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4	 Enhancing Financial Servic es in the Eastern Caribbean through the Consolidation of Synergies among Indigenous Banks
2-Day Validation Workshop | 21-22 September 2012 | ECCB, St. Kitts								 5
The Rt Hon Dr Denzil Douglas, Prime Minister,...
6	 Enhancing Financial Servic es in the Eastern Caribbean through the Consolidation of Synergies among Indigenous Banks
2-Day Validation Workshop | 21-22 September 2012 | ECCB, St. Kitts								 7
Consultant Team Leader, Mr Chris Thomas
Ms Te...
8	 Enhancing Financial Servic es in the Eastern Caribbean through the Consolidation of Synergies among Indigenous Banks
2-Day Validation Workshop | 21-22 September 2012 | ECCB, St. Kitts								 9
10	 Enhancing Financial Servic es in the Eastern Caribbean through the Consolidation of Synergies among Indigenous Banks
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  1. 1. 3 This project is funded by the European Union. The views expressed herein can in no way be taken to reflect the official opinion of the European Union nor that of the ACP Secretariat. Introduction Addresses Consultant Presentation of Diagnostic Study and Open Discussion Presentation and Consideration of Case Studies Open Discussion: Moving towards Tentative Agreement The Agreement and Resolution 4 4 7 8 8 10 CONTENTS
  2. 2. 4 Enhancing Financial Servic es in the Eastern Caribbean through the Consolidation of Synergies among Indigenous Banks Sir Edmund Lawrence, Managing Director, St Kitts-Nevis-Anguilla National Bank, Chairman Eastern Caribbean Amalgamated Bank, Chairman ECIC Holdings Ltd Introduction This brochure summarizes proceedings of the Validation Work- shop, which was held on 21st and 22nd September 2012 at Eastern Caribbean Central Bank in St Kitts, for a project entitled: “Enhancing Financial Services in the Eastern Caribbean through the consolidation of synergies”that was led by ECIC Holdings Ltd, a company held by most of the sub-region’s Indigenous Banks, and supported by the ACP Climate facility (BizClim). The project is aimed to contribute to the identification of feasible and viable options for collaboration to realise available synergies among participating banks. This private Workshop brought together about 30 chairpersons and chief executive officers of all Indigenous Banks from the sub- region with high-level representatives of the Eastern Caribbean Monetary Council, Central Bank and the Caribbean Development Bank. Participants considered the preliminary findings of a Diagnostic study that mainly looked at viable options for collaboration to realise synergies among participating banks. This project, com- prising the study and workshop, was ECIC’s contribution to the general effort and was thus complementary to other initiatives aimed to enhance financial services, especially Eastern Caribbean Single Market and Monetary Council eight-point programme. Central bank, Monetary Council and international donors and agencies were kept informed during implementation. The study had been prepared by BizClim project experts just before the Workshop. It took into account public documents, international experience, and discussions with the Boards, management and technical staff of participating banks and other stakeholders held during August and September 2012. Options to consolidate synergies among Eastern Caribbean Indigenous Banks were presented and considered at the Work- shop. How would these important banks be able to continue to provide financial services efficiently for national and regional socio-economic development? How have banks internationally taken advantage of synergies to add value? What lessons can be learned from elsewhere about how Indigenous Banks can cap- ture opportunities emerging from the Eastern Caribbean Single Market and to meet specific priorities in the sub-region’s eight point Stabilisation and Growth Programme? The project is expected to conclude with the acceptance of documents by ECIC, documents that could be the basis for wider discussion and decision about consolidation or amalgama- tion. Specifically, the consultants have to produce a Final Report with options for collaboration, including providing information about possible financial, ownership and organisation arrange- ments and structures, and an Action Plan with timeline, costs and requirements for the execution of potential options in a phased strategy. Project success will be evaluated by how much Indigenous Banks are equipped to better serve the needs of the Eastern Caribbean. The exercise was not an evaluation of any bank or indeed of any aspect of the sub-regional financial sector. Rather – given the general acceptance that re-structuring is needed - the voice of indigenous banks needs to be decided by them