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What the recent global downturn and credit crisis means for the Caribbean financial sector

One might think that there is not much the Caribbean as a whole can do to mitigate the effect of the global economic downturn on the region.

It must be remembered, however, that small actions in most Caribbean nations can have a big impact on insulating their economies, given their size, and this is one of their key advantages.

BANKING

It is important to note that, during the recent financial crisis, no Caribbean bank has failed nor required their government’s support to keep them solvent. This is in stark contrast to the numerous banks that have failed in the US and across Europe and required the intervention of regulators to broker hasty mergers with more solvent banks or direct financial support underwritten by their governments’. US and European governments, instead of being applauded for acting as a lender of last resort, have been criticised for allowing some banks to become ‘to big to fail’ and creating the possibility of a moral hazard where banks are actually encouraged to take risks with the knowledge that if all goes wrong then their governments will pick up the tab. The global financial crisis has not had any real effect on either the stability of Caribbean banks or their total deposits. As most informed commentators are aware, the deposits in Caribbean banks from individuals located in the US and Europe are not considerable. Such individuals seldom place their assets in Caribbean bank accounts as they have better investment options. In fact, in many Caribbean jurisdictions there is no benefit to placing money outside of the individuals’ home country as most Caribbean nations have some form of agreement with the US and European nations to share information on the assets held by US and European nationals. As such, the idea of the Caribbean as being a place to furtively hide assets is simply not true, is at best outdated and should remain in the Hollywood movie scripts where it belongs.

INVESTMENT FUNDS

Even in these difficult times a growing sector for the Caribbean region continues to be hedge fund formation and management, especially in the British Virgin Islands and the Cayman Islands. In fact, this aspect of the financial services industry may indeed benefit from market turmoil as hedge funds by their very nature are designed to achieve returns for their investors in both up and down markets. The sector continues to be stable as many hedge fund services simply cannot be delegated to other jurisdictions and many funds have more than recovered their losses. In fact, hedge fund total assets are at new record highs as at the second quarter of 2011. In addition, many new businesses have been and are being established offering professional services throughout the region; this reflects the concentration of hedge funds located in the Caribbean, which accounts for 80% of the world’s funds.

STRUCTURED FINANCE

Some Caribbean islands have become leading providers of special purpose vehicles (SPV’s) for structured finance transactions. One purpose of these SPV’s is to purchase groups of loans issued by US and European banks and re-sell them as a form of investment to institutional investors. The attraction of the Caribbean for these SPV’s is that it is truly ‘tax neutral’. As such, purchasers of the debt issued by the SPV’s can participate regardless of their location in the knowledge that they will only have a tax liability in their home jurisdiction. One might have thought that the global financial crisis which almost froze the secondary debt market that these SVP’s operate within would be the end of the SPV. However, some of the investment in the US Toxic Asset Relief Program was funded indirectly through Caribbean based SPV’s. The regulators in the US and Europe are now appreciating the vitally important role that Caribbean SPV’s play in allowing global financial loan markets to flow and in particular, the direct impact they have on the availability of loans for individuals and small businesses that create jobs in Europe and the US. Again, the Caribbean is finding itself playing a crucial part in the solution to the credit crisis to facilitate recovery on onshore jurisdictions.

CONCLUSION

There can be no escape from the economic problems in Europe and the US and, in all likelihood, the Caribbean as a whole faces a bumpy road ahead. That said, if we as a region continue to use our strengths to our advantage and capitalise on the stability of our banks, promote our hedge fund services and continue to develop tax neutral SPV’s, then we will be perfectly placed to provide the services required when the inevitable upswing in the major economies occurs.


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