Finance sector rejects crisis claim
KEY financial sector officials yesterday rejected that Jamaica’s banks and finance houses are heading for a 1990s-style meltdown and warned doomsayers against creating a self-fulfilling prophecy.
“There is no truth to the suggestion that there is a crisis in the financial sector,” Finance Minister Omar Davies told the Observer. “The regulatory authorities are on top of the issues in the sector. It is something that they monitor on an ongoing basis and I am assured that there is no basis for claiming there is a crisis.”
However, sector leaders conceded that financial firms will face challenges when new accounting standards come into effect this year, requiring more stringent accounting and pricing of assets to reflect real market prices. This could lead, in some cases, to a writing down of some of the assets on their books.
Analysts say that a big concern is the huge amounts of Jamaica government bonds, issued on the international market, held by Jamaican entities. The market price for these bonds has slipped in recent months.
“But in some cases these may be accounting losses rather than a major impact on day-to-day operations,” said Raymond Campbell, the head of FirstCaribbean International Bank in Jamaica (formerly CIBC) and president of the Jamaica Bankers’ Association.
Campbell agreed, too, that in an environment of rising interest rates, the Government’s cut-back since last September on its issue of treasury bills, crimped margins for finance houses with heavy stocks of variable rate instruments, which are linked to T-bill rates.
The result is that the variable rate instruments are not being revalued to fully reflect the interest rate environment, although institutions are facing higher costs for their liabilities.
“There is a contraction in net interest margins,” Campbell said.
But Campbell stressed that it was a big jump from noting any concerns facing the financial sector and concluding that there was a looming crisis that would require government intervention to save companies.
“I don’t think it is at all fair to jump to that conclusion,” he said. “What we have are a set of factors which it is prudent to look at… I think that some people have gone to the extreme of saying what will happen… We, as an association, have discussed the issues and we are not aware of anything of the magnitude that has been implied.”
The regulatory authorities — the Financial Services Commission (FSC), which polices money dealers, insurance companies and pension funds; and the central bank, which regulates the deposit-taking side of the industry — which would have an over-arching picture of the sector, need to speak to the question, Campbell said.
Jitters began to overtly seep into the financial markets last week when Bill Clarke, the CEO of Scotiabank Jamaica, warned investors, during a radio discussion, to be wary about investing with certain types of institutions and to be careful of the instruments in which they park their cash.
Clarke also raised the spectre of the Government having to embark on another Finsac-type bailout of banks and insurance companies. Finsac is the agency that the Government used to intervene in bankrupt finance sector firms during the 1990s crisis. The intervention cost an estimated $120 billion.
Fears worsened of a potential new crisis yesterday when the Sunday Herald newspaper, in a front page news story, picked up on the same theme, mentioning Clarke’s statement and other background information but quoting no other industry players.
Financial sector bosses said that despite the Herald’s limited circulation, the report could cause panic, precipitate a run on institutions, leading to a fall-out in the sector.
But while officials played down this scenario, analysts said it was likely that the Administration would deal with any short-term liquidity crunch to the sector by offering overdrafts.
Managers, however, preferred to highlight what they insist was the underlying strength of the financial sector.
“I think the financial services have challenges as we transit to new accounting standards,” said Donovan Perkins, the CEO of Pan Caribbean Merchant Bank. “But most of the institutions are well capitalised, very profitable and unlike the 1990s, we now have a strong regulatory environment.”
Perkins’ bank has an estimated $12 billion under management and he stressed that over 90 per cent of this was in government instruments.
“This is a stark contrast to the 1990s when most of the institutions held bad loans or had their assets tied up in real estate,” said Perkins, echoing a point made by Davies.
In fact, the finance minister noted that “95 per cent of assets” of the money market companies “would be in government securities”.
“This is not similar to the situation of the banking problems (of the 1990s),” Davies said.
Donna Duncan-Scott, the managing director of Jamaica Money Market Brokers, the island’s largest money market firm with $62 billion in assets, agreed that interest rates volatility created challenges for companies like her own. But Duncan-Scott said that these were not issues with which she was unaccustomed.
“The market in general has had challenges with liquidity,” she said. “But we manage liquidity issues all the time.”
Duncan-Scott, however, noted that with 96 per cent of her company’s assets in government instruments, there was “no comparison at all” with the market condition it faces and those finance companies that collapsed in the 1990s.
The changes in the accounting requirements, she conceded, would affect “the paper profits” but in the end “it is an accounting consideration”.
“We agree with the new standards and will implement them,” Duncan-Scott said. “But we think that there needs to be a massive education drive around them, explaining what it will mean and discussing when it is appropriate to implement the standards.”