and then heard by others and the project title -“Consolidation of Synergies”, whatever they may be – reflects this. Thus ECIC Holdings insisted the experts carry out their work with open minds and without a preconceived plan. Addresses The Chairman of ECIC Holdings Ltd, Sir Edmund Lawrence,-who was thanked by both the Prime Minister of St Kitts and Cen- tral Bank Governor for his substantial personal contribution in respect of the matters under consideration – opened and closed the first day of discussions. Sir Edmund Lawrence sees the workshop as springboard for moving forward the process of consolidation of synergies among Indigenous Banks Welcoming participants, Sir Edmund noted that all previous ac- tivity and discussion about the consolidation of synergies among Indigenous Banks had converged at this Workshop, which had become a springboard for moving the process forward. He wrapped up with a call for action, as the consolidation of syner- gies among the indigenous banks in the Currency Union will contribute immediately and immensely to the banks sustainable capacity toundertake the following actions amongst others: § Provide not only small and medium but also especially large credit facilities to businesses in the commercial, industrial and tourism sectors of the economy; § Stimulate increases in jobs, aggregate demand and exports; § Spur private sector investment and drive household spending; § Foster optimism; promote high expectation and unleash new and renewed energies to build a bountiful economic future for everyone in the Currency Union. Sir Edmund recalled that“During our rounds of meetings with
  3. 3. 2-Day Validation Workshop | 21-22 September 2012 | ECCB, St. Kitts 5 The Rt Hon Dr Denzil Douglas, Prime Minister, St Kitts and Nevis and Chairman of the ECCB Monetary Council Honourable John Skerritt, Financial Secretary, Montserrat The Rt Hon Dr Denzil Douglas, Prime Minister, St Kitts and Nevis and Chairman of the ECCB Monetary Council the Boards of Directors, the CEOs and other senior staff of the indigenous banks in the Eastern Caribbean Currency Union we discussed the artesian store of boundless advantages and the cornucopia of lasting benefits that consolidation of synergies among indigenous banks would generate. In our deliberations we respectively and representatively iterated that by working to- gether indigenous banks would produce a combined result that is greater than the sum of their separate results. The varied and myriad advantages, benefits and gains, whether human, institu- tional, material, financial, operational, technological or other- wise, were seen as gross, not as net, because all of the envisaged results were considered positive, none was negative”. The consolidation of synergies among indigenous banks is a pro- cess, it is not a product Sir Edmund concluded“As the representatives of the indigenous banks in the Eastern Caribbean Currency Union we are given the special and singular honour, privilege and distinction to run the first leg of this historic generational race. We must run the race with an avowed intent never to relent but to remain undaunted, fortified with stamina, perseverance and patience. We must win our leg of the race and pass the baton safely to our successors. We are not running with or against ourselves. We are running against competitors who are practised, seasoned and resourced. However, we must draw on our ancestral valour to defend the honour of our institutions and Union, and win our leg, the first leg, of the race. Now is the time for the indigenous banks in the Currency Union to start coming together and working together to reposition ourselves in our Currency Union. Now is the time for us to stop walking separately and denying us the opportunity to achieve and sustain domestic ascendancy in the Currency Union. Our most urgent need is a steely will and an unwavering belief in ourselves and our capabilities to fashion our future with the continued assistance of our partners and friends who sup- port our efforts and want us to succeed“. Both the most recent and current Chairmen of the Monetary Council - the Prime Minister of the Federation of St Kitts and Nevis and the Financial Secretary of Montserrat - addressed the workshop. The Rt Hon Dr Denzil Douglas invited the meeting to review the suggested options, to identify those that served the best interest, not only of the institutions, but also that of the region The interest of the institutions and the region were intricately and inescapably inter-twined The Prime Minister of St. Kitts, Rt Hon Dr Denzil, acknowledged the Indigenous Banks’s contribution to the region and to the growth of the people of the region. He noted that Indigenous banks were the most potent symbol of the region’s‘coming into our