Marion Williams: Safeguarding our future in the face of global economic
challenges
Opening remarks by Dr Marion Williams, Governor of the Central Bank of Barbados, at the
Seminar "Safeguarding Our Future in the Face of Global Economic Challenges" to the
Caribbean Association of Indigenous Banks, Bridgetown, 17 November 2008.
* * *
Mr. Chairman, Honourable Ministers, Chief Minister of Anguilla, Minister of State, President
and Board of Caribbean Association of Indigenous Banks, Distinguished guests,
I first would like to congratulate the organisers of this conference for the foresight and the
tenacity in keeping this annual conference going. Thirty five years is a long time to have kept
this up.
Indigenous banks are a most important part of our economic landscape and even though, as
we become more regional it seems we have tended to change our definition to a regional
definition of indigenous, they remain as important as before.
Indigenous institutions tend to have an ethos which is Caribbean and which I trust helps
them to focus on the longer term goals of the region and not just on profitability and market
share.
Today more so than ever, it is necessary for financial institutions to take the long view about
where they are going. It has been fortunate for the Caribbean that we have so avoided the
impact of much of the global financial turbulence. This is partly because we were not on the
cutting edge of the financial technology but also because we did not stray too far from the
basics of good credit assessments and sound financial management. I would like to believe
that the Central Banks within the region contributed to this approach and I know too that the
calibre of managers which we have within the region make their regulations sound. After all
this is your home. Indigenous banks will not leave at the sign of a downturn. They will stay
and overcome any challenges.
Having said that, the world has become a global village, and we cannot isolate ourselves
from global developments.
Given the unprecedented events that have occurred in the global economy over the past
eighteen months, the theme for this year's conference is quite appropriate. In my opening
remarks this evening, I will restrict my focus to the main sources of risk and vulnerability
which have emanated from four areas: (i) the global macro-financial environment; (ii)
financial markets; (iii) the balance sheets the region's households and businesses; and (iv)
financial intermediaries. At this time, I am sure many do not envy our respective positions,
since policies at both the micro and macro level face no shortage of challenges.
Internationally, with economic growth slowing in the major developed economies, the
problems in international credit markets are still serious, and inflation rates still strong, and
although there are signs of some deflationary trends, the task for policy makers is as delicate
as any faced in many years.
Though the region has over the years substantially improved its macroeconomic
fundamentals and is better suited to face external shocks, there will be fallout from the
current turmoil. Market volatility will undoubtedly lead to sharp downward growth revisions for
2008 and 2009, as the decline in global demand will tend to reduce regional exports of goods
and services. In addition, the fall in interest rates in the U.S. will impact on both fixed and
floating exchange rate regimes, while the decline in global liquidity will force curtailment of
Foreign Direct Investment and cross border flows. How we respond to the problems posed to
us by the recent upheaval will be important for the robustness of the regional economy going
forward.
Though the direct impact on the regional domestic banking sector has not been significant,
largely because of the lack of sophistication and the relative of risk aversion if our regional
banks, there are lessons we can draw from these events. We must respond to these
changes by further strengthening our efforts at maintaining financial system stability with
adequate rules and regulations while avoiding over-regulation. It happened after Enron with
Sarbannes Oxley which tended to go overboard without, some would say, achieving
sufficient strengthening of the system - the results of which we are seeing today.
Many have now related the current crisis to market over-exuberance, coupled with less than
all-encompassing regulation which was necessary to monitor the very rapid changes in
derivative and structured finance instruments. The innovations and developments which
spawned such instruments increased the complexity of financial transactions and made their
traceability difficult. Such changes were also supported by increasing levels of excess
liquidity, low interest rates in the global financial market and the increased demand for
variations in financial instruments, given different consumers' risk profiles. Consequently,
there was a further blurring of financial intermediation roles between the traditional banks
and non-bank market players. Risk-shifting and risk transfer eventually forced the collapse
we are witnessing today. What these developments have demonstrated is that adequate
regulation of the financial system in the US is important to the rest of the world. While these
guidelines are set in the developed world the failure of regulation impacts us all. Developing
countries therefore have an interest in making sure that the US gets it right. While the global
recession will have significant implications for the region, inflation continues to be a regional
concern though there is evidence that this should ameliorate in the future. It is our hope that
with oil and other commodity prices falling, the region will be a beneficiary of a substantially
lower inflation rate in 2009. In some of the Caribbean islands, demand growth evidenced by
still strong credit, has not dropped dramatically, and in many instances, interest rates are
below inflation rates. That is to say, real interest rates are negative; and this has occurred at
a time when banks anticipate heightened levels of delinquencies, and would prudently adjust
their credit standards. This has the potential to force individuals to use their savings to cope
with normal activities. As a regulator it is important that we encourage the right balance, that
is both the concerns of the depositor as it affects his earnings on the one hand, and the
borrower as it affects his costs on the other. Over the most recent past, we have also seen a
tighter level of integration between international markets and regional economies, which is
reflected in a higher volume of cross-border financial flows, FDI or otherwise. Greater
integration between the markets is supported by the emergence of new players, who operate
across borders and are often privately-owned, or are subsidiary companies of state-owned
institutions.
