By NEIL HARTNELL
Tribune Business Editor
THE international financial services industry’s “sharp contraction”, with total bank assets shrinking 65 per cent in the five years to 2016, has only “modestly” impacted the Bahamian economy.
The International Monetary Fund’s (IMF) conclusion, which will likely surprise many in financial services and outside observers, appears based on its finding that the sector’s contribution to the wider economy has “remained broadly stable” despite the significant shrinkage.
The Fund, in a separate report accompanying its Article IV assessment of the Bahamian economy, said the financial services industry’s “orderly adjustment” to international regulatory initiatives had enabled it to “manage” the spillover effects for other sectors.
To preserve such stability, the IMF called on the Bahamas to maintain “strong compliance” with global tax transparency and anti-money laundering demands, including the Common Reporting Standard (CRS) on automatic tax information exchange and addressing deficiencies identified in the recent Caribbean Financial Action Task Force (CFATF) report.
“Reflecting in part the impact of these global initiatives, the total assets of offshore banks in the Bahamas have shrunk significantly since 2011,” the IMF said. “Total assets of the international banks, including banks with trust licenses, declined to about $175 billion in 2016 from a peak of close to $500 billion in 2011 and the number of international banks dropped by 12.
“US banks bore the brunt of the decline in assets. In 2016, 11 mergers and acquisitions took place in the offshore banking sector, and some European private banks withdrew from the market.”
Thus the IMF paper illustrates how global developments, both regulatory and commercial, have driven consolidation in the Bahamian financial services industry since the turn of the century, which was marked by the now-infamous Financial Action Task Force (FATF) ‘blacklisting’.
It also indicated how the nature of private banking/private wealth management has changed, with niche, boutique firms picking up business as larger institutions exit the segment in readjusting their business models.
“Some large banks have adapted to the new regulatory environment by shifting activities away from private banking/wealth management,” the IMF said. “Based on the Central Bank [of the Bahamas] analysis, the imposition of tax amnesties in other countries has resulted in a sizable reduction in the overall assets under management (AUM) in the Bahamas, as many clients have taken the opportunity to become tax compliant with their home countries.
“Large banks have increased their investment banking activities, and moved away from trust and private banking/wealth management, with small banks still focused on private banking. Among the top 10 banks, four concentrate in investment banking, with only the two largest banks offering corporate banking and private banking businesses.
“Some banks also outsourced various business functions to achieve operational efficiencies and synergies within their groups. During 2016, the Central Bank of the Bahamas approved 25 outsourcing arrangements.”
The IMF added that private wealth management had also become much more personalised, as high net worth individuals and their families sought specific products and focused attention from the likes of family offices and private trust companies.
The SMART fund, which effectively transforms investment funds into private wealth management tools, now accounts for 65 per cent of the 920 investment funds domiciled in the Bahamas. They grew in number by 92.9 per cent, almost doubling between 2011 and 2015, as they rose from 296 to 511.
Analysing the financial services industry’s impact through a combination of jobs, tax revenues and local purchases of goods and services, the IMF said the sector generated domestic demand equivalent to 3 per cent of GDP.
“The overall direct contribution has remained broadly stable over the last 10 years, as the bulk of it originates from the relatively stable local expenses and employment, which are not sensitive to the asset size of the system,” the IMF said.
“An increase in fees paid to the Government—which are based on the size of assets—since 2012 helped increase government revenues from these fees despite a decline in the size of assets in the system.”
The IMF’s economic impact assessment numbers are startlingly low compared to the industry’s own estimates, which project that financial services could account for as much as 25-30 per cent of Bahamian GDP.
The Fund’s paper acknowledged this, agreeing that the industry’s total economic contribution was likely to be higher, especially given that other studies had pegged this at 9 per cent of GDP.
“The offshore financial centre’s direct contribution to the real economy in the Bahamas appears to have remained broadly stable despite a significant decline in its size,” the IMF said.
“An orderly adjustment of the sector to global regulatory initiatives has contributed so far to manageable direct effects on the real economy, although it is difficult to determine the full extent of the impact—including spillovers.”
But many Bahamians, especially those who work in the financial services industry and associated professions, are unlikely to recognise the scenario outlined by the IMF and its conclusions.
For the sector has shrunk significantly since the ‘blacklisting’ and enforced regulatory changes of 2000, as business exited the Bahamas, along with multiple institutions and financial services providers.
Defenders of the reforms will argue that they removed ‘marginal’ players, leaving only ‘blue chip’, quality business remaining, but the financial services industry has struggled ever since to provide the necessary growth and high-paying professional jobs that the Bahamas demands.
Still, the IMF ranked the Bahamas as the fourth largest international financial centre (IFC) in the world, after Hong Kong, Singapore and Cayman, based on cross-border asset data.
Its total assets were said to be $332 billion at year-end 2016, with the Bahamas’ 10 largest banks accounting for almost 80 per cent of that segment’s $175 billion assets. Bahamas-domiciled investment funds hold another $132 billion in assets.