The members of the Organization of Eastern Caribbean States (OECS) should move to establish immediately two separate bodies to regulate domestic non-bank financial institutions and the offshore financial services sector. In turn, these new bodies should work closely with the Eastern Caribbean Central Bank (ECCB).
Financial problems in the member states of the OECS, posed by the CL Financial Group headquartered in Trinidad and Tobago and the on-shore and off-shore banks of R Allen Stanford located in Antigua, have underscored the vital importance to the economies of these countries of strong supervision for both non-bank financial institutions, such as insurance companies, and the offshore financial services sector. The problems will worsen in the coming weeks. The IMF has warned the OECS that “waning economic growth after a period of rapid private credit expansion poses a major risk to the stability of the banking system”.
OECS countries which are part of the Eastern Caribbean Currency Union with a single currency, the EC dollar, are the independent States of Antigua and Barbuda, St Kitts-Nevis, Dominica, Grenada, St Lucia, and St Vincent and the Grenadines together with the British Overseas territories of Anguilla and Monsterrat. The ECCB is their common Central Bank.
The cross-border nature of the financial services sector emphasises the importance of cross-border regulation. Ideally, it would be best if a Pan-Caribbean financial regulatory authority could be established covering all the countries that are now members of the Caribbean Community (CARICOM). But, as I was reminded by Caribbean and European Union (EU) colleagues after my commentary last week (“Establish a Caribbean wide Financial Services Regulator”), the member states of CARICOM are unlikely to do so in a hurry.
The members of the OECS are in a better position to establish the two very necessary joint bodies because they enjoy deeper economic integration arrangements than CARICOM. They already have a single currency, a single Central Bank, and a single Court system. Further, none of them can afford to establish these bodies at an individual national level, particularly in the current situation in which remittances from their nationals abroad have fallen, receipts from tourism are in decline, preferential commodity markets have been withdrawn, and construction (which helped their economies to grow in the last two years) has now slowed considerably.
As an example of part of the costs each country would face if it were to try to establish its own national domestic bodies, the Prime Minister of Barbados, David Thompson, told his country’s Parliament on March 18th that it will cost US$2.06 million to establish, by early next year, a Financial Services Commission to regulate the non-bank financial services institutions as well as international business.
There are two fundamentally important reasons why the OECS countries should now move to establish a joint Financial Services Commission to regulate the non-bank domestic sector and a joint International Financial Services Authority to supervise the off-shore sector.
The first is that they have to establish machinery for safeguarding the interests of their own domestic investors including persons who invest in instruments of the non-bank finance companies, and the second is that the industrialised countries, such as the US and UK, are now moving rapidly to strengthen their own regulatory bodies in the wake of the their failures to deal with the practices of major banks, insurance and mortgage companies that led to the current global financial crisis.
If all Caribbean countries do not themselves move in this direction, not only will they be uncompetitive in the global market for financial services, but their economies and their local investors will continue to be exposed to the problems of non-domestic companies over whom they exercise no supervision. The truth is that it would be an abdication of governmental responsibility to allow the present situation to continue.
It is significant that, on March 18th, the British Financial Services Authority, which regulates Banks, is reported to have strongly supported “calls for the creation of a pan-European regulatory body as the only way to save the European market for financial services”. The Financial Times reported its Chairman, Lord Turner, as saying, “We’ve got to think about how to run a single market in retail banking without a European federal government.”
The countries of CARICOM face a similar challenge, only it is worse. At least the 27-nation European Union (EU) has a single market and many of its members also operate the Euro as a single currency. Only strong political will or a further major catastrophe will push CARICOM fast enough to establish Pan-Caribbean arrangements. In this context, no one can blame countries, such as Barbados, from forging ahead with the strengthening of its own financial services supervision. After all, Barbados does have a vibrant international financial services sector to preserve.
But, the point is that the member states of the OECS, given their deeper economic and financial integration, can move faster than CARICOM and they should in their own interest. They have already established a Task Force to consider their options in light of the global financial crisis. It is headed by the Prime Minister of St Vincent and the Grenadines, Ralph Gonsalves, now a senior Head of Government and Finance Minister in the region. If the OECS and the international community provide his Task Force with the resources, there is no reason why a blue print couldn’t be devised to address many of the issues facing these very small and fragile economies in a meaningful way.
In the height of economic crises, there is always a tendency by governments, whether large or small, to pursue both short-term and nationalistic solutions. Invariably, such solutions fail especially when they originate with cross-border problems.
Individual OECS countries, therefore, should resist the temptation to try to solve present and looming problems in their national economies associated, for instance, with the CL Financial Group. Instead, they should work together with the government of Trinidad and Tobago where the CL Financial Group originates and whose own supervisory authority lacked the legal muscle to enforce measures to correct deficiencies in the Group before they affected a number of countries in the Caribbean.
The government of Trinidad and Tobago should be encouraged to provide resources to the member states of OECS which remain important markets for Trinidad’s good and services.
And, the G20 countries when they meet in London on April 2nd, should be asked to provide the necessary resources to the Caribbean – and especially the OECS – to pay for the joint multi-nation financial services regulator that they need and would allow them to participate meaningfully in the global effort.
Do you agree with these views? Please post your comments and join in the debate.