SVBLA survival depends on extent of collective responsibility

With the collapse of BAICO and CLICO still fresh in the minds of Vincentians and others in the region, it is easy for panic to be caused in investor populations.{{more}}

Speaking at the annual First Citizens Investment Services 2013 Market Outlook seminar this Wednesday, Brian Glasgow, accountant and partner at KPMG, said what happened recently with the St Vincent Building and Loan Association (SVBLA) is an example of what can happen in nervous environments.

“In the last few days, I think we’ve had an example of the climate of continued uncertainty of some non bank financial institutions,” Glasgow told the audience gathered at the Grenadine House.

“Fortunately, one of the institutions that has been formed to address and to regulate non banking financing institutions, has been able to intervene,” he added, speaking of the Financial Services Authority (FSA), which took over control and management of the Association one week ago.

Over the past three weeks, some investors with the Building and Loan Association have demanded their money from the institution, following the publication, in the Vincentian newspaper, of a letter written by Ministry of Finance economist Luke Browne. Browne’s letter raised questions about the governance and financial strength of the Association. After two weeks, during which the Association is said to have paid out millions of dollars, the FSA, on February 1, assumed management and control of the Association.

“However, for the intervention to have the long term viability, for it to work in the long term, we need to have some extent of collective responsibility. And we in this context mean the stakeholders; not only of the Building and Loan Association, but of the credit union sector, and all the other non banking financial institutions,” Glasgow said.

Glasgow, who was appointed a judicial manager for BAICO following the 2009 collapse of that company, explained that institutions like the Building and Loan Association borrow money from the public at competitive rates, and in turn lend this money as mortgages.

He said these institutions face a serious challenge, when they have a client with a mortgage, and the institution wants to get its money back, but they have to get it back over the life of the mortgage, while if an investor lends money to that institution, that money can be returned immediately, or at worst three months.

“So, if there is panic, you can understand what the challenge is.

“Now these types of non-banking institutions normally have some of their money available in cash. They need cash because some people come for money, sometimes because they need to lend money so they need to have a reserve of cash.

“But when institutions (like) credit unions, building and loan associations and so on keep money, in cash, it is not profitable to them… when they keep cash, sometimes they make less… or at least not much, so it is not profitable for these institutions to hold large amounts of cash….

“Sometimes panic can be triggered off by perceptions. If people’s perceptions are that certain information being presented to them is coming from a reliable source, they will place more reliance on that sort of information than if it came from a source that is not perceived to be a well informed and reliable source.

“So, under these circumstances, when a source of information that is perceived to be well informed (and) reliable, makes certain information to the public domain, it is easy to understand why panic could be the result.”

Browne was present at the seminar when Glasgow spoke on the issue.(JJ)