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Transcript
3rd Biennial International Conference
on Business, Banking & Finance
Panel Discussion:
“Revisiting the Financial Conglomerate Model The Trinidad Experience”
Catherine Kumar
President
Bankers Association of Trinidad & Tobago Limited
May 28, 2009
Road Map
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Regional Financial Landscape – The Background
Previous Financial Business Models
Major Risks Inherent in the Model
Expected Benefits of Expansion
Expansion Options
Financial Conglomerate Structures
Attendant Risks
Moral Hazard
Financial Critical Success Factors
Institutions Act 2008
The Way Forward
2
Regional Financial Landscape-Background
•
Has its moorings in plain vanilla commercial banking dominated by small
local subsidiaries of large Canadian Banks
•
Nationalization of these subsidiaries closely followed
•
Product suite was limited and capital markets were still a concept
•
Provided the impetus for the transformation of the regional financial
landscape to go beyond commercial banking and to include activities such
as:o
o
o
o
o
o
Merchant Banking
Investment Banking
Trust Services
Stock and Fixed Income Security Brokerage and Trading
Financial Advisory
Insurance and Pension Funds
3
Previous Typical Financial Business Models
• Basic Business models:Banks:
Insurance Companies:
Life Insurance:
General Insurance:
Pension Funds:
Deposit taking institutions which earn
profits principally from the lending of
funds
Insurance premia (net of statutory fund
requirements) generally invested in long
term assets
Net premia invested quality short term
assets
Both insured and deposit administration
contracts and investments in long-term
assets
Banks and Insurance Companies were generally stand alone entities
4
Major Risks Inherent in these Models
• Liquidity risk –arising from asset/liability mismatch
• Credit risk – both from a loan portfolio and investment book
perspective
• Concentration risk – markets were small and exposure to key
credits were becoming significant
– Continued growth in profitability was capped by limited market
size and emerging signs of saturation.
5
Expected Benefits of Expansion
• Presented regional financials with a new realm of opportunities
namely:o
o
o
o
Ability to grow balance sheet
Ability to diversify revenue streams away from the vagaries of
domestic or home markets and reduce concentration risk
Ability to expand product suite to include previously
untraditional business lines e.g. brokerage, capital markets,
high end real estate and commodities etc.
Regional financials were able to pursue comparatively higher
return investments, thereby enhancing revenues and
profitability
6
Expansion Options
• Mergers and Acquisition
– Successfully used by a number of indigenous and regional
financial institutions during their expansion phase.
• Portfolio investments
– Utilized as a stepping stone into a new market without attracting
the initial start-up costs
• Establishing a greenfield “mortar and bricks branch” in
the new market
7
Financial Conglomerate Structures
• Can be subdivided into:– Pure Financial Conglomerate
• Consists of a group of financial companies providing a variety
of near to full range of financial services
– Mixed Financial Conglomerate
• Group of companies with different business lines i.e. financial
and non-financial
• Group is usually headed by a non-financial entity that is not
regulated by a financial services regulator
• Financial companies are imbedded within the structure
8
Attendant Risks
•
Business Risk:
–
•
Understanding of varied businesses in the Group
Corporate Governance Risk:
Increasing complexity of the conglomerate structure may be too great for
risks to be managed.
–
Brings to bear issues such as:Human Resource
Does the organization possess the necessary wide skill set at the Board and/or
operational level to fully understand the type or level of risks involved?
Processes
Does the organization have systems and procedures which reflect its
complexity and allow for convergence into one platform, where necessary?
•
Legal and Reputational Risk.
9
Attendant Risks Cont’d
• Regulatory Risk:
–
The Regulators also face challenges in the relevance of its
structures, monitoring and regulatory approach with similar
emphasis on its HR skill set and processes.
–
Regulators encounter challenges given that conglomerates
span over a number of industry sectors, some of which are not
actively regulated or not regulated at all.
–
Regulatory Arbitrage.
10
Attendant Risks Cont’d
• Contagion Risk:
–
Created by the diverse and wide geographical reach of the
conglomerate structure
–
Exacerbated by the regional integration and interdependence
of our markets
11
Moral Hazard
TOO BIG TO FAIL
12
Financial Institutions Act 2008
Type of Risk
FIA 2008 Response
Corporate Governance Risk
• Requires the establishment of policies and procedures for
transactions with connected parties and employees.
• Mandates the establishment and maintenance of information on
credit exposures
Regulatory Risk
• Capital Adequacy, solvency requirements are applicable to the
licensee on an individual basis and on a consolidated basis
where the licensee has subsidiaries or companies over which it
has significant control
• Establishment of a financial holding company.
Contagion Risk
• Banks restricted to banking and business of a financial nature
• Restriction on assets that can be held by licensee including:– No more than 25% of the capital base in property
development companies
– No more than 10% of the capital base in insurance
companies
• Restriction on the activities of financial holding companies
Represents the regulatory response in part to the risks attaching to the financial conglomerate model
13
Critical Success Factors
• The financial conglomerate model has worked where
there is:o
o
o
o
o
o
o
o
Strong corporate governance
A clear understanding of the business risks within the group
Robust enterprise-wide risk management
A long term organization view (as supported by culture) of
creating value as opposed to reaping short term gains
The ability of organization to quickly assimilate acquisitions
and realize promised benefits and synergies
The maintenance of positioning within one’s respective area of
core expertise
Minimized exposures to connected parties
Understanding of the risks associated with new markets and
the mitigation of same
14
The Way Forward
•
Roll out new legislation for the regulation of the insurance, pension funds,
credit union sectors and securities industry throughout the region.
•
Require the cross-border sharing of information and resources by all
regulators in the region.
•
Silo financial activities from non-financial activities by restricting the ability of
financials to depart from their core area of expertise.
•
Cap the exposure to connected parties within a financial group. (FIA 2008
recommends 10% of capital base).
•
Secure experts/highly skilled resources for the Regulatory Authorities.
•
Continue the discussion on the pros and cons of an integrated supervisor
with a view to arriving at a regional position.
•
There has been much discussion throughout the region on convergence of
financial legislation and regulations but the industry awaits some feedback
to the many comments provided to date.
15
Thank You
16