Governor of ECCB - Sir Dwight Venner
Local commercial banks have no liquidity problems, according to Sir K. Dwight Venner, Governor of the East Caribbean Central Bank (ECCB).
A US.1 million Banking Sector Reserve Fund was established for St. Kitts to provide emergency liquidity support for the banking sector if the need arises. The Observer inquired if the cash reserve was established in light of any solvency issues within the local banking sector. Sir Dwight said to the contrary, the commercial banks in the Federation were extremely liquid (having assets in the form of money or easily convertible into money).
“The liquidity in the whole banking system has increased significantly and there is a liquidity support program in the Fund for St. Kitts, but it’s not needed right now. It hasn’t been touched at all. It’s insurance,” he explained.
According to the East Caribbean Currency Union’s 71st Monetary Council Meeting communiqué issued October 21, “Liquidity in the banking system continued to improve due largely to increases in grant and official inflows. Commercial bank deposits rose by 1.4percent, roughly the same as the outturn in the second quarter of 2010.”
Sir Dwight stressed that countries routinely stockpiled reserve funds in times of crisis and the liquidity support fund was simply “insurance” in the face of future risk. He said the fact that it has not been drawn on to date is a positive indication of the stability of the banking sector.
“Those people who have weathered crises before stock pile reserves just in case. It happens. You would do that too if you know you’re going to face some risk in the future. So that’s what we’ve done and that is what is keeping the situation very stable so far. But we have to stretch out and see, if growth doesn’t occur we are going to have more pressures and you have to have a cushion and that is why we have these reserves. So that not being touched is a good sign.”
When asked if public stakeholders had a right to know if any commercial bank was having liquidity problems, Sir Dwight said the authorities were not required to go public with such information. Instead, he pointed out, the ECCB would intervene to prevent a run on the bank that would only exacerbate the problem.
“We wouldn’t come out and announce that this bank is under significant stress because you would go there the next day for your money and that would compound the problem. What we would do, like we’ve done in Antigua, is to intervene to make sure that that situation does not persist. That’s our job in the system. So once we see those signs our job is to intervene to make sure that it does not become a reality,” he said.
The staff report for the 2011 Article IV Consultation on St. Kitts-Nevis and Request for US$84 million Stand-By Arrangement (SBA) states however that the in light of its debt sustainability issues authorities “increasingly sought recourse to domestic financing, which has further increased the exposure of the banking sector to the government”.
“Of the total public debt estimated at US$1.05 billion (about 200 percent of GDP), the banking sector held about 46% at end-December 2010… The banking sector’s capital adequacy ratio, at 46%, remained well above ECCB’s regulatory requirement of 8%. However, the high CAR might overstate the strength of the banks since some banks are highly exposed to the government and government debt is zero risk weighted.”
Capital Adequacy Ratio (CAR) is a ratio of a bank’s capital to its risk which regulators track to ensure that a bank can absorb a reasonable amount of loss.
The IMF publication also noted that the net liquid assets ratio of the overall banking sector declined slightly from 44% of total deposits at end-December 2009 to 42% at end-December 2010, but was “still significantly above ECCB’s prudential guidelines of 20-25%”.
Sir Dwight, in the ECCB Annual Report for the period ended 31 March 2011, had informed that liquidity challenges in the region’s commercial banking sector persisted throughout 2010.
“The ratio of liquid assets to total deposits, plus liquid liabilities fell to 27.2 percent from 29.6 per cent at the end of 2009, while the ratio of liquid assets to total assets fell to 20.0 per cent, from 22.3 per cent a year earlier.”
Following last week’s meeting of Finance Ministers of ECCU member states, the Monetary Council said it is of the view that financial sector stability continues to be the “highest priority at this time”.
Article By L.K. Hewlett for St Kitts Nevis Observer
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