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New banking law means more teeth and muscle for Central Bank

HighlightsNew banking law means more teeth and muscle for Central Bank

Controversial law published in Gazette over the long 10th weekend

Governor Ysaguirre says definition of “spouse,” interpreted by churches to include homosexual partners, is “much ado about nothing”

The much-debated Domestic Banks and Financial Institutions Act (DBFIA), 2012—described by opponents as “draconian” but by proponents as necessary to more properly regulate the banking sector and bring it in line with proper international standards—is now law, following its publication in the Government’s Gazette dated Saturday, September 8, 2012, as confirmed to us by The National Assembly.

This latest development means that the old Banks and Financial Institutions Act, passed into law in 1996, has been repealed, and the banking system will now be regulated under the new law, which received Parliament’s assent in August.

Despite opposition from the church community to a new meaning for the word “spouse,” which they have argued has been expanded to include homosexual partners, the DBFIA is now in full force, and Central Bank Governor Glen Ysaguirre told Amandala in an interview today that the controversy raised over the definition is “much ado about nothing” and he does not see the need for a change in the definition.

In the interview, Ysaguirre was accompanied by Neri Matus, Director – Financial Sector Supervision Department, and Diane Gongora, Deputy Director – Financial Sector Supervision Department.

Ysaguirre shared with us a legal opinion provided to the Central Bank by Denys Barrow, SC, which takes the view that the new law cannot recognize or legitimize a homosexual relationship because it is not legally allowed to exist. He said that the banking legislation, according to the legal opinion obtained by the Central Bank, is legally incapable of recognizing a relationship that the law criminalizes, such as a mature man living with an 11-year-old female.

Explaining the need for the new law, which has been in the works since 2004, Ysaguirre told Amandala that serious regulatory changes were required because of new developments on the finance front; new business structures and different issues such as money laundering; the need for risk management after the ENRON incident; and the global financial and economic crisis which peaked in 2008.

The first draft of the revised banking act was submitted to Central Government in 2008, but “that died on somebody’s desk up there in Belmopan,” said the Governor. In 2009, the revision process was resurrected, and it culminated this year with the revised draft, which had technical input by consultants hired by the International Monetary Fund (IMF).
With the revised law now in place, said Ysaguirre, the big winners are depositors and banks who, he said, can rest assured that the Central Bank is in a better position to safeguard their interests. One of the major improvements, he said, is that the new law sets a $5,000 minimum that depositors can receive if a bank is to be resolved or wound up. The old law did not have this provision, the Central Bank rep said.

With the latest development, said the Governor, Belize and Trinidad & Tobago have the most modern banking laws, but Trinidad is already moving to make amendments to their act – the Financial Institutions Act passed in 2008.

Countries in CARICOM, said Ysaguirre, had agreed to harmonize their banking regulations, and the Belize law was developed using the Trinidad act as a model.

“This was not an initiative that came from outside the region or some fly-by-night initiative by the Central Bank,” said the Governor. He added that the Caribbean Group of Banking Supervisors came up with a draft bill that they agreed could be used as a model across the region and that is what Belize has used to help develop its new law.

Central Bank authorities say that the DBFIA is a stronger piece of legislation than the old law:

“From our perspective,” said the Governor, “I think the fact that it strengthens and develops the bank resolution framework aspect of the law, it introduces an element of administrative penalties with regards to certain violations that weren’t there before. We feel that this makes for better administration, because [for] some of the issues, we had to go to court to get conviction and so then that brings into question the reputational issue for the individual bankers; but in this way you could offer the banks an option…to apply an administrative penalty and save the embarrassment of going to court…”

The upgrade in the law, the Governor indicated, means that whereas a fine of up to $10,000 could be imposed on summary conviction, a penalty of $50,000 can now apply and banks would have to increase the amount of funds they set aside for financial security.

“If it were left to some banks, they would not want to be regulated any at all and that would not be to the benefit of depositors,” said Ysaguirre, indicating that banks have violated the laws because they knew that the fines, as low as $5,000, were negligible.

The Governor also told us that by law, a bank cannot lend more than 25% to any single borrower or group without getting Central Bank’s approval. Whereas that has been the law on paper, another practice had been established. Ysaguirre said that in some cases, these loans which criminally violate this law have become non-performing, and the main corrective measure that the Central Bank has been able to apply is requiring the banks to set aside more cash as security to offset the risks brought on by those bad loans.

The law now in force would mean stiffer penalties, in addition to requiring more provisioning of cash for the bad loans.

“This is why they complain about too much authority or draconian [measures],” said Ysaguirre.

He told our newspaper that before the draft bill went to legislators, all banks had the opportunity to weigh in, and what the Central Bank could change to address their concerns had been changed. However, he said, there were some changes that could not be taken onboard, because they would have eroded the authority of the Central Bank as regulator.

The bank with the most concerns—expressed in 33-pages—he said, was the Belize Bank. The bank with the least concerns was the Bank of Nova Scotia, because of their affiliation with the Canadian system and their familiarity with the international banking principles being enshrined in the new law, he indicated.

The legislation draws from the Basel Core Principles, which are 29 guiding principles for international banking across the globe, said the Governor. He added that Belize had asked for the IMF’s technical assistance to ensure its law is consistent with international best practices, and the consultants, from Canada, were able to provide assistance right up to the end.

Apart from instituting administrative penalties, another area the new law addresses is related-party transactions. According to Ysaguirre, the Central Bank always gets complaints from members of the public alleging that banks foreclose on their property but a bank manager or somebody related to them gets the property for less. The provisions in the new law, while they will not make such incidents illegal, would require full transparency to expose such related-party transactions. That is how the contention over the whole spouse issue came in, said the Governor. He said that the definition was expanded by the Central Bank to capture not only sweetheart relationships but also common-law relationships or situations where persons may separate but still have ongoing financial relationships, even if they don’t live in the same house.

As for concerns raised in some quarters that the new law may raise constitutionality questions, since it has provisions that would require banks to hand over financial data of clients to the Central Bank, Ysaguirre contends this is nothing new: “There can be no secrecy between the bank and the regulator… we audit banks. We go in and we inspect…” he said.

The new law also increases the Central Bank’s power to supervise in relation to foreign banking operations. This consolidated supervision aspect of the law is one of the main improvements the regulator pointed to. He said that notwithstanding scenarios where companies are layered to hide their ownership, the Central Bank is entitled to know natural persons who are behind these companies.

“Whatever they complain about in the act, we can safely say that it is in the interest of the public and the depositors who have the bulk of the money that are running the commercial banks…” said the Governor.

The new banking bill was not supported by the Opposition People’s United Party. As for the longevity of the new banking act, and whether it would survive a change in administration, Ysaguirre said in response to this question that: “That’s their prerogative if the government would change and they pull the new banking act…”

He added, though, that “…it would reflect badly on the government in terms of how international organizations would see us…” as they would question: “Why are you putting your system at risk by relaxing legislation? There would have to be a good justification for it.”

The Central Bank believes that the new banking bill gives it more teeth and muscle, by helping to strengthen its regulatory capacity while bringing it in line with international banking law.

The Central Bank is also working on the introduction of a credit bureau, and an automatic clearing house and settlement system that it said would help to lower interest rates and operating costs of banks.

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