own as our own people.’He encouraged the meeting to iden- tify and seize opportunities of synergistic cooperation that would benefit the people and businesses they served. He pointed out that the region occupied its own unique space in the global financial landscape and therefore could not adopt the whole- sale approaches that might have worked elsewhere. However, other examples of indigenous banks, which had capitalized on synergies in various areas should be analysed. Finally, he invited the meeting to bear in mind the eight-point Stabilization Action Plan; the fact that Eastern Caribbean Securities Market had long been a priority; and the vagaries of the global economy, which were inescapable. The Hon. John Skerritt, Financial Secretary, Montserrat, having acknowledged the“irreplaceable contribution”of the Indigenous Banks in providing access to finance in the region, noted that consolidation would provide a collective response to threats, cit- ing the examples of CIBC, RBC and RBTT - which had responded to competition in such a way as to increase market share and ser- vices, while increasing shareholder value - and noting the falling earnings, increasing levels of non-performing loans, increased provisioning for bad loans of the Indigenous Banks. Hon Skerritt stated his belief that any attempt at consolidation would require commitment and compromise, and thus the workshop was timely. He concluded:“our indigenous banking institutions are generally weak and under threat. What will you do about it?”He encouraged banks to be guided by the policy framework provided by the Monetary Council and the central bank through the stabilization programme. The Governor of the Eastern Caribbean Central Bank deliv- ered the keynote address. He described the significant role the Indigenous Banks had in the region and stated that they needed to build capacity to fulfil that role. He remarked that the Treaty of
  4. 4. 6 Enhancing Financial Servic es in the Eastern Caribbean through the Consolidation of Synergies among Indigenous Banks Sir K Dwight Venner, Governor, Eastern Caribbean Central Bank Christine Dawson, Chief Economist, Caribbean Development Bank Basseterre had created a single financial space and thus provided the opportunity for banks to consolidate and realise economies of scale, which foreign banks understood and were already tak- ing advantage of this opportunity. The Governor highlighted: § The need to re-think the Indigenous Bank business model, and that the preferred model should suit the population of the region and should take into consideration both specialized and universal banking theories. § The region was facing a period of uncertainty due to the global recession and banks needed to determine what their role should be in the current environment. The financial sector was facing a number of challenges and it was important to identify the form of the financial system, which was compatible with the region and its economies. § It was important to examine other banks that had been successful and learn from their successes. For example, a review of Canadian banks would reveal that they had expanded by moving out from their original country, overcoming the disadvantages related to small size, such as high risks. The Governor also noted that the Monetary Council had recog- nized: § Importance of indigenous banks and their role in the financial system; § Banks should be organized to facilitate intra-ECCU trade; § Indigenous banks should assist in the development of Money and Capital Markets and in particular the Govern- ment Securities Market. The Chief Executive of Bank of Anguilla, Mr Valentine Banks, and a Director of Grenada Co-operative Bank, Mr Darryl Brathwaite, made opening addresses. Mr Banks noted the important role that Indigenous Banks played in the development of the region, citing in particular that National Bank of Anguilla had made possible home ownership through providing financing to people previously denied it, and that the formation of Caribbean Credit Card Corporation (4Cs) by the Indigenous Banks had allowed them to issue credit and debit cards. But Mr Banks also noted that today the bank’s customers have more varied demands and expectations. Mr Brathwaite said that participants were well aware of the ben- efits of achieving synergies, but the challenge was in convincing members of the Banks’Boards of Directors that consolidation was the way to go; and dealing with the risks and teething problems in working towards consolidation. He encouraged participants to network and support each other as the process moved forward. Ms Dawson spoke for the Caribbean Development Bank. She stated that the global financial crisis severely tested the Carib- bean’s own financial systems, as it did the world over.
