This is bound to result in serious vulnerabilities in the financial infrastructure. In this week’s column I shall begin to address these vulnerabilities as I bring to a close, for the time being, the impact of the global financial crisis and economic recession on Guyana and the wider Caricom.
One of the most important vulnerabilities, which has been revealed is the alarming number of Ponzi-type schemes that came to the fore in the wake of the global crisis. The most infamous and disastrous of these schemes are theCL Financial Group of Trinidad and Tobago; the Stanford Group of Antigua and Barbuda; and David Smith’s Overseas Locket International Corporation (Olint) operating out of the Turks and Caicos, Jamaica and Florida. In the case of the CL Group this was a large conglomerate operation comprising about 40 firms located in the region and the wider world.
This group’s activities had been very non-transparent and involved a significant value of opaque and risky intra-group loans. Outside businesses and individuals, which dealt with the group did not seem to have an inkling of the enormous risks they were undertaking at the time.
As we have become better aware, the collapse of both the CL and Stanford Groups had major damaging financial and economic consequences not only for Trinidad and Tobago and Antigua and Barbuda where they are headquartered but very broadly across Caricom in The Bahamas, Barbados, Belize, the OECS states, Suriname, and here in Guyana. These firms operating their Ponzi-type schemes were involved in widespread cross-border transactions duping a wide range of customers across the region.
Thus after the fallout from the collapse in Guyana it has become clear that several financial and other firms, government organizations, non-governmental bodies (unions and pension funds) as well as hundreds of individuals had invested heavily in the offerings of both groups
Lack of coordination
A related vulnerability of crucial significance is that despite the considerable amount of cross-border trading in financial assets in Caricom there has been little or no coordination and harmonization of the activities of the various regulatory and oversight bodies of member states.
This has resulted in significant regulatory leakage, thereby opening the region’s financial system to financial businesses which are engaged in what economists term as “regulatory arbitrage.” By this is meant that financial firms are able to exploit loopholes and weaknesses in the network of regional regulations for their own gain.
Thus to take one practical example, agents of the Stanford Group were able to mobilize deposits from enterprises and individuals in Guyana without any local regulatory compliance. As a consequence taxes on these earnings were not withheld on behalf of the Government of Guyana and paid over.
If regulatory leakage had led to regulatory arbitrage this in turn set the stage for regulatory capture. This refers to a situation in which the agencies set up and entrusted with the regulation of certain financial businesses and categories of financial transactions are unable to do so effectively, because the enterprises and individuals they are required to regulate are able to co-opt them and exercise undue influence on their actions.
The Clico fiasco in Guyana certainly suggests the regulators had either been lax or complicit in turning a blind eye to many areas of its operations, including the maintenance of its statutory fund.
Credit rating agencies
One other major vulnerability in Caricom has been the absence of effective due diligence coverage in the markets of member states. In practice this is best provided by independent credit rating agencies.
In the region coverage by credit rating agencies is narrowly restricted to very few countries and where these do exist they are still very much works-in-progress. As readers know in the wider global economy these agencies have been subject to intense criticism since the crisis erupted.
Most of this criticism has been directed at their failure to forewarn the economic community about the extraordinary risks that banks and financial firms have been engaged in when using their customers’ money.
While some of the criticism has suggested collusion and regulatory capture, there is unanimity to the view however that truly independent credit rating agencies are essential features of a modern and efficient financial system and sound economy.
Without independent specialist credit rating bodies, governments and their agencies, private firms, investors and loan businesses will be forced to operate in the dark thereby ensuring that efficient economic decision-making is most unlikely to occur.
Some of the difficulties noted above no doubt spring from the fact that capital and financial markets in Caricom member states are by global standards very small in size. They are also very thin and remain limited in the variety of their securities offerings.
This market arrangement fosters oligopolistic and monopolistic market structures because the small market size does not offer enough inducements to sustain many competitive operators or induce a wider variety of securities offerings.
Systemic
While each of these vulnerabilities is important by itself, however, when taken altogether (including others to be discussed next week) they reveal systemic and fundamental weaknesses in the region’s financial and capital markets. These are required to be addressed as a matter of priority since the global economic crisis is not yet behind us and in any event we have not seen the last of these.
To be fair, at this time a number of measures are being undertaken by the regional authorities to reform the region’s oversight and regulatory system. These include 1) proposed new reform legislation; 2) increased training; 3) stepped up commitment to meet higher global (IMF and G20) standards; and 4) passage of the long awaited Regional Financial Services Agreement (RFSA).
