Panel Discussion: Revisiting the Financial Conglomerate Model - The Trinidad Experience

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Panel DiscussionRevisiting the Financial
Conglomerate Model - The Trinidad Experience
3rd Biennial International Conference on
Business, Banking Finance

• Catherine Kumar
• President
• Bankers Association of Trinidad Tobago
  Limited May 28, 2009

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Road Map

• Regional Financial Landscape The Background
• Previous Financial Business Models
• Major Risks Inherent in the Model
• Expected Benefits of Expansion
• Expansion Options
• Financial Conglomerate Structures
• Attendant Risks
• Moral Hazard
• Financial Critical Success Factors
• Institutions Act 2008
• The Way Forward

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Regional Financial Landscape-Background

• Has its moorings in plain vanilla commercial
  banking dominated by small local subsidiaries of
  large Canadian Banks
• Nationalization of these subsidiaries closely
  followed
• Product suite was limited and capital markets
  were still a concept
• Provided the impetus for the transformation of
  the regional financial landscape to go beyond
  commercial banking and to include activities such
  as-
• Merchant Banking
• Investment Banking
• Trust Services
• Stock and Fixed Income Security Brokerage and
  Trading
• Financial Advisory
• Insurance and Pension Funds

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Previous Typical Financial Business Models

• Basic Business models-
• Banks Deposit taking institutions which earn
  profits principally from the lending of funds
• Insurance Companies
• Life Insurance Insurance premia (net of
  statutory fund requirements) generally invested
  in long term assets
• General Insurance Net premia invested quality
  short term assets
• Pension Funds Both insured and deposit
  administration contracts and investments in
  long-term assets

Banks and Insurance Companies were generally
stand alone entities
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Major Risks Inherent in these Models

• Liquidity risk arising from asset/liability
  mismatch
• Credit risk both from a loan portfolio and
  investment book perspective
• Concentration risk markets were small and
  exposure to key credits were becoming significant
• Continued growth in profitability was capped by
  limited market size and emerging signs of
  saturation.

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Expected Benefits of Expansion

• Presented regional financials with a new realm of
  opportunities namely-
• Ability to grow balance sheet
• Ability to diversify revenue streams away from
  the vagaries of domestic or home markets and
  reduce concentration risk
• Ability to expand product suite to include
  previously untraditional business lines e.g.
  brokerage, capital markets, high end real estate
  and commodities etc.
• Regional financials were able to pursue
  comparatively higher return investments, thereby
  enhancing revenues and profitability

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Expansion Options

• Mergers and Acquisition
• Successfully used by a number of indigenous and
  regional financial institutions during their
  expansion phase.
• Portfolio investments
• Utilized as a stepping stone into a new market
  without attracting the initial start-up costs
• Establishing a greenfield mortar and bricks
  branch in the new market

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Financial Conglomerate Structures

• Can be subdivided into-
• Pure Financial Conglomerate
• Consists of a group of financial companies
  providing a variety of near to full range of
  financial services
• Mixed Financial Conglomerate
• Group of companies with different business lines
  i.e. financial and non-financial
• Group is usually headed by a non-financial entity
  that is not regulated by a financial services
  regulator
• Financial companies are imbedded within the
  structure

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Attendant Risks

• Business Risk
• Understanding of varied businesses in the Group
• Corporate Governance Risk
• Increasing complexity of the conglomerate
  structure may be too great for risks to be
  managed.
• Brings to bear issues such as-
• Human Resource
• Does the organization possess the necessary wide
  skill set at the Board and/or operational level
  to fully understand the type or level of risks
  involved?
• Processes
• Does the organization have systems and procedures
  which reflect its complexity and allow for
  convergence into one platform, where necessary?
• Legal and Reputational Risk.

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Attendant Risks Contd

• Regulatory Risk
• The Regulators also face challenges in the
  relevance of its structures, monitoring and
  regulatory approach with similar emphasis on its
  HR skill set and processes.
• Regulators encounter challenges given that
  conglomerates span over a number of industry
  sectors, some of which are not actively regulated
  or not regulated at all.
• Regulatory Arbitrage.

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Attendant Risks Contd

• Contagion Risk
• Created by the diverse and wide geographical
  reach of the conglomerate structure
• Exacerbated by the regional integration and
  interdependence of our markets

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Moral Hazard

• TOO BIG TO FAIL

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Financial Institutions Act 2008
Represents the regulatory response in part to the
risks attaching to the financial conglomerate
model
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Critical Success Factors

• The financial conglomerate model has worked where
  there is-
• Strong corporate governance
• A clear understanding of the business risks
  within the group
• Robust enterprise-wide risk management
• A long term organization view (as supported by
  culture) of creating value as opposed to reaping
  short term gains
• The ability of organization to quickly assimilate
  acquisitions and realize promised benefits and
  synergies
• The maintenance of positioning within ones
  respective area of core expertise
• Minimized exposures to connected parties
• Understanding of the risks associated with new
  markets and the mitigation of same

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The Way Forward

• Roll out new legislation for the regulation of
  the insurance, pension funds, credit union
  sectors and securities industry throughout the
  region.
• Require the cross-border sharing of information
  and resources by all regulators in the region.
• Silo financial activities from non-financial
  activities by restricting the ability of
  financials to depart from their core area of
  expertise.
• Cap the exposure to connected parties within a
  financial group. (FIA 2008 recommends 10 of
  capital base).
• Secure experts/highly skilled resources for the
  Regulatory Authorities.
• Continue the discussion on the pros and cons of
  an integrated supervisor with a view to arriving
  at a regional position.
• There has been much discussion throughout the
  region on convergence of financial legislation
  and regulations but the industry awaits some
  feedback to the many comments provided to date.

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Thank You