Monetary Council moves to strengthen ECCU banking sector

The Monetary Council, in an attempt to spark faster economic recovery and stronger job creation, has taken several important measures to strengthen the financial system of the member states of the Eastern Caribbean Currency Union (ECCU).

This was announced on Tuesday, April 14, by the Prime Minister of St Vincent and the Grenadines Dr Ralph Gonsalves — who is the current chair of the Eastern Caribbean Central Bank (ECCB) Monetary Council.{{more}}

Noting that growth in the ECCU had increased last year from 2013, Gonsalves said: “Notwithstanding this improvement, our economies continue to face challenges to sustainable growth, fiscal and debt sustainability, and financial stability… after much reflection, deliberation and careful contemplation, we in the Monetary Council have made some very important decisons.”

The decisions, which were made at the last meeting of the Council in February, include: the lowering of the minimum savings deposit rate, a stronger regulatory and supervisory framework for banks, and the extension of the timetable for meeting the debt target.

“Our strategy will result in a stronger banking sector, resulting in greater financial stability and faster economic progress,” he explained.

Lower minimum savings deposit rate

Gonsalves pointed out that although the ECCU banking system has a lot of money, credit to the private sector — new loans — has declined by 4.5 per cent, and declining credit makes economic recovery slower.

In addition to this, non-performing loans are “very high” across the sub-region because of the difficult economic situation many member states are facing.

“High non-performing loans make our banks less willing to lend, and weaken our economies… In the face of declining profitability or losses, banks have sought to lower operating expenses. This cost reduction effort has led to the closure of several branches in the ECCU and beyond.”

Gonsalves further explained that this decision to lower the minimum deposit rate — which will take effect from May 1, 2015 — will give banks a lower cost profile, and, therefore, prompt these institutions to lower interest rates on loans.

“There are too many potentially good businesses struggling to secure working capital and struggling to survive,” he noted.

Stronger regulatory and supervisory framework for banks

Assuring those within the ECCU that their deposits are safe, Gonsalves stated that the Council has approved a new Banking Bill that will provide for the issuance and revocation of licences by the ECCB; pre-emptive measures to deal with problem banks; appropriate levels of capitalization for banks and credit institutions; and will provide clear criteria for the persons who can be appointed as directors and manager of banks.

Additionally, the Council has approved amendments to the 1983 ECCB Agreement Act to “strengthen the powers of the Central Bank” and has approved the drafting of regional foreclosure legislation to allow for more efficient management of collateral.

The Council also approved an agreement and draft bill to establish the Eastern Caribbean Asset Management corporation, which will assist with the management of non-performing loans. Moreover, a Deposit Insurance Fund will be established — details of which will be elaborated on when the fund is finalized.

Extension of timetable for debt target

Prior to 2008, a target of 2020 was set by which to reduce the ECCU’s debt/GDP ration to 60.0 per cent. However, the Council has changed this target to 2030.

“Attaining this target by 2020 required prudent debt management and continuous economic growth at a level sufficient to meet the target,” said Gonsalves. “Unfortunately, there had been little or no growth in the ECU for most of the past five years.”

He pointed out that this target was set before the global economic recession, and since then, even the Euro Zone has extended its own timetable to “reflect its current reality of little or no growth”.

“The Eastern Caribbean Currency Union, too, must adapt to its current reality… Member governments have resolved to pursue appropriate fiscal consolidation measures. Indeed, most governments have already commenced these measures. It is likely some countries will achieve this target before 2030.”

Gonsalves also thanked several development partners for their support, which included Canada, the United Kingdom, the United States, the European Union, the International Monetary Fund, the World Bank and the Caribbean Development Bank.

“The Monetary Council is resolved to do whatever it takes to improve the economic fortunes of our Currency Union,” he asserted. “We will continue to take deliberate and concrete steps to… help secure a better and brighter future for all our citizens and residents.”