, our regional banking system is in far better shape and enjoying a much
greater degree of consumer trust - at least, we hope so.
The regional banking system demonstrated remarkable resilience to the international
financial crisis, thanks to the banks' conservative operating policies which left them with
limited, if any, exposure to the type of toxic assets that contaminated the balance sheets of
the banking system of many of the developed countries. Also, the loan portfolios of our banks
were largely funded from domestic deposit mobilization with little exposure to wholesale
financing from external sources.
There is the argument in some quarters that the international financial crisis was one of
several factors that contributed to the collapse of CL Financial and the Stanford Bank. While
this may be true, the demise of these institutions was in the main self-inflicted.
Several macro-prudential indicators paint a fairly robust picture of the regional banking
system.
I have sought to show these indicators in comparison with those of the advanced
countries in a few slides. I am fully aware of the problems with inter-country comparisons, but
I believe that even allowing for definitions and other differences the data provide an
interesting picture ......
(i) Table 1 shows that the regional banking system is more than adequately capitalized.
Banks in the region maintain capital adequacy ratios in a range of 15 to 20 per cent
way above the statutory minimum of 8 per cent. In Trinidad and Tobago the average
is 27 per cent.
(ii) Table 2 presents indicators of the profitability of the regional banking sector. While
profitability, measured both by return on assets and return on equity has
declined somewhat since the international financial crisis, by and large, the
regional banking industry is still very profitable by international standards. The
Trinidad and Tobago banks more so. According to the data Barbadian banks have
faced a sharp decline in profitability, as measured by "return" on equity.
A recent article in Latin American Markets Monitor predict "tough years ahead" for the
banking system in Barbados given the rising level of non-performing loans and the
expected weak economic recovery. I don't subscribe to an overly pessimistic outlook for the
banking system in Barbados. Though I agree that there could be challenging times ahead.
One of the factors behind the "weakening" of the regional profit picture is clearly the sharp
increase in loan delinquency rates which is now apparent, throughout the regional banking
system.
As shown in Table 3, here in Barbados the loan delinquency rate has increased three-fold
from around 3 1⁄2 per cent to 10 1⁄2 per cent of total loans.
In Trinidad and Tobago, the relative increase in loan delinquency is even larger - from
1 per cent in 2008 to over 6 per cent currently.
The non-performing loan ratio has also risen sharply in Jamaica - from a little over
21⁄2 per cent to close to 8 per cent of total loans.
And while we don't have a consistent series for the ECCU, the 2011 IMF Staff Report
indicated that aggregate NPLs measured 9.6 per cent in June 2010, but were higher for
the indigenous banks, also an issue in the ECCU as provisions cover less than
30 per cent of NPLs. ECCU banks were also heavily exposed to general government
debt (to an extent of almost 30 per cent of regional GDP) concomitant with the rise in
public sector debt and while some of these loans are not being serviced ... they are not
classified as non-performing.
But even this relatively comfortable macro-prudential picture begs the question as to
whether our regional banking system should not be making a greater contribution to
regional economic development. I think it should be and I also believe that over the next
few years, if we are to enhance our economic viability, our banking system will need to be
more innovative and even more supportive than it has been in the past, to our developmental
efforts.
As I noted, our Caribbean economies are still digging themselves out of the global crisis of
2008 and unfortunately the recovery of the region is lagging behind that of other developing
countries.
According to the World Bank statistics, in 1980, the Caribbean's average per capita income
was twice as high as the average for developing countries; today it is only a third higher.
Countries in the region have been growing at an average rate of 2 per cent per year while
other small island states have been growing at an average rate of 3.6 per cent per year,
roughly the average for the world economy.
Unfortunately, as we seek to reverse this trend and address the challenge of long-term
viability, the region faces the reality that it has lost some comparative advantage at a
time when the global economy has become less friendly. The following examples are
worth noting:
(i) First, the traditional preferences for bananas and sugar have ended but the region
still finds itself unable to compete with lower-cost producers;
(ii) Second, foreign aid flows to the region (with the exception of Haiti) have all but dried
up and FDI has been declining;
(iii) Third, while Caribbean tourism continues to be a viable brand, the region is facing
stiffer competition from stay-at-home tourism in both the US and Europe and will
experience even greater competitive pressures when Cuba is fully opened up (as it
could in the not too distant future); and
(iv) Fourth, the prospect of continued high unemployment in the US and the UK for the
next 2-3 years will have implications for workers' remittances which are very
important to some Caribbean economies.
