What was the capitalization status of the financial sector at the end of February 2009?

Dear Editor,

In the March 5, 2009 Stabroek News article titled ‘Bank of Guyana says financial sector adequately capitalized at Dec 2008’ the Bank of Guyana in response to purported continued deliberate attempts to mislead the public on the health of the financial system made it abundantly clear that Guyana’s financial sector was adequately capitalized until the end of December 2008. While a capital adequacy ratio (CAR) of 15.34% is indicative of soundness in an industry, it is not irrefutable proof of invulnerability. That is particularly true when an industry has leveraged heavily on foreign investment beyond the legally mandated limits.

It is also true when an industry is not heavily regulated and is free to engage in risky activity without sanction or in the absence of an effective monitoring system. In a tightly linked industry the CAR is more vulnerable if one player fails causing a ripple effect within the industry and panic from the public. In times when an industry is highly leveraged with potentially risky foreign investment in a global recessionary environment, a high capital ratio is not a conclusive indicator of stability. The example of Clico (Guyana) is instructive. I can bet that it enjoyed a favourable CAR up to the end of December 2008 and we all know what happened by the end of February 2009.

My question to the Bank of Guyana is why stop at December 2008 and why not provide the figures and more importantly the real state of the industry up until the end of February 2009? Since the end of December 2008, Clico (Guyana)’s parent company CL Financial has been in virtual ruins, Clico (Bahamas) has been liquidated and other businesses linked to the parent company are floating in a quagmire.

Since December 2008, the stock markets around the world have plummeted, banks have failed, the entire financial sector has witnessed a frightening unwinding, the global recession has tightened its noose dramatically and the overwhelming prognosis is for continued doom and gloom. Since that time, the Stanford empire, which had extensive tentacles in the Caribbean financial sector, has become the subject of investigations by the US federal government. In a matter of two months since the end of December 2008 the world’s economy and financial markets have gone to hell in a hand basket leading to catastrophic losses.

After all, based on the Bank’s press release investments accounted for 39.9% of the industry’s total assets at the end December 2008. At February 19, 2009 the total foreign currency assets amounted to $83.7 billion, representing 33% of the $252 billion in total assets and comprising foreign currency investments of $68.9 billion and foreign currency deposits of $14.8 billion.

Foreign currency investments therefore represent 27.3% of the total assets of the financial industry of Guyana in a time when foreign markets are wracked with turmoil and failures. Is this level of foreign investment acceptable or even legal based on existing Guyana regulations for the financial sector? Maybe it is time the Bank of Guyana start telling the people of Guyana where exactly this money has been invested and the losses since December 2008 and the scale of anticipated losses in the future rather than provide the public with dated statistics. The Hand in Hand Trust Corporation disclosure is welcome and should be a sign of future conduct from the Bank of Guyana in providing proactive disclosure to the public.

While I understand the need to derail panic within the country, there is also a corresponding duty to prudently disclose information to the public to prevent exactly the fiasco of fear that accompanied the Clico (Guyana) meltdown. Now that the financial industry has “been exercising enhanced corporate governance practices and along with senior management have been very vigilant in the monitoring of their institutions’ foreign investments and have been putting contingency plans in place to deal with any adverse occurrences,” the public should be accordingly fully apprised of developments, good or bad, within the industry and the industry should have such information at its fingertips.

Yours faithfully,
Michael Maxwell

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