Bermuda’s highly successful model as an offshore financial centre has inspired its share of imitators, but the banking sector is working hard to keep its edge, Philip Alexander reports from Hamilton.
When the credit crunch came in mid-2007, Bermuda appeared to be at the sharp end: it was the domicile for two Bear Stearns hedge funds whose struggle to meet margin calls signalled the start of a crisis that has convulsed US markets ever since. But the leading offshore financial jurisdiction has largely stayed out of the news since then, which is heartening for Matthew Elderfield, CEO of the Bermuda Monetary Authority (BMA). He is confident that the country’s banking sector, as well as its trusts and funds business, is in good health.
“In spite of subprime, profitability is good for the banking sector, it has been a strong year again for them, with relatively conservative balance sheets,” he tells The Banker. The risk-asset ratio of the Bermudian banking sector as a whole stands at a very strong 17.1%, while asset base growth has remained steady. “On the fund side, new registrations have been about on par with the previous year, so no obvious impact in terms of the amount of business coming to Bermuda,” adds Mr Elderfield.
Raising red flags
As most Bermuda-based funds are marketed to sophisticated institutional investors rather than a retail audience, the BMA largely limits itself to raising red flags based on market intelligence or sharp falls in net asset values. Systemically important institutions, including the banks and the largest fund managers, such as Fidelity International, have been watched more closely, so far without setting off any alarms.
“Our monitoring framework has stood up very well. We were one of the first jurisdictions to conduct a survey of subprime exposure. We like to use a stress-testing framework on a consistent basis,” says Mr Elderfield.
The authority is actively participating in discussions with other regulators on the lessons of the crisis in the so-called ‘parallel banking sector’ of off-balance-sheet vehicles and conduits that laid low some of the world’s leading banks. Although less affected than many onshore financial centres, Bermuda is keen to take on board the conclusions drawn by the Financial Stability Forum to remain highly compliant with international developments.
“The banks here were not originating any of this stuff or trading any of it. The reason they did invest in some of it was because of the AAA ratings, because they wanted to be conservative in their risk profile, so some lessons are being learnt from that,” says Graeme Dargie, director of banking, trust and investment supervision at the BMA. His monthly contacts with the banks and the fund trustees in Bermuda have confirmed that the impact of the crisis has been contained so far.
International status
That is not to say that no ripples have reached Bermuda’s shores. Bob Wilson, senior vice-president of corporate banking at the country’s second largest bank, Butterfield Bank, says the main spillover from events in the US was not on the client side but on interbank relations. “We have substantial lines out with letters-of-credit providers in New York and in Toronto but obviously, with the credit crunch going on, everyone is looking at their lines and asking who they are dealing with. I am glad we were proactive in going out to see these banks, to take the initiative and say ‘this is what we are doing at Butterfield to monitor our positions’ – it was well received,” he says.
To retain the confidence of the bank’s international counterparties, Mr Wilson fully supports the BMA’s firm response to the crisis in seeking to stay at the top when it comes to regulatory standards. He also regards this as vital from a client perspective. “The number of companies we deal with that adhere to SAS70 [US accountancy standards] continues to go up, so everyone is meeting increased hurdles to play in the international arena.”
Vital standards
These hurdles include the introduction of the Basel II capital framework from 2008 to 2009, for which Butterfield Bank is preparing a number of new initiatives to be announced later this year. For a small bank, the cost of implementation has to be weighed carefully against what it achieves, and Butterfield has “given a lot of thought to how we can more effectively spend our dollars”, Mr Wilson asserts.
“We are a small bank but, equally, we are alive to the issues and we try to react positively and stay ahead of the eight-ball if we can,” he says. His pool player’s analogy confirms the observation of Mr Dargie – who previously worked at the UK Financial Services Authority – that smaller Bermudian banks seem to complain less about the cost of implementing Basel II than their resource-rich UK counterparts.
The importance that local banks attach to Bermuda’s international status is understandable, given the limited growth opportunities in a local market of about 66,000 with a fragmented geography. Butterfield’s business from its overseas subsidiaries in locations such as the Cayman Islands and Guernsey exceeded that in Bermuda for the first time last year, following the purchase of private wealth manager Bentley Reid, which has offices in Switzerland, Hong Kong and Malta.
Even so, Mr Wilson emphasises that Bermuda remains the core of the bank and also the focus for ongoing modernisation activity. “If I see a demand in Bermuda, it is to make processing more efficient, whether it is opening an account or providing a letter of credit,” he says. “I am very conscious, as a banker who has been in the front line for most of his career, that while compliance is clearly important, sometimes these things take on a life of their own.”
Butterfield is seeking to adopt what Mr Wilson calls a “one-touch approach”, whereby information given to the bank “is sacrosanct, and you won’t be asked for it again”.
International focus
| For Bank of Bermuda (BoB), the country’s largest bank, an international focus is now inbuilt, following its purchase by HSBC in 2004. But here, too, handling local clients more efficiently has become a priority. For the first three years after the HSBC acquisition, says Ashley Parker, head of banking for BoB, much of the focus was on internal integration with the rest of the group, including structural changes, improved compliance and internal control processes, heightened training and accreditation of staff, and the “comprehensive undertaking” of migrating onto the HSBC information technology platform that was bedded down in 2007. |
“Now that we have done this, it is time to deliver to the jurisdiction and our clients the benefits of having gone through that transition, and a lot of that is about bringing in group capability, particularly on the technology front, to deliver more efficient services,” says Mr Parker.
On the retail side, BoB is positioning to sell the HSBC brand “more conspicuously” for high-net-worth clients, he explains, especially among Bermuda’s substantial community of expatriates. “In February, we went live with our ‘Global View’ capability that allows Bermuda Premier clients to view accounts in other jurisdictions on one web page, and by the end of the year we hope that they will also be able to make what we call ‘me-to-me’ transfers through a single access page across our Premier sites in almost 40 countries and territories of the group,” he says.
In addition to the demand from expatriates, the relative affluence of the local population has kept Bermuda’s residential real estate market relatively insulated from events elsewhere. In March, BoB’s residential mortgage delinquencies were at their lowest rate for almost three years.
Specialist teams
On the commercial side, BoB combined its corporate, commercial and business banking into one unit last September and began creating specialised teams within it, each focusing on a different business segment, such as captive insurance, investment funds and multinational companies.
The banking activities associated with these clients, including cash management and fiduciary services, have not suffered on account of US financial woes, barring some small exposure to structured investment vehicles in the bank’s corporate money funds, and overall investment funds under management grew in 2007.
BoB’s offering has also been strengthened by the creation of a dedicated network services team last November to manage the operational aspects of commercial banking. This is partly designed to align the bank more closely with the HSBC group but it also complements the new team structure.
“The bank is seeking to be a lot more centred on the front end, we want a higher proportion of our staff to be in client-facing roles – it is not just the quality of the experience, it is the quantity of the times we get in front of the client, whether physically or electronically,” says Mr Parker. To this end, relationship managers are now located in BoB’s business banking centre instead of at head office and are equipped for mobile working. “We are getting far more visibility and representation from St George’s at one end of the island to Somerset at the other.”Bermuda: the island’s three key commercial centres are Hamilton, St George and Somerset
