Anguilla’s indigenous banking crisis: An in-depth analysis and lessons for the region

On Aug. 12, 2013, the Eastern Caribbean Central Bank took control of Anguilla’s two indigenous banks, the National Bank of Anguilla Limited (NBA) and Caribbean Commercial Bank (Anguilla) Limited (CCB) under the powers granted to it under the Eastern Caribbean Central Bank Agreement Act which established the central bank within the laws of Anguilla.1

The central bank took the action after consultations with the Monetary Council and followed its directions.

Then-Governor of the ECCB, Sir K Dwight Venner noted that the Central Bank was empowered under the Act to assume control of and carry on the affairs of a financial institution and if necessary to take over the property and undertaking of a financial institution if the interests of the financial institution’s depositors or creditors are threatened; the financial institution is likely to become unable to meet its obligations; or the financial system of a member territory is in danger of disruption.

Venner stated that in the opinion of the Monetary Council and the Central Bank, all three circumstances were present in the case of both NBA and CCB, and he announced that the central bank would take control and possession of the banks’ funds and assets and manage their operations.

He noted the central bank would also investigate the affairs of the banks and their affiliates, provide financial assistance and restructure the businesses if required and take all necessary steps to protect depositors, creditors and the stability of the financial system.

The decision by the Monetary Council to take control of the banks had the support of the government of Anguilla and the British government. Since then, the banks have been under the conservatorship of the ECCB with technical support being provided by the International Monetary Fund, World Bank and regional banking experts.2

The background

The history of the two Banks is a storied one and despite the current situation, speaks to the vision and achievement of the Anguillian people over the past nearly 40 years. By the 1970s, while still relatively poor, and in the wake of political and socio-economic changes regionally and internationally, there began a move to gain greater economic control over the island’s economic affairs. Up to that point, banking was dominated by foreign institutions from Canada, the U.K. and to a lesser extent, the U.S.

Local people were not able to gain access to capital easily as these institutions had strict lending policies which were not only linked – many suspected – to the financial ability to repay but quite frankly also to race and class. The fact was that if you were not someone of a certain racial make-up or skin hue and from a certain class, with a few exceptions, gaining a bank loan was not possible in many parts of the region.

Anguillians established CCB as Anguilla’s first locally owned,  controlled and managed bank in 1976.
Anguillians established CCB as Anguilla’s first locally owned,
controlled and managed bank in 1976.

Thus, in 1976, with local and regional capital, Anguillians established CCB as Anguilla’s first locally owned, controlled and managed bank which serviced the needs of local people.   Immediately, Anguillians en masse, who hitherto were unable to get a loan from Barclays Bank and Bank of America, the only two banks on the island at that time, were able to secure financing to buy land, construct homes, purchase household goods, cover expenses and advance themselves.

In 1984, after Bank of America decided to close its branch in Anguilla and locals purchased its assets with government’s assistance, NBA was born and commenced operations in early 1985.  Together, the banks transformed the local banking sector and contributed immensely to the development of the island. So successful were these banks that at the time of the ECCB action, together they accounted for 76.7 percent of the assets of the banking sector in the jurisdiction.  To insert an Americanism here, these banks were too big to fail since the consequences would be dire for Anguilla.

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NBA commenced operations in early 1985.

Why did the banks fail? The official line

Chief Minister, Victor F. Banks, who is also chairman of the Monetary Council of the ECCB, released the findings of the first proper report dealing with an analysis of the lending practices of the banks during the five-year period prior to the conservatorship conducted by Grant Thornton from the BVI. In a Nov. 3, 2015 press release the government noted:
“The current balance sheet deficiency at NBA and CCB is due primarily to the quantum of non-performing loans and increasing provisions being made against such loans as a result of falling property prices in Anguilla. This problem was in part contributed to by the overreliance on the valuation of the security being advanced as collateral in the loan approval process, as opposed to analyzing cash-flows and the ability of the applicant to repay the loans in changing economic conditions. Given the limited issues identified surrounding related party loans it does not appear as though these were a major factor in causing the banks’ current situation.”

