Regulating financial institutions

Apr 23, 2009 Editorial

Over the past few months the average citizen who peruses the newspapers must have learnt more than was ever expected about the arcane world of finance. Even though this education was occasioned by the global financial crisis that is lapping our shores, it is a positive development.

Globalisation is a phenomenon that is not going to be reversed – even though there may be some temporary backsliding – and finance has been in the forefront of that world integration.
Under the auspices of the IMF/World Bank, we had opened up our financial sector and liberalized its rules to be more in line with global trends. Some of that liberalisation of rules even went into the regulatory and supervisory frameworks that are supposed to scrutinise the operations of that sector because of its essential role in servicing the real economy.

There were several aspects of this latter liberalisation in Guyana. Firstly, there was a reluctance to broaden the regulatory reach so as to rope in institutions not traditionally under regulatory gaze. This lacuna was exploited by the unregulated institutions to aggressively poach financial activities that were regulated and thus gain an advantage over those who had to hark to the regulatory regime.
We can see this in the behaviour of the New Building Society (NBS), which had been established specifically to provide mortgages to a population that had been historically denied proper housing, but which does not fall under the Financial Institutions Act (FIA).

To facilitate this socially useful function the legislation authorising NBS’s formation established ground rules while offering several benefits.
For instance, its investment portfolio was restricted to ensure prudence and it was granted tax free status on its income under the obvious assumption that its surpluses would be used to lower the interest rate it would charge on its mortgages.

Recently, the laws were relaxed (amended) allowing NBS to invest in the Berbice Bridge and even before that it had been allowed to keep a large proportion of its assets in T-Bills. Both these actions moved the entity away from the primary function towards the generation of greater profits.
Another aspect of the liberalization was the willingness of supervisors to close their eyes to obvious violations of the regulations that were on the books.

The collapse of Globe Trust demonstrated years ago the need for supervisory vigilance. But under the liberal climate, the slackness allowed CLICO to violate the regulations on the percentage of funds that must be retained locally without so much as a slap on the wrist for over a year. It was this lapse that has jeopardized the $6.9 billion that was transferred to CLICO’s Bahamian affiliate.

Both these liberal interpretations of the function of regulations arose out of a mentality that it was the government’s role to simply step out of the way of firms as they pursued the profit imperative.
The acceptance of this position resulted in what one commentator had called “cognitive regulatory capture”, i.e. by the regulators’ acceptance of the premise, there was no need for even lobbying efforts to apply the regulations (if at all) with a “light touch”.

Before the meltdown, very few commentators were stressing the need for greater regulatory rigour lest they be accused of being anti “free-market”.
The Government, with its “leftist” stain had to be especially cautious of the latter accusation.
While there have been calls for a review of the entire regulatory and supervisory framework of our financial sector, it is not as if the government has be oblivious to this need.

During the Budget presentation in February, the Minister of Finance spoke clearly both to the specific and general imperative: “The legislation to facilitate the establishment of a credit bureau and strengthening of the Financial Institutions Act will be sent for consideration, along with the proposal to bring the New Building Society under more formal supervision by the Bank of Guyana.
More supervision guidelines and insurance will also be issued to strengthen oversight of the sector.”
We would encourage a measured and thorough review of our financial regulatory and supervisory framework.

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Regulating financial institutions

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