marion williams : the drivers of a changing financial system in barbados address by dr marion williams, governor of the central bank of barbados, to a seminar hosted by the university of the west indies alumni association and the barbados institute of banking & finance, cave hill, 14 february 2005. * * * good evening, ladies and gentlemen. i wish to congratulate professor frank alleyne, the uwi alumni barbados chapter and the barbados institute of banking and finance for conceptualising this forum. it is indeed timely. my topic will be about the changes that we have witnessed in the financial sector in recent years and more especially the likely future changes. in these opening remarks, i will touch on the international and regional influences, technological changes, business needs, changing regulation and their impact on the financial system and on the economy. further, i will look at the prospects for the sector ’ s performance in an increasingly liberalised and globalised environment. the past 10 years have seen more changes in international banking than we have experienced in the previous fifty years. internationally, we have seen banks become bigger as a spate of mergers and acquisitions have taken place. we have seen the banking system become more integrated as banks were allowed to get involved in securities business in many jurisdictions where this was previously prohibited. we also saw the opening up of capital markets accompanied in some cases by increasing levels of volatility. at the same time, international financial centres like barbados began to grow significantly and this prompted a well - planned and orchestrated effort to keep them in check. globalization began to bring with it new levels of risk, and operational risks in banking became a matter of increasing concern. the complexity of banking supervision increased as international regulators introduced new measures of evaluating portfolios. the role of credit rating agencies became increasingly important as potential investors sought reliability of information for assessment investments. exchange of information and the level of transparency became important issues in judging the credibility of transactions. guidelines became more and more international in nature and national authorities found themselves faced with a plethora of new rules. technology in the banking system advanced rapidly to real time settlement, and instant transfer of funds became common place. barbados on the national front, in barbados, this country saw globalisation and regionalism in action as both the local banks and a regional bank changed hands. we also witnessed a widescale takeover of indigenous banks and for the first time in many years barbados by 2004 had no local commercial banks. in the insurance sector we saw a spate of amalgamations which

effect, leading to higher losses that the government would ultimately have to absorb. a government guarantee that is unclear or not credible, even if it is explicit and priced, will result in greater costs to the government and, ultimately, the taxpayer. what should parties pay the government for its willingness to intervene? in my view, the government must determine its exposure net of the loss absorption capacity provided by the private sector. this includes evaluating the counterparty credit risks generated by any risk - sharing transactions. risk - sharing must require a payment of cash from the private sector and oversight of the capital and overall risk profile of any participants in risk sharing. of course, the required private capital should be of high quality and should be determined relative to the total risk associated with a given set of mortgage underwriting standards. this may sound complicated, but it is not brain surgery. the government should bear only the cost of extraordinary systemic risks and the private sector must bear losses associated with the capital structure and governance of a mortgage securitization utility, federal reserve bank of new york staff report, number 644, october 2013. bis central bankers ’ speeches the normal business cycle. if this can be arranged, then the largest portion of the overall guarantee fee will be priced by the market and not by the government. an important design decision for a housing finance system is whether the government backstop will apply directly to mortgage - backed securities, their issuers, or some other legal entity. an institution - based program could erode private sector discipline, while a securitybased backstop would pick up the idiosyncratic and cyclical risks that are better left to the private sector. seeking to balance these concerns, i have explored the notion that government support would be triggered by the total losses across an entire group or “ vintage ” of mortgage - backed securities. vintage - based support would likely only be triggered by a true systemic shock. a vintage approach would also provide a transparent and finite maximum loss for the private sector to absorb, supporting robustness at the onset, during, and through the aftermath of a crisis. i believe that the costs of the recent devastating economic downturn would have been far less to the taxpayer, and the housing market would have rebounded far quicker, had a vintagebased program containing adequate high - quality private capital been in effect. attracting private capital to finance residential real estate is another important consideration. it is difficult for institutions that depend on short - term funding to take long - term interest - rate