fp Turks and Caicos

The board of the Turk and Caicos Islands Bank Ltd. and its senior management caused the small indigenous bank to fail, but the Financial Services Commission should have stepped in sooner to correct years of persistent problems.

That’s the verdict of a December 2010 report by two FSC directors into the commission’s oversight of TCIB and the decision to close the bank in April 2010. Thousands of local residents lost access to their deposits and hold little hope of getting anything back.

But the report says the damage would have been much worse had the FSC not asked the court to close the bank and liquidate what was left of its assets.

The report requested by former Gov. Gordon Wetherell was intended as an internal document to improve the commission’s supervision of financial institutions, but acting Gov. Martin Stanley said he deemed it proper to release it Sept. 6 “ahead of the start of the extensive programme of work to set up a new legal framework for the banking sector.”

The bank has been in full liquidation since October, but two court-appointed liquidators from Deloitte & Touche Bahamas have been mum on any progress they’ve made in recovering bank assets and settling claims.

The 32-page report by FSC directors Munro Sutherland and Gordon Kerr was approved by the non-executive members of the FSC’s board. Past and present FSC executive board members, TCIB management and the National Insurance Board — a major shareholder in the bank — had no input or approval in the report’s findings that describe a bank that fought an uphill battle to succeed.

Plagued with an inability to attract quality senior management and sufficient investment, the bank and its board “permitted the bank to expand its lending too quickly, exercised poor credit judgments, paid inadequate attention to liquidity management, and failed to act properly to try to safeguard the bank’s position as the emerging economic downturn acted to further undermine credit quality,” the report said.

The FSC tried in good faith to correct problems that cropped up from the day the bank’s creation was approved in August 2005, including securing the required startup capital and the required 51 percent local ownership, the report said. When the world economy plunged in 2008, the little bank’s bad loans and bad management practices made things worse.

At that point, the FSC missed an opportunity “to limit the damage that the bank’s board and senior management were able to inflict on the bank through uncontrolled loan growth and poor credit management,” the report says.

Had the FSC fully investigated the extent of the bad loans in late 2007, corrective action might have helped, the report said. But the bank continuously failed to follow corrective actions dictated by the FSC.

The FSC began helping the bank seek a number of different parties to invest in or take over the bank, but no offers proved attractive enough to seriously consider. With a whopping 18.6 percent of its loans not being repaid by December 2009, a last ditch effort to keep the bank afloat backfired.

In January 2010 the NIB was persuaded to invest another $5.5 million of the country’s pension funds with a loan secured by bank assets. But in February 2010, two depositors each withdrew $2 million, and a former director of the bank withdrew $1.7 million in February and March 2010, wiping out what little liquidity the bank had.

Word was obviously out that the bank was in trouble, so the FSC petitioned the court to put the bank in provisional liquidation in April 2010.
Several other suitors offered plans to get the bank out of receivership, but none were accepted by the court, and full liquidation was ordered in October.

While it was criticized by some bank creditors for seeking liquidation too soon, the report said the FSC acted only after it was convinced “TCIB faced a fatal loss of confidence on the part of its depositors and that action was necessary to prevent an imminent and disorderly failure of the bank.”

In light of the failure, work is already underway to strengthen bank supervision and provide protection for depositors.

“The publication of the FSC report on the licensing, supervision and subsequent failure of TCI Bank demonstrates the commitment of the FSC to moving forward with a strong legal basis for better supervision of the financial sector and protection of depositors,” FSC Chairman Errol Allen said.

“The FSC will also be publishing an Action Plan in the near future which will outline future regulatory objectives, and as part of this process we will be widening our consultations to include all stakeholders in the financial services sector in the TCI.”

The report said the FSC has made a number of changes to improve supervision, but it also made some recommendations:

• The FSC has had limited experienced supervisory and senior management staff. While that has improved during the last few years, it needs more resources.
• The Banking Ordinance and related regulations are outdated. “New provisions are urgently required.”
• “We believe that the overall system of bank reporting needs to be reviewed and improved, in consultation with the banking industry.”
• New legal provisions should require banks to allow their auditors to report to banking supervisors, and there should be whistle-blowing provisions to require auditors to immediately alert the FSC of serious audit problems. Both are best international practice.
• The minimum capital required to start a bank should be increased from $3 million to at least $5 million.

The full report is available on the government’s website at turksandcaicosislands.fco.gov.uk/en/about-us/tci-bank.

Or you can click here to read the full report on fptci.com.