  5. 5. 2-Day Validation Workshop | 21-22 September 2012 | ECCB, St. Kitts 7 Consultant Team Leader, Mr Chris Thomas Ms Telly Onu, IT Expert She suggested that the most important benefits to be derived through consolidation were: § the ability to enjoy economies of scale; § enhanced technology infrastructure; and § increased resilience to external shocks. She concluded that banking sector reform and restructuring, in whatever form it takes, should lead to the emergence of a sound, reliable and efficient system to support growth and develop- ment. She said that Caribbean Development Bank applauded this initiative to develop a clear rationale, and a credible business case for consolidation, and stated its commitment to banking sector stabilisation and operational efficiency. She reminded participants of her bank’s 2010 financial sector stabilisation loan to St. Vincent to provide critical liquidity to the National Com- mercial Bank by reducing its public sector exposure, and thereby, facilitating its privatisation. Consultant Presentation of Diagno- stic Study and Open Discussion Mr Thomas raised some questions for workshop participants to consider: § What information could they share about their estimates of the benefits of consolidation of synergies and the costs of exploiting them? § Is the consultants’assessment of external factors internal common strengths shared challenges adequate complete? § What is the applicability of the cases considered? What else do we need to know of international experience? § Provisionally what is your point of view about the options and recommendations? He described both the differences between the various Island Indigenous Banks (e.g. their size, ownership and number of branches) and common characteristics. The findings of the Diagnostic Study were presented as being that the indigenous banks shared transformational and development achievements, but also shared exogenous challenges arising from the global financial crisis, trend for consolidation in bank- ing, and increasing regulatory burden as well as shared opportu- nities arising from the Eastern Caribbean Single Market. Fur- thermore each Indigenous Bank missed opportunities to secure operational efficiency and issues with suppliers. Human Resource Development, international activity and syndicated loans were all areas where opportunities for synergy existed. IT case studies were presented by Ms Telly Onu (IT Expert) and interpreted as suggesting the need to consolidate data centres. It was suggested that by working together systems, which are locally appropriate but international standard, could be put in place for treasury, risk, compliance and internal audit, and more effective negotiations with correspondent banks could take place, perhaps including exploring the possible option of the group of Indigenous Banks becoming a Downstream Correspon- dent Clearer as defined in the Wolfsberg AML Correspondent Banking Principles. The opportunities for working together for better procurement, a common electronic transaction framework and an indigenized core banking system were also considered. A shared Centre of Excellence for professional development in risk, compliance, IT governance and internal audit accompanies by research and development in associated systems was also envisaged.
  6. 6. 8 Enhancing Financial Servic es in the Eastern Caribbean through the Consolidation of Synergies among Indigenous Banks More formal arrangements for syndicating loans were imagined, so that indigenous banks could work together to get a greater share of the corporate loan market, which would result in better diversification, and better use of liquidity. Schemes to strengthen the balance sheet through joint risk man- agement and liability assumption were also considered. Ten specific recommendations were made. Presentation and Consideration of Case Studies The main case study was the German Savings Banks Group, which was presented as being a particularly relevant interna- tional example. Mr Bergmann first summarized the structure and basic charac- teristics of the German Savings Banks Group, and then briefed the meeting on their consolidation experience, particularly in the IT area. Eventually nearly all banks had chosen to use the in- house developed core banking system from the commonly held IT company, but the process had taken ten years. He highlighting general characteristics: § Each Savings bank was independent and would, for ex- ample, set its savings rate. § A portion of the profits was used to strengthen core capi- tal and the balance given back to the community for social purposes § The banks mirrored Germany’s administrative structure and were decentralized regional credit institutions, thus enabling them to adapt to the local client structure § While each bank could decide to use another core bank- ing system, they would not do so, as it would not be cost effective § IT service providers were consolidated and as a result there were increased efficiencies including reduced IT costs The joint liability scheme of the German