ABIB Rescue Plan Lies in Consolidation

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Banking

Saturday, 29 September 2012 02:30

By Gaston Browne

Antigua St. John’s - In view of the precarious position in which the Antigua & Barbuda Investment Bank (ABIB) has been placed, Member of Parliament for St. John’s City West, Hon Gaston Browne has proposed a plan designed to safeguard depositors and other indigenous banking institutions.

MP Browne’s statement is reproduced in full:

The Antigua Labour Party was briefed a few weeks ago by the IMF officials on the proposed Resolution plan for ABIB. The plan includes the creation of a new bank and the issuance of a recapitalisation Bond of up to EC $340 million to resolve the ABI banking crisis.

In other words, ABI Bank between trading losses and toxic loans now has a gap, a hole of approximately  EC $400 million adjusted for the EC $40 million that has been injected so far into the bank.

We have been reliably informed that many of these loans are toxic, in that they are not securitised and in other instances the supporting assets are not easily realisable, especially in the prevailing economic climate. We were advised that the toxic loans will not form part of the assets of the new bank but will be transferred to a recovery asset management company which is to be controlled by the government. This means that the government and as a consequence taxpayers will be called upon to fill a hole of at least EC $200 million after the realisation of the securities associated with these toxic loans.

It is obvious, based on the magnitude of toxic loans (over 40 percent of total loans) and the attendant losses, that the Central Bank’s Intervention was extremely untimely and that there was some regulatory failure on the part of the Central Bank. In order to protect the integrity of the indigenous banking system, assurances are required confirming that the supervisory and regulatory framework have been strengthened and that there will be no repeat of such a crisis.

The magnitude of the problem is such that the Central Bank was unable to normalise the operations of ABI Bank, which is now a damaged brand that has to be discontinued since banking is based on confidence and trust. This confidence and the fiduciary responsibility to customers have been grossly undermined. The role of the government, if any, in this major bank failure as well as the role of the bank’s directors, who allegedly plundered the bank with their incestrous borrowings should also be examined and appropriate action taken.

When one considers the magnitude of the losses at ABIB and the attendant financial strain of EC $340 million on the government and consequently taxpayers, this supports my earlier view that Antigua & Barbuda is overbanked and that a consolidation of the indigenous banks is required to protect depositors and ultimately taxpayers who will be called upon to fund the humongous losses of weak, undercapitalised and illiquid banks.

Banks in the region and globally have been consolidating for decades into larger and better capitalised entities in order to sustain the stresses from particular and fundamental risks, including those caused by exogenous shocks like the prevailing global crisis -- and to improve profitability through increased economies of scale.

It is very difficult at best and in some cases impossible for small banks to withstand any economic stress and if we do not consolidate them with stronger entities we could end up with more bank failures and potential loss to depositors most of whom are working class people.

Having strong, well capitalised banks to protect depositors is very important in the absence of deposit insurance. It is also very important to protect the government and ultimately taxpayers from the burden of future bailouts in order to preserve the integrity of the banking system.



I know that they are some who will say that consolidation reduces choice and that the concentration of the market could increase costs to clients; but this is not necessarily the case in a heavily regulated oligopolistic market.

In any event, the concentration would not change the market structure, for instance, to a monopoly; therefore, it is unlikely that there will be any such price increase, to include the cost of lending.

I still maintain a preference for a consolidation of ABIB with our own local bank, ACB, which is well capitalised and has a well established track record of strong growth and proven stability. In addition, it would maintain our local ownership pride and seek to create a much larger and well capitalized entity to reduce the risks to depositors and to compete with the other large sub-regional indigenous banks. In the event such a consolidation would weaken and dilute ACB’s capital, then a consolidation with ECAB should be pursued.

It is important for our people to know that even though Antigua & Barbuda, for most of the past three decades, has had the largest economy in the OECS, the largest indigenous banks are in St. Lucia and St. Kitts with in excess of EC $3.5 and $2.5 billion in assets, respectively. None of the indigenous banks in Antigua & Barbuda have a billion EC dollars in assets. So those indigenous banks in smaller markets are up to 3.6 times larger than our largest indigenous banks. Having said this, we must be careful that any future consolidation does not create any entity or entities that are too large to fail.

These are the strong indigenous banks in the sub region, or perhaps other regional banks like Republic Bank of Trinidad & Tobago, which evidently will end up as the owners of the new ABIB on the present trajectory.

Since the government and people of Antigua & Barbuda have to give financial support to this new bank by issuing a resolution bond of possibly up to EC $340 million, I believe that the government should insist  on local ownership.

I am of the view that even the new ABI Bank will struggle to maintain its market share in what is a very aggressive and hostile industry with little growth prospects. I believe that the consolidation with ACB would make better business sense and any dilution of newly combined ACB’s capital could be shored-up in the interim with by the government taking redeemable equity shares in the new combined ACB bank.

There could be also an arrangement in which the government’s share of the profits could be used to retire the resolution bond to save taxpayers from the burden of repayment, and ACB could ultimately buy back the government’s redeemable equity shares from profits. This would be, however, under the strict understanding that the new ACB would be insulated from political interference.

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I believe that this would preserve our ownership, increase the local and regional competitiveness of ACB and ultimately create a stronger institution that could better protect depositors and serve our people. The alternative is to have several weak indigenous banks that are more susceptible to failure and end up forcibly in the hands of expatriate or other regional or sub-regional entities.

I commend those who are offering a public opinion -- even one of a differing view on the issue of consolidation and I trust that the reality of ABIB will convince the public that consolidation is a necessity.

The bright side to this situation is the fact that there is a real effort to save the ABI Bank and restore the confidence in the minds of investors and depositors alike. I applaud the efforts of the ECCB and the new Management and Board of ABI Bank to work assiduously to regularise the financial problems presently facing this Institution, and encourage them to be wary of treating this as merely a symptom without looking for the real problem.

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