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Cross-border Issues for Regional Financial Institutions: A Case Study of Resolving a Large Complex Bank Arjoon Harripaul General Manager Deposit Insurance Corporation (Trinidad and Tobago) 1

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Structure of Presentation Introduction Financial Interconnectedness of the Caribbean Region Cross-border Issues Legislative framework in the Context of Financial Interconnectedness The Demise of CL Financial Impact of the Collapse of the CL Financial Group Resolution Methodologies and Crisis Management in the Caribbean for Systemically Important Financial Institutions (SIFIs) Alternative Resolution Strategies Moving Forward 2

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Introduction For many years, regional economic integration has been the central goal of policymakers in the Caribbean region. Economic and Financial integration in the Caribbean region led to an increase in cross border capital flows in the last 15 yrs. Arguably, regional Regulatory Bodies have not kept abreast of this development. Financial interconnectedness has produced an increase risk of contagion. 3

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Financial Interconnectedness Major Financial Conglomerates With Cross Border Operations in the Caribbean as of end-2010 Assets (US$ mil.) No. of Caribbean Countries Percentage of Total Caribbean Banking Sector Assets RBC Financial116862022 Scotia Bank101452120 First Caribbean International Bank97661819 Republic Bank Limited9315614 SAGICOR Financial Group486722NA First Citizens Bank401548 Guardian Holdings Limited32814NA Jamaica Money Market Brokers13183NA 4

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Introduction The Caribbean region was not insulated from the global financial crisis in 2007/08. Cross-border linkages posed its own challenges. The collapse of the Trinidad and Tobago-based CL Financial Group in January 2009 represented a major financial shock to the Caribbean (Ogawa et al., 2013). The collapse of the Group had spill over effects in 15 CARICOM states except for Jamaica and Haiti (Monroe and Wu, 2011). 5

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Introduction The Govt of T&T opted for bailout of CL Financial; too big to fail? Group assets was more than half of T&T GDP (76.1% of GDP as at 2007). On October 17 th 2011 DICTT was appointed Liquidator for Clico Investment Bank, a major subsidiary in the Group. 6

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Cross Border Issues The collapse of CL Financial revealed the existence of an inadequate risk management and weak corporate governance system. Many Caribbean Govts were forced to intervene in order to minimize the negative impact to policyholders and shareholders. These countries economies were already tottering from the onset of the global recession. Insurance and annuities were affected badly. 7

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Legislative Framework Most governments have established Single Regulatory Units (SRUs) for the purpose of supervising all Non- Bank Financial Institutions (NBFIs) and the supervision is based on harmonized legislation across members (Ogawa et al., 2013). The structure and the standards of supervision of NBFIs vary among the non-ECCU Caribbean countries. Thus there is uneven regulatory oversight of the financial sector in an environment of rapidly increasing cross- border financial flows (Ogawa et al., 2013). 8

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CLF Consolidated Balance Sheet Source: CLFs Financial Statements Items31 December 2007 $000 2006 $000 2005 $000 Total Assets100,666,25688,721,17275,907,365 Total Equity8,469,0527,746,9117,177,167 Total Liabilities92,197,20480,974,26168,730,198 Total Liabilities and Equity 100,666,25688,721,17275,907,365 9

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CLF Consolidated Balance Sheet Borrowings2007 $000 2006 $000 Long-term portion of borrowings14,847,1258,387,894 Current portion of long-term borrowings 1,842,4802,642,263 16,689,60511,030,157 10

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CLF Consolidated Balance Sheet Investment in Associates as at Dec 31, 2007 NameCountry of incorporation Profit/(Loss) ($000) One Caribbean Media LtdTrinidad and Tobago88,575 Southern Chemical CorporationUnited States of America35,779 Bram-Ber Holdings LtdBermuda1,027 Caribbean Nitrogen Company LtdTrinidad and Tobago428,866 Nitrogen (2000) UnlimitedTrinidad and Tobago505,676 G4S Holdings (Trinidad) Limited, Infolink Services Ltd & Eastern Caribbean Financial Holdings Ltd, The Home Mortgage Bank Ltd. Trinidad and Tobago and St. Lucia 161,311 11

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CLF Consolidated Balance Sheet Investments in associates (Contd) NameCountry of incorporationProfit/ (Loss) ($000) LJ Williams LtdTrinidad and Tobago11,721 Agostinis LtdTrinidad and Tobago27,977 Jamaican Money Market Brokers Ltd Jamaica102,551 United Systems and Software Inc.United States of America3,598 United Image Technologies Inc.United States of America(244) Europa LLCUnited States of America7,399 Berbice Bridge Company IncGuyana(451) 12

