9 months ago

The Trinidad & Tobago Business Guide (TTBG, 2009-10)

global credit freeze is

global credit freeze is not likely to affect the availability of these lines, the cost of accessing them could increase somewhat. Meanwhile, the insurance companies in Trinidad and Tobago typically match their domestic liabilities with an investment portfolio heavily concentrated in domestic assets. Some companies have external exposure, but to a very limited extent. Energy prices A Financial System Assessment Program (FSAP) conducted in 2005 found that the major shock threatening the financial system in Trinidad and Tobago is a substantial fall in energy prices. Stress tests indicated that the banking system should be able to withstand such a shock, although banks with large exposures to real estate and construction could be severely affected. The FSAP also found that the local financial system faces contagion risk associated with the Caribbean region. Some one-fifth of the total banking system assets are held in the Caribbean. In addition, some undercapitalised general insurance companies are a source of risk to the financial system. Regulatory framework In terms of financial stability, the global financial crisis has certainly underscored the urgency of taking corrective action. During 2008, the Central Bank continued to enhance the regulatory framework governing the financial sector. In November 2008, the parliament approved a new Financial Institutions Act (FIA 2008) to help the Central Bank deal with many of the risk management issues that have traditionally plagued the financial system. It formalises consolidated supervision, in order to identify and evaluate group risk and the risk of contagion. It seeks to address related-party lending, which has been a traditional source of vulnerability for financial institutions. The new FIA upgrades governance structures by, for instance, requiring more independent board directors and an independent audit committee. It also gives more authority to the external auditors. Very importantly, the new legislation gives more authority to the Central Bank to take early corrective and preventive action to protect depositors 1 . In 2008 the Central Bank continued work on the governance and prudential regimes for proposed legislation covering insurance companies, pension plans and credit unions. Legislation regarding the new Insurance Act (the current one dates back to 1980) is expected to be ready in 2009. It will address the issues of a standardised actuarial methodology to value insurance liabilities and introduce an appropriate framework for setting capital requirements, commensurate with the risk profile of the particular institution. Work on new securities, pensions and credit union legislation is also expected within the next year or two. Discussions with the credit unions to formulate legislation will seek to promote an appropriate prudential framework without compromising the unique cooperative character of the movement. Lessons of the global crisis One lesson from the global turmoil relates to the risk inherent in the operations of large unregulated financial institutions. The Central Bank is seeking to address similar gaps which exist in the Trinidad and Tobago financial system. The Home Mortgage Bank (HMB) has already been brought under its supervisory ambit. Consideration is being given to making similar arrangements for the Unit Trust Corporation (UTC), the country’s largest mutual fund provider. Another lesson from the current crisis is the need to identify risks to the financial system at the earliest possible opportunity. Accordingly, the Central Bank is working on establishing an early warning system. This will require more and better information from the financial institutions, closer collaboration between regulators, and more detailed macroeconomic analysis of the local and international economy. Contingency planning The Central Bank is also working on a crisis management plan which carefully identifies systemic financial institutions and assigns specific roles to the Central Bank, the Deposit Insurance Corporation and the Ministry of Finance in the event of a crisis. Such contingency planning takes on even greater importance since local financial institutions operate in several countries across the Caribbean region, which is likely to come under increased economic stress in 2009. Caricom countries now account for 85 per cent of loans and investments made abroad by banks in Trinidad and Tobago. This exposure is even higher if one includes the cross-border investments of domestic insurance companies, pension funds and mutual funds. Bank ownership In June 2008, the Royal Bank of Canada (RBC) finalised its US$2.2 billion acquisition of the RBTT Financial Group (RBTT). Under the agreement, RBTT shareholders received per Despite dominant foreign ownership, the banking system’s limited integration into global financial markets has, in this instance, turned out to be a blessing in disguise share consideration of TT$40 (approximately US$6.33) payable in a combination of cash (60%) and RBC common shares (40%). The transaction created one of the most expansive banking networks in the Caribbean, with a presence in 18 countries and territories across the region. With more than US$13.7 billion in assets, the combined operations have 130 branches across the Caribbean, with more than 6,900 employees serving more than 1.6 million clients. RBC’s expanded Caribbean retail banking operations is headquartered in Trinidad and Tobago. The acquisition marks RBC’s return to the country where it had operated from 1902 to 1987. Liquidity During 2008, a persistent liquidity overhang and strong inflationary pressures prompted the Central Bank to continue its aggressive programme of liquidity absorption, which impacted the performance of the banking system. Two key factors affected liquidity levels in the economy. The first was the steady rise in the net domestic fiscal injection, which results when the government spends more in domestic currency than it receives from domestic revenue sources. The second major source of liquidity stemmed from the amalgamation of RBTT Financial Holdings Limited and RBC Holdings (Trinidad and Tobago), an indirectly wholly-owned subsidiary of RBC Canada. For fiscal year 2007/2008, the net domestic fiscal injection rose by 3.8 per cent to TT$12,658 million, while the RBTT/RBC transaction injected TT$2.6 billion into the financial system during the month of June 2008. The Central Bank implemented a number of measures to tighten liquidity while raising the repo rate on three occasions. These measures included the use of a secondary reserve requirement for commercial banks, increases in open market operations, and the auction of a liquidity absorption bond with a tenor of 9 years. Sales of foreign exchange also helped to contain excess liquidity. As liquidity conditions tightened, commercial banks made limited recourse to the inter-bank market and to the repurchase 30 TTBG 09/10

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