ECCB 2014-2015 Annual Report and Statement of Accounts

EASTERN CARIBBEAN CENTRAL BANK

The evolution of banks over time in all countries has involved amalgamations, mergers and acquisitions. This has proven to be much easier than growing organically, especially where markets are small. This has been the experience in the currency union with both foreign and local banks. Barclays Bank and CIBC have merged to form CIBC FirstCaribbean International Bank Limited, while the Royal Bank of Canada (RBC) acquired RBTT Bank Limited. These entities already had branches in the currency union. The next phase for the foreign banks, as a response to the global crisis and the downturn in economic activity, has been a process of rationalisation through the closing of branches and the laying-off of staff. The governments have responded to the structural problems of size by upgrading the OECS Treaty of Basseterre to provide for an economic union with a single financial and economic space. This will provide the environment for consolidation of both financial and real sector entities as well as the operations of governments by making possible the achievement of economies of scale and scope in production, marketing, distribution and public administration. The national banks have the most to gain through these new arrangements as new configurations will be necessary to improve their competitive positions. On the flip side they have the most to lose as their competitive There is an urgent need, through appropriate policies, to change the incentive structures for banks to reduce their risk averse nature and to strengthen their risk management skills

positions would be severely eroded if they remain as stand-alone entities in separate islands within a single financial and economic space. The question of what kind of business and banking model will be the most appropriate to the currency union needs to be carefully thought through. It is my view that the pure Anglo Saxon model will not work for the currency union, especially with small, undercapitalised banks in single countries with limited markets. There is an obvious need for consolidation and recapitalisation. This will make for stronger, more competitive banks but will not solve the risk averse issue and the allocation problem which is so anti-developmental. There is an urgent need, through appropriate policies, to change the incentive structures for banks to reduce their risk averse nature and to strengthen their risk management skills. The consolidation and restructuring process for banks, which is underway, must be followed by the deliberate effort to create and upgrade money and capital market institutions to complement the new banking entities. The following elements are of critical importance: 1. The Eastern Caribbean Securities Exchange (ECSE) should be given significant support to attract new firms to list so that more saving and investment opportunities would be available to our citizens and a channel for equity financing would be opened up. 2. The Eastern Caribbean Home Mortgage Bank (ECHMB) must have a wider remit to support the very critical residential housing market. 3. The Eastern Caribbean Enterprise Fund (ECEF) should be given both financial and

ECCB ANNUAL REPORT 2014/2015

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