KINGSTOWN, St. Vincent, CMC – The Monetary Council of the Eastern Caribbean Currency Union (ECCU) has sought to assure depositors that it has adopted several measures aimed at strengthening the banking system in the sub region.
Prime Minister Ralph Gonsalves, who is also the chair of the Council, told residents in the Organisation of Eastern Caribbean States (OECS) on Tuesday night that the strategy “will result in a stronger banking sector, which, along with other financial institutions, plays an essential role in facilitating economic growth and development in our region.
“The Monetary Council is resolved to do whatever it takes to improve the economic fortunes of our Currency Union. Indeed, we will continue to take deliberate and concrete steps to stimulate economic activity and strengthen our banks as we work assiduously to help secure a better and brighter future for all our citizens and residents,” Gonsalves said as he praised several regional and international governments and financial organisations for their “significant technical and financial resources required to implement successfully these decisions”.
Gonsalves told the populations in Antigua and Barbuda, Dominica, Grenada, St. Lucia, St. Vincent and the Grenadines, Montserrat, St. Kitts-Nevis, the British Virgin Islands and Anguilla that the Monetary Council at its last meeting in February had adopted “several vital decisions” that “touch upon our lives and living, our socio-economic well-being”.
He said since it was created in 1983, the ECCU has had to deal with changes in the global environment and as time changes “all of us must be ready to adapt.
“Thirty two years later, since the founding of the Central Bank, our region is slowly recovering from the effects of the Great Recession, that period from 2009-2012, particularly. Of course, the effects of the recession are still with us. The pain is still here.
“In that period of the Great Recession and the period immediately thereafter, many of our economies contracted following the global economic and financial meltdown of 2008,” Gonsalves said, noting that in 2014, economic growth in the sub-region was 2.4 per cent.
“This is good news. Our regional economy is starting to improve. Notwithstanding this improvement, our economies continue to face challenges to sustainable growth, fiscal and debt sustainability and financial stability. The Monetary Council desires to see faster economic recovery and stronger job creation.”
Gonsalves said as a result the monetary Council has agreed to lower the minimum deposit rate from three to two per cent in order to spur economic development.
He said the last occasion the rate was reduced was in 2002 defending the new rate policy.
“Our banking system has a lot of money – excess liquidity, yet credit to the private sector (new loans) is declining. Last year, despite the fact that the banks had excess liquidity, credit declined by 4.5 per cent. Declining credit to the private sector makes economic recovery slower. This situation has to change.”
Prime Minister Gonsalves said at the same time, non-performing loans in the banking system are very high and average 18.8 per cent across the ECCU, largely because of the difficult economic situation in many of our countries.
“High non-performing loans make our banks less willing to lend and weaken our economies. This situation must change. 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.”
Prime Minister Gonsalves said as a result of the lower rates, banks in the ECCU will have a lower cost profile.
“Combined with the economic recovery taking place in our economies, we expect to see banks start lending more to the private sector. There are too many potentially good businesses struggling to secure working capital and struggling to survive. Some of these businesses are paying very high interest rates on loans from our commercial banks.
“As a consequence of the lower deposit rate, we anticipate a lowering of interest rate spreads. More importantly, we expect to see businesses pay lower interest rates on loans provided by our commercial banks.
“We are especially keen to see lower interest rates for all export-oriented firms. We would also like to see interest rates on mortgages continue to fall so that more of our people can afford to own a home,” he said, noting that even with this reduction, the rate on savings in the ECCU remains higher than the rate in Trinidad and Tobago, Canada and the United States.
He said the new deposit rate will take effect from May 1.
Gonsalves also said there was needed to further strengthen the regulatory and supervisory framework for banks, noting that since 2009, “our banks have recorded declines in profitability and performance” and the global crisis has led to significant contraction in domestic economies and increases in non-performing loans.
He said these experiences led to the Monetary Council’s decision to pursue a comprehensive bank resolution strategy aimed at strengthening the resilience of the financial system in the ECCU.
He said the strategy would allow for the protection of all depositors by ECCU governments as well as the implementation of a new Banking Bill that provides for the issuance and revocation of licences by the Central Bank rather than the respective Ministers of Finance.
In addition, the legislation provides for pre-emptive measures to deal with problem banks as well as ensuring appropriate levels of capitalisation for banks and credit institutions and clear criteria for the persons who can be appointed as directors and managers of banks.
Gonsalves said in addition, other measures including amendments to the 1983 ECCB Agreement Act , the drafting of regional foreclosure legislation to allow for more efficient management of collateral by financial institutions and the establishment of the Eastern Caribbean Asset Management Corporation were also approved by the Monetary Council.
“Ultimately, our strategy will result in a stronger banking sector resulting in greater financial stability and faster economic progress. The measures that we have taken are to ensure that your deposits are safe,” Gonsalves said, adding that a decision had also been taken to extend the timetable to reduce the debt to gross domestic product (GDP) ratio to 60 per cent from 2020 to 2030.