This has important implications for us in the Caribbean in the current situation. As we have
witnessed, that changes in the global financial markets have the potential to rapidly alter
levels of global liquidity. The sharp growth in excess liquidity that started in the early 2000's,
and cheaper financing costs which fuelled the export of wealth and capital from the financial
capitals to all parts of the globe is now at a premium. This boom in growth, liquidity and
employment served to fuel heightened levels of Foreign Direct Investment flows to the region
through interests in real estate and other forms of investment. These "boom" conditions also
led to strong performances in the flow of remittances, which has been a vital component of
virtually all regional economies' balance of payments. With the turmoil in the international
markets, there has been a liquidity crunch, coupled with the higher-than-usual levels of risk
aversion. As a result, access to this kind of funding has contracted sharply.
The excess liquidity which we observed in the past few weeks could well be called upon and
could contract as players who had previously been accessing the international markets turn
to the local market now that these markets are closed.
While we do need Foreign Direct Investment and value it highly, thankfully, the region has
not been overly reliant on portfolio cross-border flows. This was a direct consequence of the
thinness of our financial markets but has turned out to be a benefit. A decline in net inflows of
funds into the region would have had large spillover effects on the domestic economy, and
some impact on the international business sector had the region been more securitised.
Although short-term capital inflows can be useful to meet short-term national financial
requirements, they can also be very volatile and vulnerable to sudden reversal. Short term
borrowers are more influenced by market expectations. The factor of expectations is
currently clearly evidenced in the sensitivity of some regional currencies towards changes in
the risk appetite of global investors towards US dollar-denominated debt instruments in the
region. At least one central bank in the region had to provide support for issuers of national
bonds denominated in US dollars as a result of this volatility. We may therefore need to turn
increasingly to the region and support each other. It would seem obvious that what I have
outlined so far implies that maintaining regional macroeconomic stability is clearly one of the
supporting pillars of overall financial system stability.
As for the resilience of the banking system, I can say that the regulatory actions of the
regional central banks have categorically shown that our banks are able to overcome the
market risk related to the current macro instability in the global market. However, we need to
constantly reinforce the resilience of the banking industry and guard against over-confidence.
Ladies and gentlemen, we should be grateful for the strength and resilience of the banking
industry when confronting these various risks and shocks. Industry performance has steadily
improved. Bank profits remain healthy and are in line with expansion of the intermediation
function and with efficiency improvements, as well as effective risk management. Although
much has been accomplished, a lot more still remains to be done. In this current
globalisation era, the speed of change is rapid. Our achievements up until now do not
guarantee success tomorrow. We have always relied on this awareness as the foundation of
banking industry policy. From here every step needs to be carefully and cautiously
calculated. It is imperative that we remain always sensitive to our long term goals and to the
impact on the financial system when addressing the changes and dynamics of the current
crisis. We also have to be able to calculate the implications of each step, prioritize policy, and
maintain a good balance in the implementation.
I know that the negative credit trends will filter through to our markets and is likely to affect
corporations in some key sectors, particularly those who entered this phase with low levels of
liquidity. This underscores the challenges of slower economic growth and, shrinking liquidity
in the global economy and may mean that they turn to regional banks and to indigenous
banks in particular.
These challenges facing regional macroeconomic policy makers look more difficult than they
have been for a long time; but with the collaborative efforts at the micro level, the region will
weather the storm. I am sure that the discussion over the next few days will help us focus on
the severity of the issues, and will help us to find viable solutions to head off any potential
adverse impacts.
I wish again to congratulate the CAIB for their commitment to commercial banking in the
region and to the exchange of views and ideas on the safeguarding of our future, given the
global financial challenges. Sometimes collaboration is important in order to make a
breakthrough. I thank you and wish you a successful conference.