Antigua and Barbuda
Detailed Assessment of Compliance with Basel Core Principles for Effective Banking Supervision—Offshore Banking

The Detailed Assessment of Antigua and Barbuda’s compliance with the Basel Core Principles for Effective Banking Supervision is presented. The largest bank represents 61 percent of the sector’s aggregated assets, highlighting an important degree of concentration. Investment portfolios represent the bulk of banks’ assets, and are predominantly composed of government and corporate bonds and equities. Loan portfolios include a number of large exposures, some exceeding 25 percent of capital, and/or connected party loans.

Abstract

The Detailed Assessment of Antigua and Barbuda’s compliance with the Basel Core Principles for Effective Banking Supervision is presented. The largest bank represents 61 percent of the sector’s aggregated assets, highlighting an important degree of concentration. Investment portfolios represent the bulk of banks’ assets, and are predominantly composed of government and corporate bonds and equities. Loan portfolios include a number of large exposures, some exceeding 25 percent of capital, and/or connected party loans.

I. Basel Core Principles (Offshore Banking)

A. General

1. This Report on the Observance of Standards and Codes (ROSC) for the Basel Core Principles for Effective Banking Supervision was prepared by a team of two independent bank supervision experts.1 The mission was conducted from February 23 to March 5, 2004. The report provides a summary of the level of observance of the regulation and supervision of offshore banks licensed by the Financial Services Regulatory Commission (Commission) of Antigua and Barbuda with the Basel Core Principles (CP).

Information and methodology used in the assessment

2. The assessment of Antigua and Barbuda’s regulation and supervision of offshore banks was based on an examination of the legal framework as it related to offshore banking, and assessing the supervisory procedures used by the Commission. The self-assessment questionnaire was very helpful and useful information was provided in meetings with the Board of the Commission, the Administrator and senior staff of the Commission, who made themselves freely available. Meetings were also held with senior management of licensed offshore banks and accounting firms. The assessment reviewed examination procedures for offshore banking, as well as draft prudential policies or guidelines, which will only have effect once Antigua formally adopts and implements them. Subsequent to the completion of the missions’ on-site work, the mission was notified by the Commission of the implementation of a number of regulatory, guideline, and procedural changes. The mission commends the authorities for these positive developments. The changes are noted at the bottom of the descriptions of the affected CP. While credit is given where due for these changes, the ratings also reflect the mission’s views on how quickly and effectively in each case the new powers can be implemented in practice.

3. The assessment of compliance with each CP was made on a qualitative basis. A fourpart assessment system was used: compliant; largely compliant; materially non-compliant; and non-compliant. To achieve a “compliant” assessment with a principle, all essential criteria had to be met without any significant deficiencies. A “largely compliant” assessment was given if only minor shortcomings were observed, and these were not seen as sufficient to raise serious doubts about the authority’s ability to achieve the objective of that principle. A “materially non-compliant” assessment was given when the shortcomings were sufficient to raise doubts about the authority’s ability to achieve compliance, but substantive progress had been made. A “non-compliant” assessment was given when no substantive progress towards compliance had been achieved. A CP was considered not applicable when, in the view of the assessor, it did not apply given the structure of the offshore banking industry in Antigua.

4. The assessment takes account only of existing laws and requirements. However, limited credit is given to legal instruments and guidelines that were introduced immediately following the assessment mission. These are noted where appropriate in the comments section of each CP assessment.

Institutional and macroprudential setting, market structure—Overview

5. Antigua and Barbuda is part of the Eastern Caribbean Currency Union (ECCU), which is comprised of eight members, the others being: Anguilla, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.2 There are 16 offshore banks licensed in Antigua and Barbuda, some employing 50 or more staff in Antigua and Barbuda, and some with only a single staff member in the jurisdiction, the remaining management and staff being located in offices in Central and South America.

6. Aggregated assets reported by the offshore banking sector totaled about US$ 3.0 billion as at December 2002. The largest bank represents 61 percent of the sector’s aggregated assets, highlighting an important degree of concentration. Investment portfolios represent the bulk of the banks’ assets, and are predominantly composed of government and corporate bonds and equities. Loan portfolios include a number of large exposures, some exceeding 25 percent of capital, and/or connected party loans. Since 2002, there has been a gradual strengthening of the regulatory and supervisory regime, which has reduced such exposures somewhat, but some banks still require more time to meet the higher standards. A few banks reportedly also carry substantial investments in local real estate projects.

