ECCB 2014-2015 Annual Report and Statement of Accounts

EASTERN CARIBBEAN CENTRAL BANK

operations and are under constant pressure to repay debt. This limits the operations of the private sector to strictly commercial activities with a quick turnover. Other activities outside of this commercial sphere are high risk and do not meet the criteria for lending by decidedly risk-averse institutions. We are therefore faced with the challenge of the risk averse institutions being in possession of most of the loanable funds. Since these loanable funds are mainly in the form of savings deposits, this naturally leads to the creation of a self-perpetuating risk averse system. Several other factors compound this situation: y y Most of the national banks have weak capital positions and are incapable of absorbing losses from their loan portfolios. y y Their risk management and credit review and management systems are not geared to dealing with loans to the productive sectors. y y The absence of a credit bureau precludes them from getting the type of information necessary to make good lending decisions. y y The legal and administrative impediments to realising the collateral pledged against delinquent loans raise the risks that banks face. y y The size of the market in each country leads to concentration of lending and increased risks. We now have a chance to stabilise and restructure the banking system and to follow a deliberate path of financial sector development compatible with the growth and development objectives of our member countries

Two factors must be taken into consideration in moving forward; firstly, the fragility of the banking system which was exposed by the crisis and secondly, the fact that the existing bankingmodel has not been particularly conducive to facilitating sustainable growth. We now have a chance to stabilise and restructure the banking system and to follow a deliberate path of financial sector development compatible with the growth and development objectives of our member countries. The two types of commercial banks in our system, foreign and national, will have to be looked at separately and specifically to align their operations to the needs of our member countries. In doing so, it is vital to recognise the evolution of banking systems in different countries which followed different paths, and to note some general commonalities which have been observed over time. Two typologies have emerged. One is the Anglo Saxon type of banking referred to earlier, which is prevalent in the United Kingdom, the United States and Canada and which we inherited. The other is the system of universal banking which is prevalent in the European continent and Japan. The former draws a clear divide between banking and the connection with the private sector, while the latter is characterised by banks holding equity in and being closely connected with the operations of private sector entities. The fundamental problem in the ECCU region is the lack of equity and long-term capital for existing and startup firms which is a major impediment to their development. Many firms in our jurisdiction are overburdened with debt before they begin their

ECCB ANNUAL REPORT 2014/2015

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