– to help stabilise financial sector

THE Bank of Guyana (BoG) will soon be given the power to provide temporary liquidity assistance to deposit-taking financial institutions as the National Assembly Friday night passed the Bank of Guyana (Amendment) Bill 2018.

The Bill was passed despite concerns raised by the opposition People’s Progressive Party (PPP), but according to Finance Minister Winston Jordan, the amendments represent an integral measure which will be employed to maintain stability of the financial system.
Jordan made it clear that the amendments to the legislation are not unique to Guyana, as the same has happened in the United Kingdom, Canada, Belize, and Jamaica. Each of those territories, the minister said, has implemented emergency financing provisions within their laws.

Moreover, Jordan noted that had the legislation been in place some 14 years ago when Globe Trust experienced financial troubles, that financial entity would have been saved.
“With the passage of these amendments,” he said, “the Bank of Guyana would be in exalted company insofar as it establishes an emergency liquidity facility, which, had it had such 14 years ago when the crisis of Globe trust took place, those depositors who are dreaming and hoping for their return of their deposits and those who only got partial deposits…we would have helped that bank and could have saved the day for those depositors.”

The minister told the House that despite the challenges of the past, “it is never too late”, while noting that the amendments to the legislation together with Thursday’s passage of the National Payment Management Bill, the Insurance Bill, the Financial Institutions Bill and the Deposit Insurance will give the financial system the necessary tools, while providing the Bank of Guyana with the powers and strengthened oversight to ensure banks do not fail.
And if they do, measures are in place to ensure corrective action.

Meanwhile, during his wrap-up arguments, Jordan denied that the amendments to the legislation was a result of a shortage of foreign exchange by virtue of poor performance in the export sectors, particularly, sugar, gold, rice and bauxite.

“There is an excess of foreign currency,” the finance minister said, while noting that the loans will be short-term loans and not long-term ones. He explained that his administration is trying to safeguard depositors, and return confidence to them, while referencing the events which affected both Globe Trust and CLICO.

“These amendments are non-contentious, and are here for good reason,” said the finance minister, who noted that like central banks in other jurisdictions, the Bank of Guyana acts as, inter alia, the provider of liquidity into the financial system. This ‘lender-of-last-resort’ function, he said, has been a fundamental one of the central bank since the 19th Century.

PREVENT A CRISIS
“The aim is to prevent or mitigate financial instability by providing liquidity support at the particular financial institutions or to financial market participants,” Minister Jordan said.
“The Bank of Guyana has had its experience with running a deposit-taking financial institution; the market is always susceptible to liquidity shortages and fragility.”
He stressed that through this tool, the bank has the discretion to provide a loan or an advance to eligible financial institutions facing serious liquidity problems. This liquidity assistance is expected to apply and or provide on an extraordinary basis, he noted.
“The ability of the central bank to act quickly and to provide adequate liquidity makes it possible to prevent liquidity problems from developing into serious financial problems,” Jordan told the House, while adding that neither deposit insurance nor bank resolution proceedings can achieve the same result, given the lengthy and complicated processes involved.

Opposition Member Irfaan Ali accused the government of bringing the amendments to the House because the financial architecture is weak.

“The problem you are faced with now is that the financial architecture is on the verge of imploding, and in recognition of that implosion, the government is rushing to pass all these bills together,” declared Ali, who opined that based on the principal act, the bank should focus on creating the enabling environment for the market to function effectively to achieve price and exchange-rate stability, rather than be an active participant in the market.
“The proposed amendment to Section 40 is therefore in conflict with the primary objective of the Principal Act,” he said.

He argued that by amending the legislation, the Bank of Guyana will be given a licence to be an active participant where it will compete directly with dealers in the foreign exchange and precious metal markets.

“This is inimical of the efforts by our country to liberalise the financial markets where government’s interference in the market is minimal,” he stated.

Meanwhile, Foreign Affairs Minister Carl Greenidge, who served as Finance Minister under the People’s National Congress (PNC) administration, said that the Bill relates to legislation pertaining to the operation of the central bank. It has to do with the heart of central bank operations which has to do with liquidity control.

He said Clause 2 of the Bill amends section 40 of the Principal Act to expand the open market and credit operations of the Bank to better reflect the monetary operations of a modern central bank, while Clause 3 amends section 41 of the said Act to explicitly allow the bank to grant, in exceptional circumstances, temporary liquidity assistance to financial institutions which take deposits against a wider range of collateral and for longer periods than what is accepted in the normal liquidity-providing facilities.

Additionally, the amendment gives the bank the power to grant financial assistance where necessary to preserve the stability of the financial system and offers protection to the Bank of Guyana, as it prescribes that all assistance in this instance requires a government guarantee.

Meanwhile, Clause 4 of the Bill amends section 42 of the Principal Act to remove the rates of interest charged for rediscounting eligible paper under section 40.
Clause 5 of the Bill amends Section 56 of the Principal Act to allow the bank to secure the credit granted to a financial institution on real property and to acquire such real property if the institution defaults, the bank, however, is required to dispose of such property at the earliest suitable opportunity.

“The bank has itself the guarantee from the government and the guarantee itself does not constitute the incurring of debt as such,” said Greenidge, who noted that on the question of viability it is “quite proper” for an entity to be illiquid at a certain point in time and viable. The intention he said, is to avoid the financial entity from collapsing.
Other contributors to Friday’s debate on the amendments included Opposition Chief Whip Gail Teixeira, and Opposition members Juan Edghill, and Anil Nandlall.