The Clico crisis follows closely the story of the global financial meltdown. Essentially, the regional financial crisis represents the culmination of regulation failures, out of control financial globalization and financial liberalization, and a problematic view of the role of finance in economic development.
At present, our local/regional regulators use a supervisory approach which places significant importance on commercial banks, while neglecting other non-bank financial institutions such as insurance companies, trust companies, and other financial services providers. We use the word ‘neglect’ since the mechanism that we have in place to supervise non-bank financial institutions are not as robust as those we have for monitoring the banking system.
The existing supervisory framework also fails to take a complete view of firm-wide risk of financial institutions since it focuses on the internal operations of individual institutions. In other words, the current framework focuses on each financial institution independent of its parent and/or subsidiaries.
Additionally, while the existing supervisory approach considers the impact of risk management practices on an individual institution it does not consider how external factors may impact on individual institutions and the financial system as a whole. It is for this reason the regulators are unable to inform the public of the true impact of the Clico debacle on the domestic financial system.
Given all the deficiencies in our regulatory framework it is no surprise that the risk associated with the activities undertaken by the cross-national subsidiaries of Clico went undetected for so long.
To prevent the recurrence of Clico, it is therefore important that our regulators take steps to improve their regulatory framework. In this regard, the following should be considered:
1. The time for consolidated supervision is now. This approach to supervision should take a firm-wide perspective of the risk exposure of financial institutions.
2. Number 1 would require regulatory coordination at the Caribbean level. As far as we are aware there is no unifying regional institutional framework for regional coordination and supervision. This would not only complement consolidated supervision but help to eliminate regulatory arbitrage which often motivates the kind of complex operational structure that Clico developed.
3. Consolidated supervision could be buttressed with the adoption of risk-based supervision which is a flexible supervisory approach that caters for almost any financial institution and product. Risk-based supervision goes beyond the avoidance of existing risk and focuses more on risk management.
4. The regulatory institution also needs to impose a greater disclosure requirement by financial institutions as it relates to risk management. At the moment, accounting standards only require that a financial institution highlight certain standard risk exposure – for example, foreign exchange risk exposure, credit risk exposure and so on. This disclosure requirement should be expanded to include other risks.
For instance, companies which are highly diversified like Clico should be required to disclose information on their operational risk which would give an indication of the capacity of the institution to be engaged in cross-sectoral activities.
This type information would also be more meaningful if financial institutions are required to disclose the mechanism they have in place to manage these risks.
5. Given the rapid pace at which financial institutions are expanding and diversifying their activities it is important that diversification guidelines be developed at the local and regional level.
6. The local supervisory framework should be expanded to treat non-bank financial institutions – including pension funds – with the same importance as commercial banks. It should also be adjusted to capture systemic risk, contagion, and include early warning systems.
7. Since our local financial institutions are engaged in higher risk activities, there is an urgent need to have deposit insurance to protect local investors/depositors.
8. The local and regional regulatory bodies must build-up their capacity to research, analyze and anticipate dangers and changes in global financial and economic circumstances. In other words, they must address regulation in a holistic and forward looking manner.
9. Unfortunately some practitioners in the financial system are devoid of ethical values. This is not unique to Guyana and the region but seems to be a universal problem today. As such, our regulator needs to place greater emphasis on corporate governance. While it is not possible to legislate ethical values, we have to develop more punitive laws to deal with malpractice by those who are responsible for managing our funds.