To add to these exogenous factors, most countries in the region already have unsustainably
high public debt burdens, which limit the extent to which government spending could lead the
recovery.
Some of my countrymen would like to argue that Trinidad and Tobago represents a
variation of this theme, given our energy resources, our stronger public finances and our
much lower public debt burden which gives us more room to manoeuvre. I warn them to be
careful about pushing this argument too far since:
(i) our proven energy reserves are fast dwindling (though some experts think that
prospects for new discoveries are high);
(ii) our fiscal space is being steadily consumed, the more the private sector activity
remains subdued and government steps in to lead the recovery; and
(iii) three years of fiscal deficits and the CLF/CLICO bailout are taking a heavy toll on
our public sector indebtedness.
The slow recovery of the Caribbean economies is mainly due to the challenges being faced
by the regions main export markets - the U.S and Europe. The conventional wisdom is that
over the medium term, growth in these traditional markets would continue to lag behind the
more dynamic emerging market economies - China, India and Brazil. According to this
thesis a greater diversification of regional exports of goods and services towards
these new growth poles would make regional economies less vulnerable to the kinds
of shocks experienced in the past few years. This, combined with the establishment of
greater regional linkages would seem to be a desirable medium-term economic strategy for
our regional economies.
With limited fiscal space and with uncertain prospects for foreign direct investment, the
private sector would need to play an enhanced role, supported by innovative financing
mechanisms. And herein lies the challenge for our regional banking system.
Available data suggests that compared with the more dynamic emerging market countries
banking services in our region are relatively high cost and inefficient.
For example, total operating costs for banks in Trinidad and Tobago average about
6 per cent of total assets compared with under 2 per cent in the EU and 3 per cent in the US
and about 4 per cent in most emerging markets. Yet, the rates of return in assets and equity
for Trinidad and Tobago banks are considerably higher than international norms.
The greater profitability of the local banks is related, inter alia, to the high interest margins. In
Trinidad and Tobago the data show that these margins increased from 7 percentage points
in 2004 to 10 percentage points in 2009, before declining to 9 percentage points in 2010.
Barbados has the lowest interest margins at around 6 1⁄2 percentage points.
The relatively high cost of banking in the region is certainly related to its small scale but also
has to do with the limited exploitation of new technologies and the oligopolistic structure of
our banking market which limits competition, allowing banks to maintain their profitability
without increasing efficiency.
My banking colleagues always remind me that as Regulator I should be pleased when banks
make profits instead of having to show losses, and I fully agree. Clearly the large margins
are excellent for banks' bottom line, and for bank shareholders but there is a difference
between private and social rates of return and particularly, going forward, where banks would
be critical to the diversification effort, we need to seek a better balance between one and the
other.
In the long term, a diversified economy that facilitates a steady and sustainable rate of
growth is better for banking than an economy of anemic growth or stagnation.
Our banks have also been somewhat slow to embrace technology than perhaps they should.
Thus, for example, while transactions volumes have been increasing, electronic banking
remains rudimentary in Trinidad and Tobago and has not yet started to produce major cost
savings for the banks. Our investigations suggest that the still limited acceptance of
e-banking has to do with concerns about security, quality of internet connection and a
general lack of awareness about internet banking. A recent survey revealed that 75 per cent
of those questioned were familiar with debit cards, while only 22 per cent were familiar with
internet banking and 27 per cent with tele-banking.
It is noticeable that not only individuals, but businesses and the public sector are still slow to
adapt to the electronic environment. If I could cite another example from our experience. The
Central Bank, in collaboration with the banking system, has invested considerable resources
to establish electronic payments systems - the Real Time Gross Settlement System (RTGS),
for large value transactions, and the Automated Clearing House (ACH) for small
transactions. However, the transition from cheques (and other paper-based systems) to
electronic payments has been very slow even after having sought to advertise the advantage
of using electronic payments and have imposed a $100 surcharge on large cheques.
The good news is that the government is now taking steps to change the long outdated
legislation to facilitate electronic payments on its own account. Hopefully, this should set
the example and provide the necessary incentive for the private sector to do likewise.
A few words on banking and the consumer.
