Cayman predicted to weather financial storm

| 14/10/2008

(CNS): On the day where unprecedented bail-out plans were set in motion across Britain, Europe and North America bringing markets back from the brink, the Cayman Islands Monetary Authority (CIMA) said the islands’ retail banks were on a solid financial footing and Philip Paschalides (left) of Walkers said the credit crisis had not undermined the fiscal advantage for banks registered in Cayman.

CIMA said that that local retail banks are subject to robust regulatory oversight and have always been required to report to the authority on an ongoing basis.

 “CIMA and the retail banks are meeting regularly and the banks are providing reports on their financial position to CIMA on an even more frequent basis,” said the Authority.  “The regulatory environment in which Cayman’s retail banks operate is very strong and there is reason for confidence in the banking system. The banks’ capital position is in excess of the minimum requirements. Over the years they have had relatively conservative lending practices and sub-prime loans have not been a feature of the Cayman Islands’ domestic banking system.”

CIMA said its current data showed loan losses to date have been very low and the banks remain liquid and well capitalised.

Meanwhile HSBC Cayman’s latest retail bank has along with four other UK banking giants rejected offers of capital assistance. Along with Abbey and Alliance & Leicester, Barclays, Standard Chartered and Nationwide Building Society, HSBC do not intend to use the UK government’s recapitalisation initiative. Last week HSBC unveiled its own plan to inject £750m – about 1 per cent of total shareholder equity – into its UK subsidiary HSBC Bank.

Share prices rebounded around the world and frozen interbank lending markets showed some signs of thawing on Monday. The FTSE 100 recovered almost half of last week’s losses to close 8.3% higher, up 325 points at 4,256.9. It was its second-biggest one-day percentage rise ever. The Dow Jones in New York closed up 7% following the largest one-day points gain in its history, as dealers on bothsides of the Atlantic said the financial world had stepped back from the brink of disaster – for now at least.

The resurgence in the markets followed the release in London and Europe of details of the multinational attempt to refloat the crippled banking system.

Here in Cayman the offshore banking world was not expected to suffer adversely with Cayman’s experts predicted the sector would weather the storm. The vast majority of the near 300 banks licensed in the Cayman Islands are branches or subsidiaries of banks with headquarters in the major onshore financial centres but very few of them conduct actual "investment banking" activities on the island.

“By being established in Cayman, these institutions are able more efficiently to conduct international business for their groups within Cayman’s regulatory framework, as well as take advantage of the tax neutrality offered by being based in Cayman. From our perspective, the credit crisis has not made any difference to these fiscal advantages and we expect that to continue to be the case,” said Philip Paschalides, Partner in the Finance Department of Walkers.  However he did say that Cayman was by no means immune and the credit crisis has had an inevitable impact on the financial services industry “Cayman is too deeply embedded in the markets not to have been affected and the global paralysis of the capital markets has resulted in fewer capital markets and structured finance transactions coming through Cayman in this period,” he added.

However Paschalides said many analysts and commentators believe there will always be a place for investment banking, given how the capital markets, structured finance and securitisation transactions they arrange are so integral to the functioning of our modern economies.

“Indeed, some of these commentators attribute the severity of the credit crisis to the wholesale closure of the securitisation markets; Cayman Islands vehicles, of course, have always played an important role in these financial markets,” he explained.

Jeremy Walton a Partner with Appleby noted that Cayman stood to gain certain advantages as a service provider in the financial world in specialist areas especially in the hedge fund sector and he said their work could also help bring clarity in the wake of the crisis.  “Litigation should at least provide some clarity on issues which have surrounded fund structures for years but have never been the subject of judicial decisions.  This will enable lawyers to advise more definitively and draft with greater certainty, and will in turn assist all industry players in knowing where they stand at the outset of establishing a hedge fund in the Cayman Islands,” he said.

With the whys and wherefores of how the world’s financial markets almost collapsed being endlessly debated Paul Byles of Focus Management said the upcoming regulatory seminar being held at the Ritz Carlton this Wednesday will look at the financial turmoil and the key regulatory issues.

Byles said he felt the crisis was a result of poor regulation in and bad decisions in onshore jurisdictions.

“The real question is whether US regulators will take a balanced approach in terms of how much additional oversight is required when reacting to the crisis or whether they will try to use a sledgehammer approach which will not work for the financial markets,” he cautioned. “Given the political implications in the US (as we saw from the failure of congress to approve the bailout, at first, partially due to their constituents concerns), it is more likely that there will be an over reaction by legislators and we may therefore see excessive additional regulations.”

Julian Black, Partner in the Finance Department at Walkers said that the problems certainly stemmed from careless lending decisions in the context of US residential mortgages.  “US regulators and legislators will no doubt be looking at the shortcomings of all the participants in these markets and we can expect to see a significant reassessment of what is required in regulatory terms to make this sector operate more efficiently,” he said.

 

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  1. Chris Randall says:

    A minor point but, although the RBC may be a branch of the Canadian Bank in legal terms it does not function in that way.  If you go into a branch of RBC in Canada and mention the Grand Cayman operation you are quickly shunted into a side office, where the general public cannot overhear, and any direct connection is vehemently denied.  Similarly the staff of the Grand Cayman bank do not admit to having any connection with the branches in Canada.

    With regard to reporting this would not be an issue if the CIMA were to expand it’s function and become a central bank.  At present interest rates are tied, by the Class A banks, to the U.S.$ rate set by the U.S. Federal Reserve; this is not acceptable as it effectively gives the American Federal Government control over the Cayman Islands economy.   A central bank would also ease the transfer of funds from one Class A bank to another; the present procedure for which is cumbersome to say the least.

    The Cayman Islands currency is 100% backed by invested funds; the same cannot be said of the U.S. counterpart which is backed partially by gold and partially by government guarantee.  Thus the U.S. government can control our inflation rate and may well do so for political reasons shortly after the presidential election if the democratic candidate is successful. 

    We need out!

  2. Tim Ridley says:

    It is very welcome that CIMA has issued a statement on the retail banking situation. But how much better and more informative it would be if the retail banks also themselves issued a statement and  published regular quarterly statements for their Cayman Islands operations so that the community could better assess their strength.

    Two of them (Butterfields and Cayman National) do so and are to be congratulated. I believe Fidelity will give a customer copies of its financial statements on request. The Royal Bank of Canada is a branch (not a subsidiary) of the Canadian bank ( whose consolidated financial statements are regularly published and Canada was recently ranked as having the best banking industry and best bank regulation in the world) so great comfort can be gained from that. But that leaves three, First Caribbean, HSBC and Scotia that are all Cayman incoporated entities that do not release the financials for their Cayman operations (other than to CIMA and perhaps to a select few customers). There is no suggestion currently that they (or their respective parents, who do publish consolidated financials) are other than solid.

    These banks are doing themselves and the Cayman Islands a disservice. So why not contribute to transparency and good governance  and provide reassurance to the community by publishing the financials of the Cayman operations at the same time as they file them with CIMA? If there is still reluctance to do so, perhaps the time has come to make publication a legal obligation for Class A banks doing local business here.