Global Banking Issues and the Impact on Financial Services in The Bahamas Presented by Governor John Rolle IBFS Summit 2 nd March, 2018
2 Some High Level Observations Balance sheet adjustments have been exaggerated relative to shifts in economic impacts & employment Adjustments to international forces expose tensions between domestic and international sector Latest impacts from client regularization of tax compliance status may not be not as damaging as feared Proactive as opposed to reactive stance is needed; with fact based appeals to global community.
3 Some High Level Observations Application of KYC and CDD frameworks remained too stagnant as global frameworks shifted more to risk based approach; Detrimental effects on ease of access to domestic financial services [Current FATF guidance encourage adaptation of standards; similar expectations for safety and soundness regulations that apply to supervision of sector] At risk: domestic systems for monetary and financial system: BEPS raises transparency and level playing field questions about At risk fiscal systems: tax reform of international sector could, if done poorly, undermine domestic source revenue, increase fiscal exposure to less reliant revenue; increase cost of revenue administration; introduce inefficient arbitrage if personal income taxes excluded
International Developments Impacting the Jurisdiction FATF focus on adequacy of ML Standards AML/CFT Requirements Correspondent banking challenges (de-risking) Shifting business strategies/models Tax & Information Exchange: FATCA, CRS, and BEPS Global financial crisis and great recession : strained fiscal resources (having to rebuild buffers) Fintech & Digital Currencies
AML/CFT Ongoing impact of FATF Recommendations & Standards Invoked legislative changes in in the Bahamas (2000) Introduced a new compliance infrastructure Introduced structural shifts in sector
6 AML/CFT CFATF Mutual Evaluation Reports Emphasis now placed on technical compliance and effectiveness in practice Highlighted gaps including absence of a National Risk Assessment (NRA) New outcomes: NRA & Coordinated strategy to address AML/CFT risks identified systemic weakness.
7 AML/CFT The Central Bank s response:- shifting to continuous supervision performing risk-focused assessments more targeted examinations of SFI s compliance programs supporting inter-agency co-operation in the AML/CFT arena
AML/CFT Dec. 2017: CBB surveyed the Bank & Trust Sector. Results: For International Firms A broad spectrum of Correspondent Banks Near zero cash deposits/transactions Typically low volume of activity within customer accounts For Domestic Firms Continued improvement in the number of unverified accounts
9 DE-RISKING To combat de-risking, banks must:- stay abreast of legal and regulatory changes adapt and evolve to retain their CBRs leverage available technology (to reduce the costs and inefficiencies) continue to demonstrate commitment to their AML/CFT compliance programs These complement policy level actions.
IMPACT of International Regulatory Initiatives Increases uncertainty in the sector Erodes the historical competitive advantage of The Bahamas Increases SFI s compliance burden, reporting obligations and the risks and costs of servicing clients Requires a new value proposition Compels an innovative response May re-shape domestic policy
IMPACT of International Regulatory Initiatives Reshaping domestic policy Tax reform policy and BEPs analysis could expose unnecessary threats to monetary and fiscal stability Corporate vs personal taxes; rates of taxation; exchange control/national investment policy Resources & capacity constraints in policy and technical responses point to suboptimal regulatory structure at agency Examples: regulatory guidance notes; risk-based supervision, onsite supervision
Fintech Innovations Public policy should not stiffle: Developing standard setting bodies consensus is to regulate where financial stability other systemic risks emerge; scale of impact will matter for timing of action. Bahamas will need a forward looking, proactive regulatory infrastructure: Being forward looking as to the market conduct risks for cryptocurrencies Avoid any posturing based on adverse international regulatory arbitrage
Fintech Innovation In The Bahamas, Fintech companies (and digital currencies) have the potential to:- reduce our reliance on physical bank branches, cash and cheques promote financial inclusion lower transaction costs and expedite service delivery introduce better and more tailored financial services
Some Data 14
Economic Contribution Expenditures of the Banking Sector (B$M) 800 700 600 500 400 300 200 100 0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Staff Other GovFees
16 Sector breakdown of Bank s contribution (B$ Millions) 800 700 600 500 400 300 200 100 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Domestic International
In 2000, The Bahamas overhauled its legislative system to enhance financial supervision, and deter money laundering and other criminal abuses. These developments have impacted the composition and number of licensees
Shifting business models In an effort to eliminate shell banks, physical presence requirements were introduced in 2003 Almost all licensees are now physically present.
Shifting business models Employment Implications of Physical Presence Requirements 6000 Total Employment in Banking Sector (Bahamians vs. Non-Bahamians) 5000 4000 3000 2000 1000 0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Bahamians Non-Bahamians Total employment
1400 Shifting business models Employment in International Banking Sector 1200 1000 800 600 400 200 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Bahamians Non-Bahamians Total Employment
Shifting business models Employment in Domestic Banking Sector 4000 3500 3000 2500 2000 1500 1000 500 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Bahamians Non-Bahamians Total
4000 3500 3000 2500 2000 1500 1000 Employment in Domestic Banking Sector 1400 1200 1000 800 600 400 Employment in International Banking Sector 500 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Bahamians Non-Bahamians Total 200 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Bahamians Non-Bahamians Total Employment
These and other changes have resulted in a decline in both Public and Non- Public licensees Shifting business models
Bank s Balance Sheet 700,000 Total Claims and Liabilities in the Int'l Banking Sector (in USD millions -- BIS Data) 600,000 500,000 400,000 300,000 200,000 100,000 0 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Total Assets Total Liablities
25 Having international voice is important Mechanisms and forums exist to voice concerns on impact international standards. Evidence or data based interventions are more effective ways to persuade change than anecdotes. CARICOM (Both at the political and agency levels of governments) IMF/World Bank (Political representation) FSB Regional Consultative Group for the Americas OECD Global Forum; CFATF, Many other industry specific regulatory bodies
Conclusion The financial sector in The Bahamas remains under significant international pressures More reforms at the structure of the regulatory systems will have to be prioritized Further clarity is needed on the value proposition to skillfully navigate adverse spillovers on domestic policy space
Thank You!