The bank resolution

In late 2015, GOA presented a bank resolution strategy to the British government for approval.  The plan was drafted by the Ministry of Finance, the ECCB, with assistance from the IMF, World Bank and other officials, including those from the U.K.

In his Budget Address in December 2015, Chief Minister Banks finally told the jurisdiction that the government of Anguilla would in effect bail-out the banks to the tune of EC$302 million (approximately US$112.3 million) in borrowing to be amortized over 25 years. To put that figure into context, the expected revenue raised by government for 2016 to run all of its operations is projected at EC$225.3 million.

To fund this bail-out, all indirect taxes like license fees in various areas and property taxes were increased as of Jan. 1, 2016. It is expected that more increases shall come over the years to finance the resolution strategy.

Subsequent to the passage of the budget and the legislation, shareholders of one of the banks launched legal action against the ECCB on a matter being heard in Chambers.

In addition, on the Feb. 22, 2016, the Financial Services Commission announced that on an application by it, the High Court had appointed William Tacon, a chartered accountant with FTI Consulting from the BVI as administrator of the two offshore banks.

Observations and lessons to be learnt

Despite the analysis by Grant Thornton and its reference to loans to related parties and the reason for the non-performing loans, along with politically correct statements by government officials, the fact is that the failure of the indigenous banks is due to mismanagement on behalf of their leadership both at board and senior management levels.

The argument about loans to related parties not being a major contributor to the banks’ current situation is nonsense, to say the least, since in a small community like Anguilla, every person can qualify on an expanded definition as a related party due to family and social links. To keen observers of both banks, it was known that there was too much incestuous lending, too much lending based not on sound business/risk principles but based on personal, familial, social and political connections. I don’t fault Grant Thornton for not picking up or writing about this but as an Anguillian, I can speak bluntly about the situation.

The fact is that the banks were managed as personal fiefdoms by a social clique of friends who were major shareholders and who all seemed to think the same way. There was no vision, no outside influence, no one to call them out and the leadership all suffered from group think reflective of a common outlook and political affiliations with the political party in office at the time between 2000 and 2010.

It was then that the Banks expanded their balance sheets rapidly as Anguilla experienced a property boom and great economic development especially between 2004 and 2008. That is the real reason why loans were granted to persons for projects, whether mortgage or commercial, which elsewhere or in other institutions, would never have been made.

The genius of the banks and their storied history of closeness to the local population, the desire to help the small man get ahead to build a home, educate his children and advance in life, was also their great weakness. Hindsight is 20/20 but some of us, in quiet conversations, raised alarms about the quality of senior management and directors of both institutions, many of whom held positions based not on any great academic qualifications or known business acumen but because of who they were, their political connections and their shareholding in the banks.

Some like me voted with our feet and sold our shares when we decided that there was nothing that we could do to influence the direction of the banks. As an aside, I once held shares in NBA but decided in 2003 to sell them for a small profit after I concluded that the management both at board and senior management levels left much to be desired. Someone who is a large shareholder in a bank does not necessarily make a great director of the institution but it was clear that the large shareholders demanded a say in the running of the banks to both protect and advance their interests and it is now clear, that this was done at the cost of other shareholders, depositors and the general population of Anguilla.

Thus, what the fall in property prices, caused by the downturn in the global economy and which also affected Anguilla’s immensely in around 2008/2009 did was to expose weaknesses in the banks’ leadership and decision-making and shed light on the many wrong business decisions that were made.

To take Grant Thornton’s analysis further, had proper risk analyses been done on the borrowers and the projects, whether personal or commercial which were being funded, then once there was evidence of the ability to repay the loan which was sound, the fall in price of the underlying asset would have had less of an impact.

Blaming falling property prices for causing the high level of non-performing loans is like the captain of the Titanic blaming the presence of the iceberg in the North Atlantic Ocean for the sinking of the ship. The iceberg was supposed to be or was likely to have been in that area of the ocean at that time of the year. The task of the captain, knowing this, was to navigate his ship safely around the iceberg and through the North Atlantic Ocean. The task of the management of the banks was to lead them through changing economic circumstances and not blame said circumstances for their failures and the liquidity issues that the banks now face. After all, that is what they were being paid for.

