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Another Finsac?
The most important issue is transparency, as with transparency you can operate with the principle of caveat emptor, or 'let the buyer beware' at least at the wholesale institutional, or informed high net worth individual level.
Jamaica's financial crisis was due to a combination of the same factors of lax regulation, lack of transparency (conglomerate structures clouded the true situation), hubris (notably the 'edifice complex' of some entrepreneurs and non- responsiveness of some policy makers), and high leverage (most institutions had a very low level of capital even before the crisis. )
The area I want to concentrate on today, however, is investor due diligence. In the run-up to the financial crisis, many greedy investors put their money with obviously shaky institutions at rates of almost five per cent per month. The banks then charged interest rates of double this very high cost of funds to compensate both for their high costs and the clearly very high probability of default, the default rate of which the banks then disguised by a process of 'ever greening' the loans, postponing recognition of arrears and thus their designation as bad loans. This was onlypossible due to a lack of transparency in the banks accounts. These investors were then bailed out by a blanket government guarantee, justified by the need to protect the financial system.
Bailout
This 'bailout' will not happen twice. The signal that all was not well was the exceptionally high rate of return some banks were offering this form of risky behaviour was rewarded once, the problem today is no longer with the traditional local financial institutions, which are well regulated. Today's investor can also do very significant due diligence on the investments of the major quoted money-market players, as their audited accounts require very significant disclosures. Thus, any financial crisis will not be like the one that created FINSAC, threatening the payment system. However, significant financial risks are emerging that may affect Jamaica later this year. Let those who have ears to hear, hear.
The most important issue is transparency, as with transparency you can operate with the principle of caveat emptor, or 'let the buyer beware' at least at the wholesale institutional, or informed high net worth individual level.
Jamaica's financial crisis was due to a combination of the same factors of lax regulation, lack of transparency (conglomerate structures clouded the true situation), hubris (notably the 'edifice complex' of some entrepreneurs and non- responsiveness of some policy makers), and high leverage (most institutions had a very low level of capital even before the crisis. )
The area I want to concentrate on today, however, is investor due diligence. In the run-up to the financial crisis, many greedy investors put their money with obviously shaky institutions at rates of almost five per cent per month. The banks then charged interest rates of double this very high cost of funds to compensate both for their high costs and the clearly very high probability of default, the default rate of which the banks then disguised by a process of 'ever greening' the loans, postponing recognition of arrears and thus their designation as bad loans. This was onlypossible due to a lack of transparency in the banks accounts. These investors were then bailed out by a blanket government guarantee, justified by the need to protect the financial system.
Bailout
This 'bailout' will not happen twice. The signal that all was not well was the exceptionally high rate of return some banks were offering this form of risky behaviour was rewarded once, the problem today is no longer with the traditional local financial institutions, which are well regulated. Today's investor can also do very significant due diligence on the investments of the major quoted money-market players, as their audited accounts require very significant disclosures. Thus, any financial crisis will not be like the one that created FINSAC, threatening the payment system. However, significant financial risks are emerging that may affect Jamaica later this year. Let those who have ears to hear, hear.
keithcollister@cwjamaica.com