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1. The Financial Crisis to date has claimed several venerable names and may yet claim more Investment Banks.

2. The Investment Banking Industry in the Caribbean is extremely important:

- Contribution of Investment Banking Sector

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- Emp – (1000 – 2000)- Profits – USD 200MM- Raising Capital - USD 1.5 Billion- Funding Projects - USD 250MM

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2. It is therefore natural to enquire and to examine

whether or not the Investment Banking Industry

in the Caribbean is exposed in the same way or

will be susceptible to contagion via transmission

mechanisms.

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HYPOTHESISThe current Financial crisis stemmed from a

deterioration in credit quality (sub-prime Loans)

which was exacerbated by Liquidity crisis in US

Investment Banks (which typically fund their assets

with wholesale short-term Liabilities) but which

was further compounded by Mark-to-Market

(MTM) Accounting convention.

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CAUSES AND AMPLIFIERSA. Sub-prime Lending and the Lowering of Credit

StandardsB. LiquidityC. Mark to Market AccountingD. Excessive LeverageE. Exposure to DerivativesF. Off Balance Sheet FinancingG. Inability to access Federal Reserve FundingH. Lack of on-site supervisionI. Credit Rating Agencies

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SUB-PRIME LENDING AND THE LOWERING OF CREDIT STANDARDS

In a nutshell, global liquidity from China and

other current-account surplus countries was

directed towards the US and UK which then

inflated asset markets (especially housing) which

was plagued by poor regulation and dangerous

incentives.

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By contrast, Caribbean Investment Banks have little or no exposure to US Sub-Prime Loans, very little exposure to mortgages generally and are currently exhibiting non-performing ratios of less than 2.5%.

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LIQUIDITY

US Investment Banks are particularly vulnerable

to credit-market turmoil, because they rely on

funding from wholesale markets, much of it short-

term including over-night funding in repurchase

markets. This 4.5 Trillion Market became unstuck

during the crisis.

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Caribbean Investment Banks, unlike their US and

UK counterparts raise their liquidity via deposits.

Furthermore, if they ever run into difficulty, they

can go to their parents which are usually

commercial banks. Due to their lower reserve

requirements they are often more competitive

than their retail and commercial counterparts.

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LIQUIDITY RISK This situation is further compounded by the fact

that there is what I have described as a liquidity

trap whereby, due to poor transmission

mechanisms. (from local to foreign currency)

local liquidity is actually trapped in the local

financial system and keeps “slushing around”

moving to where it attracts the highest internal

rates.

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REGULATORY ARBITRAGE

Regulatory Arbitrage means that because the range of

investment opportunity is limited for regional

institutional investors even more liquidity is trapped

in the system.

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MARK TO MARKET ACCOUNTING AND THE PREPONDERANCE OF TRADING ASSETS OF THE BALANCE SHEETS OF INVESTMENT BANKS

Fair value accounting can cause a downward

spiral in prices by encouraging institutions to sell

assets quickly and forcing them to take write-

downs that do not reflect the “true” value of the

underlying assets.

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In respect of Caribbean Investment Banks,

although MTM accounting is in effect, the

component of their balance sheet which is

affected by this convention is still relatively small

when compared to North America Investments

Banks.

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EXCESSIVE LEVERAGE US Investment Bank were allowed to leverage their

Balance Sheet to levels unheard of in the Caribbean.

The Leverage ratio of Bear Stearns rose from 26 Times (assets were 26 times equity) in 2005 to almost 30 times at the time of its collapse in 2008.

Under the FIA Trinidadian Merchant Banks are limited to 12 times their capital

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EXPOSURE TO DERIVATIVESAccording to the Economist Magazine (May 7,

2008) approximately half of the write-down of

banks was due to the exposure to derivatives

which contained synthetic exposures to sub-prime

assets (CDO’s) and credit default swaps.

In the case of Caribbean Investment Bank, this

exposure is almost non-existent.