Savings Banks group, which operates alongside German Deposit Protection schemes, was described. Beneficial characteristics were stated to be: § Institution Protection, which was more that a guarantee of deposits. It protected the entire existence of the Savings Bank § Proactivity - Risk Monitoring, Ratio System, and Qualitative Reports § Individual Case Rulings, which encouraged risk conscious behaviour by institutions § Not perceived as an insurance and as such the system working well § The structure was designed to protect the trust of custom- ers The Isle of Man bank case study was also presented briefly. This bank had been owned 100% by foreign banking parent since 1961 but preserved its name and local decision-making to the extent that it is still regarded as local. More significantly as a case study, Capitol Bancorp example was considered. This company defines itself as a bank development company with chartered bank development as a core business. Each of its members banks - despite having 51% ownership by the holding company and each having similar business focus, type of customers, products and services, and centralized back office - operates independently with a local board, locally branded name and local credit decisions. There was some discussion of lessons to be learned from previ- ous experience of working together (e.g. ECIC, Eastern Caribbean Amalgamated Bank, 4Cs). Open Discussion: Moving towards Tentative Agreement Mr Milton Lawrence, Chief Executive of ECIC, moderated this and other discussions. Mr Chris Thomas stated that this workshop had not changed the main conclusion he reached after meeting with Management Ex- perts and the Board members of all of the indigenous banks. This was that the time was right for the establishment of the Eastern Caribbean Indigenous Bank Cooperation Entity to consolidate synergies and formally cooperate in various areas. The other alternatives were: § a loose Association to try to consolidate synergies § Consolidation of Balance Sheets A third alternative was then suggested by Mr Milton Lawrence, CEO, ECIC Holdings Ltd. which was: § A combination of the previous two approaches which would allow for consolidation of synergies, allowing banks which wished to do so to pursue consolidation of Balance Sheets, within an agreed upon framework. Mr Thomas summed up the presentations of the previous day. He noted that the following types of entities or arrangements had been identified for moving the process forward: § Partnership § Lead Company § Held Company § Holding Company § Amalgamated Bank § The various synergies identified could be exploited using the following arrangements: Mr Thomas then went on to outline the next steps to be taken, including the establishment of a steering committee, the involve- ment of ECIC to enlist private and donor funding and technical assistance, announcing a calendar of visibility events for 2013 aimed at initiating synergies in five distinct areas:
  7. 7. 2-Day Validation Workshop | 21-22 September 2012 | ECCB, St. Kitts 9 Electronicpayments CentreofExcellence CoreBankingSystem ITservice ECInd.Bank.Holdingreg./nat. ECInd.BankAssoc. Corr.BankingForeignBranches Syn.Loans/JointLiabilityScheme/Liq. Partnership x x Lead company x x x x x Held company x x x Holding company x Amalgamated Bk. (i) Taking advantage of the Single Market and Leveraging Inter-Bank Payments systems (ii) Setting up Indigenous Banks Centres of Excellence (iii) Defining and Transforming Institutional architecture, which would likely lead to development of held ICT com- pany (iv) Establishment of a Task Force to look at Correspondent and International Banking (v) Establishment of a Task Force to consider Financial Syner- gies in terms of Multilateral syndicated loans, Enhanced Liquidity Sharing and Joint Liability Schemes. Phasing was considered. The meeting noted that the following OECS indigenous banks were not ECIC Holdings Ltd shareholders: Bank of St Vincent and the Grenadines, Bank of Saint Lucia, Antigua Commercial Bank, Eastern Caribbean Amalgamated Bank and Bank of Montserrat. But the meeting further noted the role the ECIC had played in laying the groundwork for discussions on consolidation of OECS Indigenous Banks and the suggestion that the option of ECIC becoming the vehicle for consolidation be explored. To enable the ECIC to be considered for that role it would be necessary to: 1. Invite the five (5) non-member banks to purchase shares in ECIC Holdings Ltd 2. Conduct an assessment of the ECIC Holdings Ltd 3. Build capacity within the ECIC 4. Galvanize members to demonstrate a high level of com- mitment to ensure success 5. Provide adequate resources to meet the objectives of the institution 6. Communicate the plan both to Directors and Shareholders of member banks, in a professional manner Mr Bergmann advised that cooperation should be structured - loose cooperation would not be enough, as no action would be taken. He said he believed that a consolidated Balance Sheet might be too ambitious as clients might not be open to the idea of their