The first lesson to be drawn from Anguilla’s problem is that, especially where indigenous banks are concerned, because of their peculiar nature of being small, localized, patriotic in a sense, sound leadership needs to be put in place both at board and senior management levels. Business decisions must be made on sound principles with proper risk analysis being done and not clouded by emotional, nationalistic, personal or political preferences and prejudices. It is clear that in the case of these two banks, this was a major failing. In fact, at one point, Anguilla’s Chief Minister Osbourne Fleming was also chairman of CCB. When this was brought to the attention of the ECCB, nothing was done. Fleming was once Anguilla’s representative on the Monetary Council. It is safe to say that this was a most unusual situation.

The second reason why, in my opinion, the banks failed was lax regulation by the ECCB. The Central Bank cannot pretend to be an innocent party in this saga. Had the ECCB done its job and intervened earlier when there were clear warning signs, then perhaps the problem would not have become as bad as it did. There was evidence, as admitted by senior bank officials in private conversations, that from as far back as 2008/2009, the ECCB had concerns about the viability of the banks as the property market in Anguilla which, as those of us on the ground were well aware, was inflated, and in the midst of an artificial and unsustainable bubble, was beginning to collapse. Instead of removing the leadership of the banks, the ECCB did nothing. Some have argued that perhaps this was because Anguilla’s then minister of finance, who is now chief minister and again minister of finance, and its representative on the Monetary Council was related to and had close relationships with the senior management of both institutions. It is this type and level of conflicts of interest that are unique and peculiar to very small places like Anguilla that makes it even more important that proper regulation and standards are put in place especially where indigenous banks are concerned.

This extends to the Financial Services Council which should have done more to ensure that the management of the two subsidiaries which were under its licensing and supervision were up to the task and that all was well. That regulatory body also failed in its statutory duty to ensure the viability of these two licensees and must also shoulder some of the blame. The FSC, unlike the ECCB, had and has the power to approve directors before they are appointed to the board of an offshore bank and thus, it could have done more to ensure that the subsidiaries were properly managed.

Thus, the second lesson that needs to be drawn from this is that there is no excuse or room for weak or lax regulation no matter the circumstances. Unlike international banks which are subject to supervision by large international regulatory bodies and have resources to put in place extensive systems of control, risk management, Chinese walls and manage conflicts better, indigenous banks are small, insular and often present in only one jurisdiction and thus only subject to local regulation. It therefore makes it even more axiomatic that the regulator is on the ball at all times.

The third lesson that should be drawn from this is that where indigenous banks are concerned, especially where share ownership is not widespread, board and senior management appointments should be subject to regulatory approval. It is ironic that for the two offshore banks, the FSC had to approve the directors but for the two parent companies, whomever the shareholders decided to appoint as directors, no matter their qualifications, got to sit on the boards.

It was a running joke amongst a few of us in the offshore sector about the poor quality of the boards of both banks and even at the level of the two offshore banks. In many cases, it was risible to see who got to be directors of these institutions and as a result the entire jurisdiction is paying a high price in increased taxation on the population, massive reputational damage and banking inconvenience.

The broader picture

Anguilla’s indigenous banking crisis could not have come at a worse time granted that U.S. and European banks, under pressure from their regulators, are considering ending correspondent banking relationships with regional indigenous and offshore banks as part of their de-risking exercises.
In fact, in the case of Belize, this has happened to some of its banks. The risk to the region of being destroyed by losing correspondent banking relationships is so great that CARICOM (the Caribbean Community) has established a Ministerial Committee to look at the issue. It is chaired by Antigua and Barbuda’s Prime Minister and Minister of Finance, Gaston Browne, to lead the response to this issue.

