Editorial | Resurgent financial conglomerates, but …

Times and circumstances have certainly changed in Jamaica.

Two decades ago, in the aftermath of the financial sector collapse, it was Jamaican banks and insurance companies that were on the auction block and Trinidadian and Barbadian investors heading to Kingston for deals. For instance, the insurance portfolios of the iconic Jamaica Mutual Life, as well as those of newer companies, Crown Eagle Group, Dyoll Life and Horizon Life, were acquired by Trinidad and Tobago’s Guardian Holdings. Life of Jamaica, which, too, went bust during the crisis and was shored up by the Government’s Financial Sector Adjustment Company (FINSAC), was gobbled up by the Sagicor Group, the company that emerged at the demutualisation of Barbados Mutual Assurance.

Union Bank, created by FINSAC out of the wreckage of four domestic banks – Workers Savings and Loan, Island Victoria, Eagle Commercial and Citizens, was bought by RBTT Financial Group of Trinidad and Tobago.

The cause of the crisis remains a matter of controversy, and the report of a politically tinged commission of inquiry into the matter remains outstanding a decade after it concluded its hearings. But critics of the People’s National Party administration of the day insisted that it was the inevitable outcome of loose fiscal policies, which led to high interest rates and an inability of borrowers to service their loans. That unstable environment, these critics say, had been exacerbated by a premature removal, in 1991, of exchange controls when the central bank was without reserves.

An alternative view is that this analysis wrongly exculpates, or doesn’t take sufficiently into account, the poor management of the banks and insurance companies, which were lax about connected-party loans, risk analysis, and in their use of short-term money to acquire long-term assets. In an increasingly competitive environment, their operations was inefficient, made worse by offering increasingly higher rates to entice depositors. When liquidity issues arose, contagion soon effected the entire sector, but for the foreign-owned entities.

What, however, is not in dispute is the cost of the crisis. When the Government finally brought the FINSAC bill on to its books, the price tag was J$140 billion, or around 40 per cent of gross domestic product. Central government debt jumped from under 80 per cent of GDP to more than 100 per cent, reversing the preceding years of a downward, even if slow, adjustment.

Not only has Jamaica’s financial system recovered since the onset of the crisis in 1995, it appears to be moving forward with a confidence unknown in the early FINSAC era, when big financial conglomerates were being frowned on, particularly by the key officials in charge of the management of the crisis, former Finance Minister Omar Davies and Jacques Bussieres, the then French-Canadian governor of the Bank of Jamaica.

A week ago, the JMMB financial group, which started life as a small money market dealer a few years before the collapse, closed a US$225-million deal with the Toronto-listed fund manager, Alignvest Acquisition II, to acquire 22.5 per cent of Sagicor Financial Corporation Limited, a regional financial services conglomerate whose flagship is its listed Jamaican operation, in which it owns 49 per cent. Like The JMMB Group, Sagicor Jamaica, the leading player in the island’s life insurance market, controls a commercial bank. Further, NCB Financial Group, built from the bones of another of the crisis’ casualty, National Commercial Bank, now controls 62 per cent of Guardian Holdings. Both groups suggest that they have the foundations for further expansion. Similar configurations are also taking place elsewhere in the sector.

The big financial groups are back

We appreciated the pride, tinged with anxiety, with which some Jamaicans view this development. After all, two decades is not a terribly long time. Many people remember the crisis and its association, in part, with interlocking conglomeration. The new laws, and institutions, established in the early 2000s to improve oversight and regulations, will, we expect, have lessened the likelihood of a repeat of the 1990s fallout. Nothing, though, is static.

In that regard, it would probably do well for the central bank governor, Richard Byles, a former head of Sagicor Jamaica, as well as Finance Minister Nigel Clarke, to assure Jamaicans that the regulatory systems, and the firewalls against contagion, are in place and, where necessary, strengthened. The head of the institutions themselves might also speak about their international protections.