WILLEMSTAD - In light of recent financial problems, primarily caused by the issues surrounding Ennia and also Girobank, two prominent econometricians, Servaas Houben and Ronald Ketellapper, propose outsourcing the supervision of financial institutions by the Central Bank of Curaçao and Sint Maarten. They explain this in a conversation with the local journalist Dick Drayer.
The news in the financial world of Curaçao and Sint Maarten has been dominated by the issues with Ennia for some time now. A significant gap has been created in the financial reserves as a result of proven abuse by the majority shareholder Ansary, confirmed by the court. Can you briefly summarize what has happened?
Servaas Houben: "Ansary sold private investments to Ennia for amounts much higher than their actual value. A number of former commissioners and directors were also involved. As a result of a court ruling in November 2021, they are jointly liable to compensate the insurer for an amount exceeding one billion guilders."
Ronald Ketellapper: "Apparently, the collection process is not going well, and no money has been received yet. There is now a significant risk of substantial discounts on claims and pension payments, which would be socially disastrous. The question that concerns us is: could and should the supervisory authority CBCS have prevented this, and did they act appropriately after the appointment of a curator for Ennia?"
Does that question suggest that the Central Bank is also to blame for the Ennia debacle, or at least that it allowed it to happen?
Houben: "First of all, the guilty parties are Ansary and his commissioners. But over the past years, we have made several suggestions to improve the supervision of financial institutions. We have pointed out that there is insufficient oversight by the Central Bank regarding interest rate risk, the risk that pension funds and insurers face in not being able to deliver the promised returns to their clients. There is also the so-called longevity risk, the risk that people live longer than assumed by pension funds and insurers, which arises due to the very long duration of the obligations these institutions carry on their balance sheets."
Ketellapper: "Insufficient oversight arises, among other things, due to the open standards applied by the regulator: institutions are allowed to choose the assumptions they use to quantify their obligations to their clients. In our opinion, this provides too much leeway for financial institutions to manipulate outcomes to their desired results. It's logical because shareholders are not eager to inject more capital, and pension fund boards understandably hesitate to implement cuts and prefer to postpone such decisions."
Houben: "There is also a lack of consistent reporting to the public: some pension funds and insurers have comprehensive annual reports with a risk management section that analyzes various future scenarios, while others only publish their financial highlights with limited explanations."
Is the Central Bank the only regulatory body in Curaçao?
Ketellapper: "Yes, we have also mentioned that before. Due to the limited size of Curaçao, there are few other stakeholders that can act as corrective agents: most pension funds and insurers are not reliant on the judgment of a rating agency, media influence and expertise are limited, and customer advocacy organizations like consumer unions are barely present."
Houben: "Despite financial institutions perhaps not being enthusiastic about stricter regulations, the supervisory authority must stand firm in the interest of policyholders and pension fund participants. These are all components of so-called prudential supervision."
Ketellapper: "Furthermore, the regulator must also ensure that directors behave properly: that is called conduct supervision. In this regard, for example, we have argued that the Central Bank lacks strict enforcement, something that is much better regulated in Aruba. With Ennia, the supervisory authority also made mistakes in terms of conduct supervision."
Houben: "The shareholder had too much influence on the insurer's policies. The directors did not position themselves independently enough from the shareholder and neglected the interests of policyholders. It is unclear whether the small scale of Curaçao makes it more challenging for a regulator to intervene in a timely manner due to interpersonal factors."
Has the Central Bank failed?
Ketellapper: "A regulator who is on top of things, especially in the case of the largest financial institution like Ennia, would not allow the funds of a supervised company to be substantially drained as was the case with Ennia. The Central Bank was warned by De Nederlandsche Bank in 2015 and 2016, but with a successful appeal to independence, they disregarded those warnings."
Houben: "The Central Bank should have been alerted when the diversification in the investment portfolio disappeared after Ansary's transaction, resulting in an unacceptably high concentration risk."
But Ennia is still fully paying out pensions to this day.
Houben: "We have previously shown that each pension payment further erodes Ennia's financial position if the one billion guilders are not recovered. In our opinion, it is better to apply the cuts immediately and reverse them if successful collection takes place. Unless the government is willing and able to replenish the deficits. But that must happen quickly."
Ketellapper: "We find the supervision rules in Curaçao insufficiently risk-based. Solvency II and IFRS17 are well-known examples of supervision rules that are risk-based. Curaçao does not have to blindly adopt those rules: simplifications are certainly possible to better align the complexity with the relatively small size of institutions in Curaçao. Unfortunately, we have not seen any concrete steps from the Central Bank to introduce risk-based regulation."
Do you have any suggestions on how to proceed?
Houben: "We wonder to what extent a regulator in a small economy with a small financial sector is even capable of conducting adequate supervision. The available expertise is limited, and the costs of supervision are high, up to four times higher compared to supervision in larger economies. Supervision costs are paid by supervised entities, and they pass on those costs to customers. These are bank account holders, policyholders, and participants in pension funds."
Ketellapper: "In our opinion, there is a strong case for outsourcing supervision in Curaçao to, for example, De Nederlandsche Bank. They are much better equipped and can likely perform supervision in Curaçao more efficiently and cost-effectively. Supervision by the Central Bank in the Netherlands also has the advantage of creating a physical distance between the supervised financial institution and the regulator, reducing the likelihood of personal interests playing a role."
Houben: "We realize that such a step limits the independence and autonomy of the Central Bank of Curaçao and Sint Maarten. By structuring this outsourcing in a purely civil-law outsourcing agreement, the objections against alleged dependence can be addressed."