It is widely agreed that the last decade or so has seen a rapid acceleration in the pace of
product innovation in the financial services industry, due in large measure, to advances in
information technology. The challenge posed by the proliferation of new financial products
and service delivery models, has prompted many jurisdictions to scale up financial education
and consumer awareness and to increase emphasis on consumer protection.
In the aftermath of the crisis, in addition to the Dodd-Frank Wall Street Reform, intended to
guard against financial instability, the US Government enacted the Consumer Protection Act
and created the Consumer Financial Protection Bureau to ensure that markets for financial
products and services operated in a fair, transparent and competitive manner and were
subject to meaningful oversight.
In the UK, the Financial Services Authority has outlined a new consumer protection strategy
aimed at (i) making retail financial services operate better for consumers; and (ii) facilitating
the delivery of prompt and effective redress as needed.
In 2003, the Central Bank of Trinidad and Tobago, in collaboration with the commercial
banks set up an Office of the Financial Services Ombudsman to deal with specific
complaints by customers against banks (and later against insurance companies).
Interestingly enough, perhaps the major impact of the Ombudsman's office is the fact that it
has served as a catalyst for commercial banks to upgrade their internal dispute resolution
mechanisms to better address complaints before they are allowed to reach the
Ombudsman's office. Because of this success the number of complaints against banks
currently handled by the Ombudsman's office has declined from a high of 156 in 2004 to
about 20 in 2010.
I should note that the Ombudsman's terms of reference do not cover the fees, commissions
and interest rates charged by banks. I should note also that the level of fees and
commissions remain a principal area of complaints and irritation for bank customers.
Our bankers insist that fees and commissions charged by banks in Trinidad and Tobago are
the lowest in the region. If that is correct the level of these fees in Barbados may also be a
problem, as indeed they are in Jamaica.
The Central Bank in 2007, also launched (in collaboration with the Central Government and
the financial sector) a National Financial Literacy Programme (NFLP) aimed at increasing the
level of financial education and awareness of the population. The programme which has
been funded by donations from stakeholders has targeted primary and secondary schools;
small and micro-businesses; employees in the workplace and community groups. Under the
NFLP, the Central Bank has launched a national campaign entitled "Savings for Retirement"
and is promoting retirement planning in many communities.
The issue of consumer protection in the financial services industry is, surprisingly, not a
contentious one with some bankers insisting on the free play of market forces and
competition. The fact is however, that particularly in small economies like ours, where sheer
size constitutes a barrier to entry and where there are information asymmetries, there
is a case for the Regulator to intervene to insist on adequate disclosure and to provide some
level of protection for the most vulnerable groups.
The challenge is therefore to balance regulation, competition and financial education to
achieve the twin objectives of financial stability and consumer protection.
Let me say a few words on financial regulation in the region.
It is a fact that the evolution of the financial sector in the region has outpaced that of the
regulatory system. The gaps have been widest in the areas of insurance, credit unions and
securities regulations but we are also lagging in respect of bank supervision which is our
strongest forte.
I know that many regional jurisdictions are currently in the process of upgrading financial
legislation.
In Trinidad and Tobago we recently enacted a new Financial Institutions Act and are about to
send a new Insurance Act to Parliament.
As regards supervision our supervisory authorities have taken the initiative to establish a
regional Colleges of Regulators to more effectively supervise the international banks that
operate in multiple territories.
Our regulators are now working on a Regional Crisis Management Plan that would inter alia:
(i) seek to enhance information-sharing among regulatory authorities;
(ii) introduce a regime of macro-prudential indicators and a framework to be used as an
early warning system for an emerging crisis; and
(iii) formulate agreed strategies for the timely and orderly intervention into the affected
institutions so as to limit the impact on the regional financial system.
While we can never rule out another regional financial crisis we can certainly be more
prepared than we were, when it happens again.
Let me end where I started with reference to the movement - Occupy Wall Street - I think
there is a message there for us (and I think that public reaction to the Clico crisis
underscores this message). The message is that banks and other financial service industries
have a responsibility to the country's development and a sacred obligation to consumer
wellbeing, even as they keep an eye on their bottom line.
I think that regional regulators need to listen to and be responsive to the voices of consumers
of financial services if trust in the regional financial system is to be maintained and
strengthened.
Thank you.
BIS central bankers' speeches 7
8 BIS central bankers' speeches