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OFF BALANCE SHEET FINANCING AND EXPOSURE TO SIV’S

US Investment Banks accounting under US GAPP,

typically allowed for SIV’s which are akin to a

“shadow banking system” in which short-term

funding was raised (at lower interest rates) and

later invested in long-term higher yielding assets.

Quite often these structures were not

consolidated

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and therefore provided a false sense of security in terms of

the bank’s capital adequacy ratio. Citi had more than 83

Billion in SIV’s in September 2008.

Caribbean Investment Banks typically use IFRS. In this

regard, IAS 39 and SIC 12 would require these enterprises

to consolidate any “SIV” or SPV once they retained an

economic interest in the enterprise.

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INABILITY TO ACCESS (IMMEDIATELY AVAILABLE) EMERGENCY FINANCING FROM THE FEDERAL RESERVE Because US Investment Banks did not come under the

jurisdiction of the Federal Reserve they did not have

access to Federal Financing.

Investment/Merchant Banks in the Caribbean are

regulated by the Central Bank and by virtue of this, have

access to Central Bank Financing via the repurchase

market

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REGULAR BANK SUPERVISIONBecause regional banks fall under the supervision of

the Central Bank, they are subject to regular on-site

inspections by the regulators.

US Investment Banks were not subject to such

routine regulation which would have alerted the

authorities to the impeding danger.

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THE ROLE OF CREDIT RATING AGENCIES

The legitimacy and stamp of approval of Credit Rating

Agencies undoubtedly contributed to the crisis.

As these assets began defaulting the Credit Rating

Agencies downgraded these assets further

exacerbating the situation on account of the MTM

accounting convention thereby forcing further sales.

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In the case of Caribbean Investment Banks and

Institutional Investors Credit Rating Agencies played

and plays no such role. Indeed, Pension Funds are

mandated as to what investments they can invest in

statutorily so that you do not have this vicious cycle

and therefore no compulsion to sell.

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CARIBBEAN INVESTMENT BANKING MODEL Regional Projects Requiring Financing Up to USD

250 MM

Non-Investment Grade Projects

Projects with a pay-back period of 10-20 years

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Basic Infrastructure financing (Toll Roads, Airports, Seaports, Hydro-plads)

Local Private Placement Issues

144 A Issues

REG: S. Issues

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PROFILE OF INVESTORS

LOCAL INSTITUTIONAL INVESTORS

LOCAL BANKS

US INSTITUTIONAL INVESTORS

CENTRAL AMERICAN INSTITUTIONAL INVESTORS

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CARIBBEAN INSTITUTIONAL INVESTORS

HNW INDIVIDUALS

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WHITER GOES CARIBBEAN INVESTMENT BANKING Notwithstanding The remotest of nexus. To

Its US and European Counterparts The Investment Banking Industry In The Caribbean Is At A Critical Juncture

CLICO / CIB Bailout (US 1-2 BN)- Not Related to US Financial Crisis- Related Party Lending- High Cost Resource Mobilisation Strategy

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Collapse Of Stanford Banking Group

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THE MULTINATIONALISATION OF THE

REGIONAL BANKING SECTOR

In the recent past several highly profitable

indigenous financial organisations have been

targeted by Foreign Banks. At least one has

been taken over.

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Invariably, the purchasers of these bank tend to be

much more “risk averse” than their predecessors with

a propensity for “white good” financing. This is done

to the detriment of Development Financing.

Quite simply they gravitate towards Retail Banking

and tend not to be developmental or transformative

in their approach to financing.

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INABILITY/RESTRICTION ON SELLING SECURITIES TO US INSTITUTIONAL INVESTORS Due to the meltdown in the US, due to the

imposition of new and “higher “ standards

US Institutional Investors are now less

likely to purchase regional securities.

(Approximately USD 150-200MM in regional

securities were being sold into the US

before the crisis.

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REGULATORY OVER REACH

Having seen finance wreck havoc, the temptation

would be to bind it in a regulation.

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THANK YOU.

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