ewart s williams : implications of the current financial crisis for trinidad and tobago address by mr ewart s williams, governor of the central bank of trinidad and tobago, at a ttma seminar “ crisis in global financial markets : implications for trinidad and tobago ”, port - of - spain, 26 september 2008. * * * thanks for the invitation. the sub - prime crisis first grabbed the headlines sometime around august 2007. who would have thought that after one year of high - priced casualties, not only is the end not in sight, the ongoing spillovers now threaten to destroy the workings of the international financial system as we know it. we are now seeing, among the industrialized countries a level of financial panic the likes of which we have not seen in our life time. president bush, in making the case for the us $ 700 billion rescue package warned that “ the entire us economy was now in danger ” : he cautioned that the current crisis could wipe out banks, empty retirement nest - eggs, send home - values into a free - fall and create millions of new jobless. warren buffet called the crisis “ a financial pearl harbor ”. the speakers before me have given their take on how the crisis will affect various sectors of our economy. i will try to avoid too much overlap by focusing on the impact of the crisis on the country ’ s external reserves and on our financial system as a whole. in the latter context, i would also like to suggest some lessons for financial sector regulation. i would end with a few brief comments on the macro - economic risks to the economy as a whole. last week, at least two commentators wondered why specific details on the impact of crisis on the country ’ s reserves were not forthcoming, surmising that the government or the central bank had something to hide. with the indulgence of my host, i would like to address this issue in some detail. let me say up front that, as far as the official reserves are concerned, we have not suffered any capital losses as a result of the financial turmoil on wall street. and this is so because we have stuck to our mandate which requires the central bank to adhere to conservative reserve management principles and to have in place as many risk mitigants as feasible. let me explain our reserve management system : very often central banks are criticized for being too conservative in investing the country ’ s reserves and not maximizing their income potential. it ’ s an unfortunate criticism since the conventional wisdom is that generating returns

original basel accord has seen most g - 20 countries starting to implement the basel 3 capital rules, which has delivered what many consider to be the world ’ s first global liquidity standard for banks. the jury is still out on basel 3. as many of you know ( or at least i hope you know ), the basel committee does not have the right to impose the standards it produces on others, and has never, at least explicitly, sought to constrain national authorities to do so. nevertheless, more than 100 countries are implementing the three versions of the basel accord in different forms at varying speeds. here in the caribbean, most jurisdictions are still seeking to fully comply with basel 1 before moving to basel 2, while others are focusing on first satisfying pillar 2 of the basel 2 framework. the region, as whole, decided to put the adoption of basel 2 on hold following criticisms of the approach in the wake of the eruption of the international financial crisis in mid - 2007. five years later, one might even perhaps question why the region is not focusing on basel 3 at this time. bis central bankers ’ speeches so why has the caribbean region been grappling with implementation of the basel accord? perhaps the answer, in my respectful view, is that the basel framework was never really designed with developing countries in mind, and implementation of any version in developing countries is likely to be fraught with difficulties. there are a number of factors which determine the speed of basel accord implementation plans in different countries of the world. these include the size, structure and degree of financial sector development, the level of economic development, and the capacity of the existing regulatory and supervisory authorities. application of these factors to the caribbean reveals the following : first, the small island states in the caribbean experience greater macroeconomic volatility, greater volatility of external flows and greater vulnerability to external shocks than the industrial countries. secondly, the newer versions of the basel framework rely on strong institutions. in the caribbean, institutions limiting rent - seeking are weak : banker and bureaucrat have more opportunity and incentive to reap private benefits at public cost. basel 3, for example, presumes that sophisticated and integrated risk management systems are in place, and for the caribbean this is generally not the case. thirdly, skills are scarce in the caribbean. supervision and market discipline require skilled supervisors and market participants. i, therefore, believe it is timely for the regional working committee on basel 2 implementation to start thinking about developing a regional prude