local banks being part of a wider regional grouping. He recommended structured cooperation using an existing entity would be the right way forward. The entity would become a ser- vice provider and would provide a service mentality. He encour- aged banks to gain and maintain momentum trying to achieve something quickly, which can be demonstrated to shareholders that the Corporation can work. While he agreed in principle that it might be best to build on what existed, Mr Chris Thomas noted that complications in using the ECIC Holding Ltd related to structure and the fact that only nine of the fourteen banks were members of ECIC Holdings Ltd. He further commented that while the history and experience of ECIC was invaluable, it might be better to start a new institution using the experience gained from the ECIC Holdings Limited. The Governor referred to the current economic environment and the situation of the Indigenous Banks and reminded participants that they needed to act on a basis of urgency. He confirmed that the Monetary Council had recognized the importance of indig- enous commercial banks and that it was critical that these banks continue to operate in the sub-region. The meeting noted that: 1. A change management and communication plan would be important in moving the process forward. 2. The Governor said that the central bank would share the results of the stress tests it conducted with the individual banks. Mr Whitfield Harris, Director Eastern Caribbean Amalgamated Bank and Financial Secretary, Antigua, noted that it would be more difficult for some institutions to proceed than others. He recommended that given the timelines, consideration be given to proceeding on two tracks: (i) an overarching entity that would guide the process; and (ii) identifying leaders in the process - banks which were in a position to explore and exploit the op- portunities, and should proceed to do so. Identifying the option of an Eastern Caribbean-personality Indig- enous Bank Holding Company, perhaps owned by people’s funds from each ECCU nation, Mr Thomas stated that such an institu- tion could hold between forty to one hundred per cent of the shares in local entities, which would retain their national identity and local governance and management. Under that arrangement it would be accepted that two or more banks might choose to amalgamate independently, yet it was expected that such bilateral decisions would take place within the scope of the multilateral process. He commented that further investigation would be needed on: (i) the likelihood and conditions of private and public invest- ment in any proposed Eastern Caribbean Indigenous Bank Holding Company; and (ii) the legal and regulatory implications, especially how the proposed holding company would complement any activ- ity envisaged for the Resolution Trust Company.
  8. 8. 10 Enhancing Financial Servic es in the Eastern Caribbean through the Consolidation of Synergies among Indigenous Banks Mr Thomas presented the Recommendations arising out of his presentation. The Agreement and Resolution Arising out of the recommendations and the discussions of the Workshop the Meeting approved the following Agreement: Agreement by Participating Banks: 1. Participating Banks agree to pursue consolidation on the basis of information gathered from the diagnostic review, one-on-one discussions with banks and workshop delib- erations. 2. Participating Banks agree that Consolidation of Indig- enous banks, in the areas where synergies exist, can bring significant added value. 3. Participating Banks agree to consider three main options: i. Mandating a Steering Committee comprising Representative of Indigenous Banks to pursue consoli- dation of synergies with individual banks maintaining their independence; ii. Establishing a Holding Company to pursue con- solidation of banks, including Balance Sheets, where corporate control and major functions are directed from the Holding Company but national identity and local governance are preserved; and iii. Pursuing (i) above with the option for individual banks to pursue (ii) within an agreed upon framework. 4. Participating Banks acknowledged that other options might arise. Resolution: Participating Banks resolved to: 1. Establish a Steering Committee comprising the Chairper- sons of the Boards of Directors or their nominees. 2. Formalise the Committee’s Mandate, including confidenti- ality provisions. 3. Define a Work Plan and Budget and Identify Funding sources. 4. Arrange regular meetings with the ECCB to inform them of the process. 5. Liaise with other stakeholders This agreement was unanimously adopted by: 1. 1st National Bank St Lucia Ltd. 2. Antigua Commercial Bank Ltd. 3. Bank of Montserrat Ltd. 4. Bank of St Lucia Ltd. 5. Bank of St Vincent and the Grenadines Ltd. 6. Caribbean Commercial Bank (Anguilla) Ltd. 7. Caribbean Union Bank Ltd. 8. Eastern Caribbean Amalgamated Bank Ltd. 9. Grenada Co-operative Bank Ltd. 10. National Bank of Anguilla Ltd 11. National Bank of Dominica Ltd. 12. St Kitts Nevis Anguilla National Bank Ltd.