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Regional banks have unique assets, says Cayman's Financial Secretary

Friday, November 25, 2005

GEORGE TOWN, Cayman Islands: Opportunities for Caribbean indigenous banks to solidify a place in the market can come through leverage of their unique assets, and use of strong leadership to take advantage of these resources.

This is the view of Cayman Islands Financial Secretary Kenneth Jefferson who described assets of these home-grown institutions as inherent local market knowledge, an ability to make decisions and move quickly, and a local perspective.

Mr. Jefferson noted a growing environment of trade liberalisation, its potentially adverse affect on profitability; issues of market share stemming from new requirements in fiscal practice being asked for by international organisations, and national laws enacted by major trading partners.

“The onus is on developing effective, informal and aggressive strategic plans which capitalise on these assets,” he told indigenous bankers at the four-day 32nd Annual Conference of the Caribbean Association of Indigenous Banks (CAIB) that began in Grand Cayman on Tuesday, 15 November.

Delivering the feature presentation titled, ‘Transformation: Critical Strategies for Survival and Success in an Uncertain Marketplace,’ he said these banks and institutions should look beyond uniformity and sameness and ask themselves where can they show leadership: “Be open to alliances and strategic partnerships … Seek out others who are concerned or like-minded on similar issues.

“Industry dialogue is a key to success, it requires public-private partnership on major initiatives.”

He said that for the Caribbean region of financial organisations who vie for the same clients, this type of collaboration could occur among governments, regulators, and even competitors.

“Be open to change and instill this culture within your firms,” Mr. Jefferson advised representatives of the 47 members of this association, which boasts an estimated collective asset base of US$17 billion.

The Cayman Islands holds membership to this organisation through 26 locally incorporated financial institutions including its development bank (CIDB) and Cayman National Bank. Mr. Jefferson used examples of Cayman’s experiences and this territory’s approach to international challenges to show that bigger is not always better. He said that Cayman’s encounters demonstrate that regional and local banks can successfully compete with large international entities for domestic business.

The Financial Secretary said that among the fundamentals of Cayman’s approach to international challenges are ensuring a clear and concise understanding of the forces – or uncontrolled variables - at play, and totally assessing the local commercial and regulatory landscape.

He pointed to matters concerning the European Union Savings Directive as a case study on experiences of the Cayman Islands while manoeuvring its way through new international regulations and impositions.

The Financial Secretary noted that in recognising a need to chart a clear course to protect investments of this jurisdiction, the government established a working group within the local Private Sector Consultative Committee, and sought external support to ensure understanding of its financial circumstances.

“We negotiated with the EU/UK to strike a balance between commercial needs and objectives of the Directive,” Mr. Jefferson said and added, “As a result we negotiated equal treatment to EU member states – same ‘carve out’ applied across the board.”

Results of this action were removal of barriers for the European market to do business with Cayman, and a strengthened relationship with the private sector because the benefits were seen as the result of a collective effort.

He said the landscape in which these locally incorporated banks operate can be looked at in two areas. The first relates to issues such as the types of investment necessary to comply with requirements for conformity with the World Bank and IMF-inspired Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) stipulation; the USA PATRIOT Act; and Basel II, which stipulates the amount of capital banks should have for specific activities.

The second area has to do with issues affecting market share. Examples here can be found in the impact of trade liberalisation based on rules of the World Trade Organisation, the Free Trade Area of the Americas (FTAA), and the Caribbean Single Market and Economy.

Under the umbrella of AML/CFT dictates, Mr. Jefferson identified the retrospective rule on knowing your customer (KYC) and noted that as a leading financial jurisdiction, Cayman engaged in thorough updates while a number of other territories did not. “The private sector should seek opportunities to collaborate with regional bodies on these initiatives,” he advised.

He said that the broadened compliance requirements under the USA PATRIOT Act affect entities from banking institutions to all financial services. “This holds financial institutions and their compliance officers liable for handling illicit funds knowingly or unknowingly. It presents a challenge for regional banks.” An option held by the US authorities under this Act is to shut non-compliant entities out of the American financial industry.

Mr. Jefferson said that though the framework for measurement of capital adequacy under Basel II is an improvement over Basel I, there remain formidable challenges. “Implementation will be significant, and regional banks are at a disadvantage. Bank and regulatory entities will need to commit major resources.”

Mr. Jefferson added that matters of liberalised world trade also have issues of compliance. These include market access; financial services published by public entities; cross-border trade; new financial services; non-discriminatory measures; and transfers and processing of information.

Although the FTAA has not yet been agreed upon, he said that an obvious implication for CAIB members is greater access for external financial services that gives foreign institutions an ability to compete with indigenous banks. He noted that the Caribbean Single Market and Economy is likely to further open regional markets to competition.

Stressing that globalisation is a driving force, he said, “There is a single set of standards and practices emerging. Those falling below [those standards], whether real or perceived, are being left behind.”

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