New York, 12-16-97 -- In a report published today, Moody's Investors Service says that "foreign currency deposits in certain offshore banking centers are partially immune from the sovereign risk of the host jurisdiction," and the rating agency examines the offshore sectors of the Cayman Islands, the Bahamas, Panama, and Bahrain. Offshore Banks Partially Immune from Sovereign Risk, Moody's Reports -- New Bank Deposit ceilings Introduced
Yves Lemay, senior vice president in Moody's sovereign risk unit, says this is so in small jurisdictions where the offshore banking center features a number of attributes. First, Lemay mentions, is that "fundamentally, the center owes its existence to ease of operation factors such as a friendly regulatory environment, locational advantages, bank secrecy laws, and the absence of income taxes." In addition, he says, the center contributes significantly, either directly or indirectly, to employment, government revenue and, more generally, the economic life of the host country.
At the same time however, Moody's Lemay points out that, as financial intermediaries, banks in these offshore centers have very limited linkages to the local economy, reflecting the "cross-border nature of their assets and liabilities."
Because of these features, the host country has little incentive and only a limited capacity to interfere with the cross-border payments of offshore banks. In addition, Lemay explains that "the very nature of these centers suggests that maintaining a presence is unlikely to be of strategic importance to international banks." And with only limited financial ties to the host country, foreign banks in these centers are more apt to relocate quickly should deposit payment obligations ever become threatened by acts of state.
To delineate differences in the exposure to sovereign risks between the domestic component of the banking system and its offshore segment in these small jurisdictions, Moody's is now providing separate and distinct foreign currency bank deposit ceilings according to licenses and/or designation. For banks licensed to function as financial intermediaries in the local economy, we retain our normal approach, which is to assign a ceiling which is at or, in the case of lower-rated countries, below the country's foreign currency ceiling for bonds and notes. For the offshore segment of the bank population, we provide a ceiling that is significantly higher.
Turning to specific cases, the foreign currency deposit ceilings for offshore banks (license "B" banks) in the Cayman Islands are Aaa for long-term debt and Prime-1 for short-term debt. The ceiling for domestic banks (license "A" banks) are two levels lower for long-term debt at Aa3 and Prime-1 for short-term debt -- both of which correspond to the newly assigned ceilings for bonds and notes issued by indigenous Cayman entities. The higher ceiling for the offshore segment of the bank population reflects the degree of insulation stemming from the center's "flag of convenience" nature, the "B" banks limited ties to the local economy as financial intermediaries and ease of relocation factors.
The Bahamas' bank deposit ceilings for offshore banks (designated as "non-resident" under the jurisdiction's foreign exchange regulations) are also Aaa and Prime-1 under this framework. Again, this reflects the offshore banks' tenuous linkages to the local economy as financial intermediaries, the behavioral factors stemming from the flag of convenience nature of the venue, as well as the country's relatively low risk profile. The ceiling for banks providing financial intermediation services to the local economy matches the country's ceiling for bonds and notes -- A3 and Prime-2. In order to institute this new approach, the previous bank deposit ceilings of A2 and Prime-1 have been withdrawn.
As for Panama, the offshore banks ("international license) have a Aa2 long-term ceiling and a Prime-1 short-term one. Domestic banks (general license) face a Baa2 long-term ceiling and are capped at Prime-2 for short-term deposits. Moody's Lemay says that the Aa2 rating is appropriate because "the contribution of the offshore industry to the economy gives the local authorities strong incentives and reasons to avoid interference." At the same time, "the ceilings for the offshore center still need to reflect the 'residual' exposure to country risk – however small that exposure might be."
In the case of Bahrain, offshore banks (offshore banking units) are capped at A3 and Prime-2. Domestic or "full commercial" licensed banks are limited to Ba2 and Not Prime ratings. Lemay says that ownership linkages, physical presence requirements, and Bahrain's increasing role as a source of funding for projects in the regions suggest that local/regional ties are stronger in Bahrain than in the other three venues featured in the report. Lemay says, though, that "Bahrain's offshore banks nonetheless enjoy a high degree of protection from the country risks given the economic self-interest of the host to avoid interfering with cross-border payments."
NOTE TO JOURNALISTS: For a copy of this Moody's report, please contact Donna Gee in New York (212) 553-0376, Andrew Chmaj in London (171) 772-5454, Juan Pablo Soriano in Madrid (341) 310 1454, Katrina Braund in Sydney (612) 9270 8111, Mauricette Salque in Paris (331) 53 30 10 20, Juergen Berblinger in Frankfurt (4969) 242 840, Velvet Yoshinami in Tokyo (813) 3593 0734, Hilary Parkes in Toronto (416) 214-1635, Edward Young in Hong Kong (8522) 509 0200, Patrick Winsbury in Singapore (65) 320 8330 or Christiana Aguiar in SÆo Paulo (5511) 3043-7186.
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