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					CARIBBEAN FINANCIAL STABILITY-
        NEXT STEPS




                 Presented by Cleviston Haynes
FIRST JOINT CARIFORUM-EU COFERENCE ON FINANCIAL SERVICES

                       9 July, 2010
              OVERVIEW
1. Lessons from Global Financial Crisis.

2. Caribbean Financial Systems.

3. Proposal for Promoting Regional
   Financial Stability.


                                           2
    GLOBAL FINANCIAL CRISIS
 Break-down in risk management at financial
    institutions.
   Gaps in supervision and regulation that
    adversely impacted regulators ability to
    monitor or address these risks.
   Regulatory arbitrage.
   Fragmented supervision.
   Risks were easily transferred across
    institutions.
   No one protected overall system.
                                               3
                 CARIBBEAN
             FINANCIAL SYSTEMS
 Banking sector is the dominant financial sector activity within the
    region.
   Banking sector complemented by insurance, securities, credit
    union and mutual fund activities which individually and
    collectively are small in comparison.
   The banking sector is mainly foreign owned and highly
    concentrated.
   Notable consolidation of activity in recent years through mergers
    and acquisitions.
   Significant financial entities domiciled in region but operating
    cross-border.
   Some firms are operating across financial sectors.


                                                                        4
             CARIBBEAN
         FINANCIAL SYSTEMS
 With the high degree of concentration,
  institutions that may not be considered
  systemically important in their home country,
  may be systemically important in a small
  country because of its share of the market
  and the lack of alternatives to provide similar
  services.
 Dependence on foreign institutions make
  Caribbean economies vulnerable to shocks
  occurring elsewhere.

                                                    5
    FINANCIAL SECTOR SUPERVISION

 Mixed models of supervision with the dominant mode being
    central banks with responsibility for banking while insurance
    companies and credit unions are handled under government
    ministries.
   Jamaica has established a financial services commission to
    regulate securities and insurance companies while Barbados is
    on the verge of integrating all non-bank regulation under a
    single regulator to be established.
   Trinidad and Tobago has responsibility for banking and
    insurance.
   Jamaica has also established a financial regulatory council.
   These trends reflect concerns about regulatory framework and
    supervision, particularly in the non-bank sector.


                                                                    6
       RISKS TO FINANCIAL STABILITY

 Financial stability extends beyond banks.
 Insurance companies could have significant
  exposures in a bank that goes bad. If the
  insurance entity is significant this could shake
  confidence in both types of institutions.
 Financial stability could be threatened by
      Inadequate information sharing among domestic
       and regional regulators.
      Lack of consolidated view of financial institutions
       and the risks posed by intra-group transactions.
      Inadequate assessment of cross-border
       contagion risk.                                       7
                  CONSOLIDATED
                   SUPERVISION
   Financial institutions are operating cross-border and
    sometimes cross sector
   Entities need to be examined as a whole and not solely on the
    basis of the local operation
   Primary responsibility falls to the regulator where the parent is
    domiciled
   Important to have common standards across jurisdictions
   Effective information sharing among regulators needed
   Contagion risk is high even for sound subsidiaries when one
    significant affiliate falters.
   Efforts at consolidated supervision relatively recent and need to
    be enhanced.

                                                                        8
         REGIONAL SUPERVISORY
              APPROACHES

 Role of Regional Supervisory groupings.
   Sector specific supervisory standards

   Harmonisation of legislative framework

   Training



 Memorandum of Understanding.


 Colleges of Supervisors.


                                             9
        FINANCIAL STABILITY ANALYSIS


   It involves both the economic and the prudential,
        capturing the impact that domestic and external
         economic effects may have on financial risk
        Applying traditional prudential standards.
   It is regional in scope, to take account of cross
    border exposures, contagion, and the effects of the
    operations of regional financial conglomerates.
   It is an ongoing exercise, with monthly data
    collection, analysis and reporting.


                                                           10
         ELEMENTS OF THE REGIONAL FRAMEWORK



   Collection and publication of regional FSIs, monthly.
   Monthly financial stability assessment memorandum to
    highlight new sources of risk, vulnerabilities, and to track
    remedial actions.
   Monthly meeting of central bank governors to review the
    memorandum, to take action to strengthen regional
    financial system resilience and to monitor implementation
    (video conference).
   Publication of regional FSR, annually.
   Trigger mechanism for response to impending financial
    failure built-in.
                                                              11
    CURRENT MONTHLY DATA
   Real sector and monetary data.
   Commercial bank balance sheet and income
    data.
   Regional financial soundness indicators
     (Jamaica, Trinidad-Tobago, …)



                                               12
         DATA WE NEED MONTHLY

   Insurance and credit union balance sheet and income
    data.
   Balance Sheet and Income data for other non bank
    financial institutions e.g. – mutual funds, mortgage
    companies, other deposit taking institutions and
    financial conglomerates.
   FSIs for nonbanks.
   Intra-regional transactions balances.
   Regional interbank market transactions; interbank
    loans and deposits.

