Not Rumours Or Baseless Statements

The discussions about economic and financial issues is heating up, and it's getting very political very quickly. Some local commentators, notably The Barbados Advocate, has had a beef about remarks that it implies are reckless and baseless. People here are struggling to get a good handle on what is going on, and that is a recipe for heightened, not lessened, concerns. Almost on cue, comes a Lone Ranger.

The IMF is often reviled but one thing it does is look at economic and financial issues in depth and tends to do that for every member country, so has immense international expertise built up over decades. The IMF made its annual check-up visit to Barbados soon after the change of government last year (March-April 2008). Part of its mission's work was to prepare a 'Financial Sector Stability Assessment' for Barbados, and this was published in a 'timely' manner last week, on February 20 (see report). We need to note that the assessment was completed last summer, since when economic financial developments worldwide have worsened, and the region has been hit by two major financial headwinds with CL Financial's Trinidad operations needing a bail out and Antigua-based Stanford International Bank and its owner Sir Allen Stanford facing US$ 8 billion fraud charges by the US Securities and Exchange Commission.

Readers of the report will focus on different things. But, for me, the report flagged a pertinent problem as seen some 9 months ago. The reports says 'Barbadian financial system has proved to be resilient and, so far, has not been affected by the turmoil in mature financial markets'. But it sent out a salient warning for the insurance sector:

• The lack of adequate supervision of the insurance sector exposes the sector to material risks. Profitability and capital adequacy in this sector are difficult to assess due to incomplete and inadequate data. Single negative events may significantly damage the reputation of a jurisdiction in an increasingly regional and global market. Although the mission noted the introduction of on-site inspections, the sector remains largely self-regulated owing to continuing shortages of qualified staff, inadequate regulation, and out-of-date financial reporting. Greater cooperation and exchange of information, particularly with the authorities in Trinidad and Tobago, are necessary to facilitate effective assessment of financial soundness and the protection of Barbadian policyholders by the supervisor.

Key recommendations for the financial sector included:

For the banking sector:

• Strengthen cross-border consolidated supervision, including establishing a clear legal framework for the consolidated supervision of banking groups and enhancing home/host cooperation.
• Strengthen regulation and supervision for large exposures and related-party exposures, including setting up the regulatory aggregate limits on total large exposures and related-party exposures on a consolidated basis.

For the insurance sector:

• Develop standards on corporate governance, market conduct, internal controls (including asset and derivative controls, particularly in the case of the offshore market), asset and liability valuation, and a solvency standard for life insurers with a view to enhancing the observance of the IAIS principles.
• Improve the timeliness of supervisory returns, and redesign processes for onsite inspection, and offsite analytical support.
• Collaborate with the Trinidadian authorities in the supervision of larger cross-border groups.
  

In IMF-speak, they saw major problems in the fact that supervision was inadequate and that collaboration was weak between national authorities concerning enterprises that worked across their borders. Put a little less nicely, things were not really being taken as seriously as they should be and there was a certain parochial coziness that could facilitate some major problem.

I will let this report percolate a few days and see what is made of it.