The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamian commercial banking industry was yesterday reacting with alarm to indications that the Homeowners Protection Bill tabled in the House of Assembly contained few, if any, of the recommendations it made to “protect the integrity” of the financial system.

Leading bankers once again expressed concern to Tribune Business that the Bill negatively impact the ability of deserving Bahamian borrowers to access credit, and further exacerbate ‘moral hazard’ in the market.

But Michael Halkitis, minister of state for finance, expressed surprise at banking industry reaction when contacted by this newspaper, saying the Government felt it had been “able to reach common ground” with the sector over the Bill.

Confirming that the Homeowners Protection Bill had gone through its first reading in the House of Assembly, with the next step being the full debate over it, Mr Halkitis promised the Government would hold further discussions with the banks if there were any remaining concerns.

Nathaniel Beneby, Royal Bank of Canada’s (RBC) Bahamas country manager and head of the Clearing Banks Association (CBA), did not return Tribune Business’s call seeking comment before press time.

However, this newspaper understands that numerous e-mails were sent between senior commercial banking executives on the issue yesterday, and Tribune Business was able to confirm the negative sector reaction to developments.

One leading banker, speaking on condition of anonymity, said: “We got word today that the final version was presented to Parliament. The changes we recommended were not included in that.

“We had got them to agree to certain changes that we thought were important to protect the integrity of the system, but a lot of that was taken out.”

Another top banker said: “It was not the version we were reviewing and amending. It was their version.

“The Government had engaged us in extensive discussions, but we heard the final version did not reflect the input we gave them. We’ll have to see where it ends up. We were OK with the amended version we ended up with.”

Tribune Business understands that a further meeting between the Government and CBA over the Homeowners Protection Bill is scheduled for later this week.

Mr Halkitis, meanwhile, said the CBA’s concerns had been extensively reviewed and discussed within the Government, involving the input of both the Law Reform Commission and the Attorney General’s Office.

“I’m surprised to hear that the banking industry is alarmed,” Mr Halkitis told Tribune Business. “We thought we had some fruitful discussions, and were able to reach common ground on most issues.

“We had the original Bill, and asked the CBA to please give us comments. They did that through two attorneys. Following that, we had several meetings involving the Attorney General’s Office and the Law Reform Commission, and we heard their concerns.

“We went through their comments one by one. The only matter where there was a separate opinion was that the banks wanted a separate Tribunal to deal with this process [defaulted loans]; we thought it best left to the courts.”

And Mr Halkitis reiterated: “I don’t think there was anything to be alarmed about. We thought we had some fruitful discussions, and were able to come to a compromise everyone could live with.

“We thought we were largely in agreement. There were one or two matters where we were in disagreement.”

Tribune Business has obtained a copy of the Bill that has been tabled in Parliament.

The changes made to it from previous versions appear to be largely cosmetic. For instance, section seven, which previously allowed the courts to give borrowers a period “of no less than 12 months” to make good their arrears under certain circumstances, has been changed to “no more than 12 months”.

Bahamian banking executives had previously told Tribune Business that the Bill, if passed into law without appropriate changes, could cause this nation’s own ‘credit crunch’ by fundamentally changing the risk/reward calculation associated with lending.

This, Tribune Business was told, was largely due to the Bill giving the Supreme Court the power to intervene when commercial banks were attempting to realise exercise their power of sale on delinquent properties.

Further exercising commercial bank concerns is that the Bill plans to give the courts the ability to delay this process for an unspecified time period, creating huge uncertainty about the industry’s ability to realise mortgage security/collateral.

As a result, senior bankers explained, the risk associated with mortgage lending in the Bahamas would dramatically increase, with potentially huge implications for the wider economy - especially the real estate and construction industry.

One banker told Tribune Business then: “What they are doing is allowing the courts to intervene in a transaction where the lender has assessed the risk and levied an appropriate rate of return.

“When there’s a borrower default, that’s already been priced into the rate, and you have some expectation as to what happens when there’s a default.

“But the Bill will allow the courts to determine what happens, which means the underlying risk fundamentally changes. Why would any lender enter into an open-ended contractual arrangement where the court can intervene and fundamentally change the risk in the middle of the contract?

“All these open-ended arrangements shoot the risk through the roof.”

Suggesting that the Bill’s drafters were likely unaware of the potential ‘unintended consequences’, another banker said previously: “What this is going to do is simply increase the risk of the lender.

“You are stuck with risk that you cannot manage, because in the event of default the courts can intervene, and you can’t charge a rate commensurate with the underlying risk.

“It’s all about risk and return. If you’re risk can’t be controlled and defined fully upfront, with all this uncertainty you will act appropriately.”

Essentially, with the risks associated with mortgage lending increased, and returns reduced, Bahamian bankers said there would be major ramifications for home lending in this nation.

Potential consequences, they added, included fewer persons qualifying for mortgage loans; higher downpayments and interest rates; and potential withdrawal from the mortgage market.