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The Demise of CL Financial CL Financial (CLF), based in Trinidad and Tobago, is the parent company for Colonial Life Insurance Company (Trinidad) Limited (CLICO). The companys subsidiaries expanded over time and included activities in banking and finance, insurance, energy, beverages, agriculture, forestry, real estate, services and communications. At end-2007, the groups assets stood at US$16 billion, equivalent to about 30 percent of the Caribbean regions GDP (Ogawa et al., 2013). CL Financial has subsidiaries in Bahamas, Belize, Barbados, Guyana, OECS, Suriname, UK, USA and Trinidad and Tobago. 13

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The Demise of CL Financial On January 30 th 2009 a Press release announced that the Government of Trinidad and Tobago would bailout CL Financial the parent company of CLICO and several other local and regional businesses. The Memorandum of Understanding was signed between the Government and CL Financial highlighting the underlying problems that had given rise to the financial crisis (Guardian Newspaper, 2009). 14

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Impact of the collapse of CL Financial Group The corporate collapse of CLICO/CL Financial had a tremendous effect throughout the Caribbean due to the operations of its subsidiaries (Soverall, 2012). Thus, after 15 years of positive growth the economy of Trinidad and Tobago declined in 2009 (-3.5%) resulting in the collapse due to share size, scope of operations and the systemic risk posed to the financial system (Soverall, 2012). The collapse of CLICO/CL Financial revealed that the supervisory framework was inadequate to detect a company that is involved in risky activities (Ogawa et al., 2013). 15

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Challenges Implementing Core Principles Legal Infrastructure is very slow- updating mandates and powers, recovery of assets, reimbursing depositors, adjusting coverage limits, failure resolution are all stymied. Given the small size of the countries and the structure of the economies institutional development tends to be seasonal/ cyclical (boom or bust). Given the resource constraints independence is sacrificed- issues related to corporate governance. 16

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Resolution Methodologies in the Caribbean for SIFIs Resolution methodologies in the Caribbean for SIFIs are dictated by economic constraints. Methodologies utilised in the Caribbean for SIFIs include: i.Mergers and acquisitions ii.Government bailouts 17

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Crisis Management The former Governor of the Central Bank; believed the financial difficulties faced by CIB and CLICO were due to the following: Excessive related-party transactions which carried significant contagion risks. An aggressive high interest rate resource mobilization strategy to finance equally high risk investments, much of which were in illiquid assets (including real estate both in Trinidad and Tobago and abroad). A very high leveraging of the Groups assets, which constrained the potential amount of cash that could be raised from asset sales. 18

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Crisis Management When insurance supervision was transferred from the Ministry of Finance (MOF) to CBTT, the Banks regular monitoring of CIB and of CLICO consistently focused on these deficiencies but were stymied by the inevitable challenge of change and by the inadequacies in the legislative framework which did not give the Bank the authority to demand these changes (Williams, 2009). CL Financial has an imposing presence with potentially systemic consequences for the financial sector and the economy of Trinidad and Tobago (Williams, 2009). 19

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Crisis Management When CIB was declared closed on January 30, 2009 deposit insurance was triggered. Legally DICTT had to commence payments to insured depositors of a failed member institution within 90-days of closure date. However, due to inadvertence not on the part of the DICTT the 90- day period was extended. Insured depositors had two options of securing their deposits; either to be paid up to TT $75,000 in deposit insurance or have their deposits transferred and paid by First Citizens Bank. 20

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Crisis Management In May 2014, the Governor of CBTT; Mr. Jwala Rambarran made a televised statement to CLICOs traditional policy holders. In his address he stated that the terms and conditions of their policy remains intact and that CLICO will continue to: Pay their monthly pensions Honour their health and life claims Renew all group and health & life contracts Receive and process their premiums 21

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Crisis Management Mr. Rambarran also indicated that since CBTT assumed control of CLICO in February 2009, it has always been the plan to transfer CLICOs traditional business to a third party. The process is underway and the Governor is committed to providing updates and relevant information as the process unfolds. 22

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Alternative Resolution Strategies Alternative resolution strategies that may have been more effective in the CL Financial debacle: Bail-In Purchase and Assumption Open Bank Assistance 23

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Moving Forward Presently, the MOF, CBTT, DICTT and the Securities and Exchange Commission (SEC) are collaborating to form in the near future a National Financial Crisis Management Group (NFCMG). The purpose of the NFCMG will be to take the necessary pre-emptive steps to respond appropriately in a financial crisis that may impact the Trinidad and Tobagos financial system. To support such a move, the DICTT is reviewing its legislation to allow it to operate under an expanded mandate. The proposed legislation is intended to provide enhanced resolution powers such as: Purchase and Assumption Open Bank Assistance Bail-in Admittedly the foregoing options will present challenges for DICTT given the issues mentioned in terms of legislation, economic structure and so on. 24

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Thank you! Questions??? 25