                                                           13
    OTHER INFORMATION/DATA REQUIRED


 Ownership structure of regional financial
  conglomerates.
 Foreign asset/exchange exposure of large
  financial institutions.
   Market information – equity prices, housing
    prices, commodity prices, financing
    arrangements for major investment projects.
   Capital flows – regional and extra regional
    flows (higher frequency).
                                                  14
     MONTHLY FINANCIAL SYSTEM ASSESSMENT IS
                   ESSENTIAL


 Someone needs to be maintaining vigilance
  over the regional financial sector at all
  times.
 Since regional central banks have financial
  stability responsibility in their countries, a
  regional conference of central bank
  governors and heads of monetary
  authorities is the obvious choice.
 May be via teleconferencing

                                                   15
    QUARTERLY CONFIDENTIAL FSR MEMO


   The quarterly meeting would need to
    be informed by a memo, indicating
    the strengths and vulnerabilities
    revealed by an analysis of the
    monthly FSIs.
   This memo would be short, focusing
    on crucial issues, and supported by
    appropriate tables and charts.
                                          16
     MEASUREMENT AND MODELING

The analysis which informs the report would use the
 following techniques as appropriate:
 Analysis of prudential indicators and ratios;
 Financial Soundness Indicators;
 Early Warning Systems (EWS), signaling and
     discrete dependent variable approaches;
 Vector Auto regression (VAR) frameworks;
 Stress testing frameworks;
 Judgemental analysis



                                                      17
         INSTITUTIONAL ARRANGEMENTS

   The CCMF is currently implementing a project on Financial
    Risk Assessment in the Caribbean which is funded by the IDB.
   The project is a collaboration with CARICOM central banks.
   The project is designed to produce financial soundness
    indicators for the region and develop appropriate
    methodologies for monitoring financial stability.
   This project will provide the CCMF with the capability to
    prepare confidential brief, focused FSR memos, in addition to
    the annual published FSR envisaged in the IDB project.



                                                               18
   INSTITUTIONAL ARRANGEMENTS

 The CCMF is in discussion with the CDB on
  the need for financing for a second project, to
  build the financial statistical data base needed,
  in collaboration with regional central banks;
 In order to implement both projects, CCMF will
  need additional staff and funding.



                                                      19
      QUARTERLY REGIONAL
    CENTRAL BANK MEETING …
   Would review main sources of vulnerability in the
    regional financial system;
   Would identify measures to strengthen the
    resilience of the financial sector, and the lead
    central bank to undertake remedial action. The
    convening of colleges of regulators could be a
    vehicle for such remedial action;
   Would monitor progress;
   Would serve to reduce the risk of systemic financial
    failure.

                                                           20
                CRISIS MANAGEMENT

 In the event a crisis did emerge, an emergency meeting of
  the governors would be triggered, to discuss the
  appropriate response;
 The governors meeting would initiate crisis response
  irrespective of the source of the crisis, because of their
  global responsibility for financial stability;
 CCMF would provide this emergency meeting with the
  most recent information relating to the affected institutions
  and sub-sectors of the financial system;
 The crisis meeting would designate the lead actor, and the
  countries and regulators to be involved, depending on the
  nature of the crisis.                                        21
          RECOMMENDATIONS

   Regional central banks and monetary authorities set up a
    schedule of quarterly meetings on financial stability issues,
    beginning when CCMF acquires the ability to prepare the
    envisaged FSR memo;
   The quarterly financial stability meeting would determine
    actions to increase regional financial resilience, and would
    monitor implementation;
   All colleges of regulators, for all financial institutions, would
    report to the monthly meeting;
   The central bank group would also act as regional financial
    crisis manager.



                                                                        22
THE RECOMMENDED FRAMEWORK

             Monthly meeting of Governors and
                      Heads of MA’s



                      Reports of         Reports of
  Monthly FS
                      colleges of       CGBS, CAIR,
    memo
                      regulators        CGSR, CAPS



   Info from            National regulatory
 central banks         bodies for insurance,
   and MA’s          collective investment, etc



                                                      23
     IS THERE ANY PRACTICAL ALTERNATIVE?


   Extending the existing colleges of regulators does not address the
    need for preventative measures, and it does not address the
    deficiencies of data and analysis.
   We do not want to wait until the next crisis erupts to have to take
    remedial action in a data vacuum, as was the case with CL
    Financial.
   The recommended action helps to avert crises, by policy action to
    increase resilience.
   In the event of a crisis, central banks and monetary authorities will
    have up to date data and analysis to inform their response, and to
    reassure the public that they have the measure of the crisis and its
    implications.


                                                                       24
       CRISIS MANAGEMENT
 In the event that an entity faces
  catastrophe, regulators need to be able to
  respond.
 Situation heightened if entity operates
  cross-border.
 Emphasises need for communication
  channels to identify potential risks and
  responses.


                                               25
THANK YOU!




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