This week’s column and the first part of next week’s will bring to a close my discussion of the vulnerabilities to be found in the financial regulatory and oversight structures of Guyana and the wider Caricom region. These vulnerabilities have become increasingly manifest as contagion from the global economic recession and financial crisis has continued to take its toll on these small open economies.
Uncertainty and caution
As readers would be aware from previous columns, at best, global economic recovery remains fragile and threatened. Great anxiety continues to be exhibited by the economic and financial authorities in the nations termed by the IMF as “advanced economies,”, where the present global crisis is heavily centred. Indeed, this is also true for the broader G20 Group of countries, which is the de facto international body managing the global economic crisis and its recovery.
On close inspection, in every country the watchword today is ‘caution,’ as both the European Union (EU) and the United States continue to face intractable economic problems. In the case of the EU, these are highlighted in the sovereign debt crises facing some member states and the resultant speculation against their sovereign bonds, currencies, and the Euro itself. The countries, which have been worst affected by the failing recovery, are Portugal, Italy, Ireland, Greece and Spain (the infamous PIIGS).
In the case of the United States, the continuing economic problems are highlighted in its inability to resolve the private household mortgage crisis and its related toxic-mortgage securities, which threaten the portfolios of the most important financial businesses in that country. Alongside this, there are of course, the stubborn unemployment and underemployment levels, which continue to remain at record levels. Indeed, as recently as the end of November these were estimated at 9.8 and 7.2 per cent, respectively.
A measure of the extent of how uncertain the global economic and financial situation remains is perhaps best revealed in the massive vulnerabilities, which are still evident in the financial regulatory and oversight infrastructure of the United States ― the world’s most advanced economy. As recently as the end of last month (November 2010), 903 commercial banks were being classed as “problem banks” by the US authorities. This number is more than ten times greater than it was as recently as two years ago. Of equal significance, the total value of the assets involved in these problem banks is equal to US$420 billion. This sum is sixteen times greater in value than that of two years ago! Of perhaps greater significance, the banks that are classed as problem banks, do not include the US mega-banks, because these are considered as being too-big-to-fail. Yet all the mega-banks are plagued with toxic private household mortgage-backed securities in their portfolios, for which no solution has been found. Thus it is estimated that JP Morgan-Chase has US$65 billion of these toxic assets in its portfolio; Wells Fargo has US$69 billion; and, Bank of America has US$75 billion.
Regulatory capture
Another pressing vulnerability in the US financial structure has been the near collapse of its due diligence and credit-rating arrangements. The practice in the US is for its rating agencies to be paid huge fees by businesses issuing bonds, insurance policies, and other investments traded in the public market-place. This means that the ratings, which these bodies provide are bought (and paid for) by the very firms, which they are engaged to rate. Not unexpectedly, this raises serious concerns over potential conflicts of interest and bias in the ratings which they provide. To many observers this is a case of regulatory capture, as discussed earlier in these columns. The rating agencies cannot be trusted to fulfil their obligation to remain independent.
As an aside, readers should have some familiarity with the procedures used by credit-rating bodies. While different credit-rating agencies employ different labels for rating their clients, basically these conform to the following procedure: grades are given as Triple-A; Double-A; Single-A; Triple-B; Double-B; Single-B. Triple-B and better, is classed as an ‘investment grade’ security; lower than this is classed as a ‘speculative’ or ‘junk’ security. The four largest rating bodies in the United States are: Standard and Poor; Moody; Fitch; and, A M Best; however, there are many others less well known.
These types of uncertainties over the soundness of the recovery from the global economic crisis in the United States, the European Union, and the G20 have spawned considerable caution among the International Financial Institutions (IFIs), (particularly the IMF and World Bank) whose responsibility it is to provide global oversight, regulation, surveillance, and coordination, as well as strategies for bringing to an end, as soon as possible, the global economic recession and financial crisis.
Not immune from contagion
Readers should not adopt the view that if the advanced economies’ regulatory and oversight infrastructure displays massive vulnerabilities, it cannot be expected that Guyana’s would fare better. While it is true that the advanced economies are, like Guyana, not immune to global financial shocks and contagion, these economies are incomparably more resilient to these threats.
One sign of the need for caution in Guyana can be seen in the media report on the recent IMF Article IV surveillance mission to Guyana (November 8-18, 2010). The Head of the Mission (Theresa Turner-Jones) has been reported in the media as stating that the IMF welcomes recent improvements in Guyana’s financial sector supervision and regulation, including the new guidelines on risk management. She, however, urged the authorities to remain watchful. She also applauded what we have been calling for for some time now, the authorities’ decision to disseminate Guyana’s financial sector indicators, which are now made available on the Bank of Guyana website.
Next week I shall conclude this topic with a brief look at some cultural factors, which serve to compound the vulnerability of Guyana’s financial regulatory and oversight infrastructure, before turning to the final topic as we come to the close of the first decade of the 21st century.