Prime Minister Browne has described the threat in the following terms: “If there were any scheme designed to destroy the economies of several countries without a military war, then this is such a scheme. It is erroneous; it is pernicious; and it is vicious.” It remains to be seen how effective the work of this committee is but the risk to the region cannot be overstated.

Conclusion

Anguilla and Anguillians should be very proud of the banks. These institutions were created at a time when access to capital was limited and restricted and they have contributed immensely to the island’s development. However, those who started them, weren’t ideally suited to continue managing their operations in an increasingly changing world after a certain point when the banks reached a certain size and stage of their developmental cycle. It is indeed human nature never to realize when one has reached one’s level of incompetence and despite protestations to the contrary, the fact is that the management of these banks was not suited to continue to be in charge of them after a certain stage of their development especially as the global economic situation moved beyond their own understanding.

However, not only did the management fail but so did the shareholders by continuing to repose trust in persons who were clearly out of their depth. In addition, both the ECCB and the FSC failed to take the necessary steps needed to rein the management in and to put the institutions on a sound footing. This was due to cowardice, political considerations, social restraints and a lack of vision. Now, as a result of failures by all these actors, the entire jurisdiction and population will pay the price.

The lessons to be learnt from Anguilla’s mistakes with its indigenous banks are clear. Proper management is required irrespective of ownership; the banks should be run on sound business principles without political interference or overly nationalistic and social considerations within reason of course since that is indeed a difficult balancing act to achieve; there needs to be proper and sound regulation, again without political interference and regulators should have the legal and regulatory tools to ensure this is done; and finally, directors and senior management should be subjected to regulatory approval. Despite owning shares, there is no God-given right for any shareholder to be appointed a director of a financial institution which has fiduciary obligations to depositors and is part of a regional and global financial system.

Hopefully, other indigenous banks will not suffer the fate of those here in Anguilla and will take heed before it is too late.  Only time will tell.

ENDNOTES

  1. For background information on the ECCB and how it functions, refer to a previous article I wrote at: http://www.compasscayman.com/cfr/2015/08/19/The-Eastern-Caribbean-Currency-Union-at-a-crossroads–The-road-ahead/).
  2. It is worth noting that in addition to the two Banks, each of them had a subsidiary which was licensed not by the ECCB but by the Financial Services Commission (FSC), the island’s regulator of the offshore or international financial services industry. These two institutions, wholly owned subsidiaries of the aforementioned Banks, being the National Bank of Anguilla (Private Banking & Trust) Ltd (NBAPBT) and the Caribbean Commercial Investment Bank Ltd (CCIB) were also taken over by the ECCB at the same time.
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Carlyle K Rogers

Carlyle K Rogers MBA, LLM is a barrister-at-law in Anguilla who practices in the areas of corporate and financial services law. He is also admitted in the BVI and New Zealand, owns and manages the Stafford Group of Companies.  He studied law in London at Queen Mary and Westfield College, University of London, where he obtained an LLB (Hons) degree in 2001 and with the University of London (International Programme) from which he obtained an LLM degree in Corporate and Commercial Law in 2005. He completed the Legal Education Certificate (LEC) at the Hugh Wooding Law School in Trinidad in March 2013 and was admitted as a barrister of the Eastern Caribbean Supreme Court in Anguilla and BVI in 2013. 
 

Carlyle K Rogers MBA, LLM
Stafford Group of Companies
201 The Rogers Office Building
Edwin Wallace Rey Drive
George Hill, Anguilla

T: 1 264 498 5858 + 1 264 498 5858 ; + 1 954 607 7239/7217
C: 1 264 476 5858 + 1 264 476 5858
F: + 1 264 497 5504
E: carlyle.rogers@stafford-trust.com 

 

Stafford Corporate Services

Stafford Group of Companies
201 The Rogers Office Building
Edwin Wallace Rey Drive
George Hill
Anguilla

T: 1 264 498 5858
T: + 1 264 498 5858
T: + 1 954 607 7239/7217
C: 1 264 476 5858
C: + 1 264 476 5858
F: + 1 264 497 5504 
E: carlyle.rogers@stafford-trust.com