7. Mission staff were informed that loans are frequently collateralized by cash, CDs and equities (so-called “back-to-back lending”), that would reduce their risk of loss. Reported non-performing loans are low. Some banks appear to undertake substantial derivative transactions but no data is available at this moment to substantiate the extent of the exposure.

8. Two of the licensed banks accept deposits only from within their groups, or from related companies. Although, in principle, identical regulatory requirements apply to such captive banks, in practice they are routinely in violation of the large loan and connected lending limits applicable to the other licensed offshore banks. Both such banks (one of which appears to be a special purpose vehicle set up to finance a single investment) have little or no activity reported on their income statements.

9. The number of licensed offshore banks has been substantially reduced in the past few years partly due to the strengthening of the regulatory requirements regarding minimum capital (US$5 million), minimum equity to assets (5.0 percent), connected lending and the need to establish a physical presence. A stronger anti-money laundering regime has also contributed to the decline in numbers. This assessment acknowledges that substantial progress has been made, while highlighting a number of areas that need to be further strengthened in order to achieve compliance with the CPs.

General preconditions for effective banking supervision

10. The Commission’s functions and responsibilities are set out in the IBC Act. The Office of National Drug Control Policy (ONDCP), which is the authority responsible for the implementation of the AML/CFT measures in Antigua and Barbuda, works in close collaboration with the Commission.

II. Principle-by-Principle Assessment and Recommended Action

Table 1.

Detailed Assessment of Compliance of the Basel Core Principles

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Table 2.

Summary Compliance of the Basel Core Principles

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C: Compliant.

LC: Largely compliant.

MNC: Materially non-compliant.

NC: Non-compliant.

NA: Not applicable.

A. Recommended Action Plan and Authorities’ Response to the Assessment

Recommended action plan

Table 3.

Recommended Action Plan to Improve Compliance of the Basel Core Principles

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Authorities’ response to the assessment

After the mission in March 2004, the authorities have undertaken a wide range of legislative, regulatory and supervisory steps to improve the offshore banking supervisory regime and expressed commitment to fully implement the Basel Core Principles for Effective Banking Supervision in a time bound manner. While noting that the mission has downgraded the ratings against four principles after issuing the first report, the jurisdiction’s response on key issues follows:

  • While not agreeing that the existing laws foster “significant interference” from the political directorate with respect to the management of FSRC, the authorities have nonetheless undertaken to revisit this matter.

  • While disagreeing with the mission’s assessment of information-sharing, in view of clear legal powers to: share information with other supervisors and seek information on banks’ affiliates, FSRC is nonetheless finalizing a MOU with ECCB. FSRC does not view the absence of MOU as an impediment to information sharing since: (1) FSRC is not dependent on ECCB for information because of its powers (already being exercised) to seek information about their related companies directly from the offshore banks; (2) FSRC has been sharing information and cooperating with other supervisors, including the ECCB, even without a MOU.

  • FSRC does not apply diluted standards to captive banks but is considering a separate licensing category for them. The new licensing procedures are already being applied to new applications.

  • The new investment criteria have been incorporated into the examination procedures.

  • FSRC will implement a risk-based capital regime allowing for capital charges for credit and market risks, in consultation with regional supervisors.

  • Revised bank examination procedures include a review of the implementation of recently issued Guidelines on Investment and Lending (regarding credit policies, loan evaluation and loan loss provisioning, large exposure limits, and connected lending), internal control systems and risk management processes. FSRC will implement a provision for general losses.

  • The new quarterly reports will be fully implemented from December 2004, which will facilitate monitoring of trends and developments in the offshore banking sector.

  • The already existing program of contact with bank management will be strengthened.

  • The Supervisor already has authority to: hold meetings with external auditors and demand a copy of their management letters and work papers. FSRC will ensure that all financial statements published in future also contain the notes.

  • The Supervisor already has powers to apply penalty to corporations, including their directors and officers.

1

Marcel Maes (Belgium) and Tony Maxwell (Canada).

2

Anguilla and Montserrat are overseas territories of the United Kingdom.