QUICK LINKS

The Banking Intervention & Rehabilitation department is concerned with the comprehensive restructuring, monitoring and rehabilitation of banking institutions in which FINSAC intervened. These are the newly-formed Union Bank of Jamaica Limited (Union Bank), and the National Commercial Bank. Through its participation in a Cash Management Working Group, the department also assists in ensuring that adequate liquidity management provisions are in place to allow all FINSAC intervened entities to regain viability. Additionally, through its Prosecutorial and Forensic Unit, the department conducts, monitors and supervises prosecutorial and forensic investigations. It oversees examinations of FINSAC assisted entities, and, where necessary, institutes legal actions to ensure the recovery of public funds and the accountability of those who may have misappropriated these funds. 

UNION BANK Union Bank is the result of the merger of the businesses and assets of Island Victoria Bank (IVB), Citizens Bank Limited, Citizens Merchant Bank, Eagle Commercial Bank (Eagle) and Corporate Merchant Bank. Part of the business and selected assets of Workers Bank were also included in the merger. Prior to this, the assets, liabilities and operations of a number of the failed merchant banks were merged into the operations of Citizens Bank Limited. FINSAC gained control of these banks, and the groups of companies with which they were associated, following the government’s provision of financial assistance to help resolve their chronic liquidity and solvency problems. The decision to merge their operations followed consultants’ diagnostic reviews, which indicated that none of the banks was individually capable of survival in the current and foreseeable economic environment. A merger to create a single larger profitable bank was recommended. 

The first step was the formation of a holding company, Union Bank of Jamaica Holding Company, charged with effecting the merger. It was also recommended that an independent management team be given the responsibility of carrying out the transition under FINSAC’s supervision into a single viable entity over an eighteen to twenty four month period. Because of the specialised knowledge and expertise that would be required, and in view of the judgement that it would be difficult to find suitably qualified and unconnected individuals locally, an overseas team was necessary. TransAmerica Financial Services (TFS), a United States bank management and consulting firm with extensive experience in the restructuring and rehabilitation of banks, was the chosen contractor. The TFS team assumed the management of Union Bank in January 1999. 

Their mandate under the agreement includes: 

• Consolidation of the financial entities 

• Conversion of all operations to a single Year 2000 compliant IT platform

• Stabilisation of the loan portfolio 

• Reduction of operating costs through rationalisation 

• Preparation and implementation of a strategic plan for the bank 

• Restoration and promotion of customer and employee confidence.

The selection of a single Year 2000 compliant information technology platform from which to launch the new entity was a top priority. The solution chosen was the FINWARE software, a product of CitiCorp Information Technology India Limited, which was already in place as the core system at Workers Bank. A total of seven branches of Workers Bank, Eagle and both branches of IVB have been converted to and now operate on FINWARE. It is expected that the whole of Union Bank will operate on this fully Year 2000 compliant system by September 1999. 

Rationalisation is proceeding. Head Office functions including administration, treasury, human resources and accounting have been integrated. There has also been a necessary reduction in staffing levels to improve efficiency. Prior to the merger, the banks operated a total of 42 branches. These have so far been rationalised to 37 branches. Union Bank is eventually slated to have a total of 24 branches island wide. The TFS team is expected to complete its work by late 1999. The expectation is that Union Bank will then be returned to the private sector. The legal merger of the banks became effective April 23, 1999 and the name of Citizens Bank was changed to Union Bank of Jamaica Limited by a vote at the Annual General Meeting on June 29, 1999.

NATIONAL COMMERCIAL BANK
FINSAC’s financial assistance package for National Commercial Bank (NCB) totalling $19.5 Billion, together with a structured turn-around plan for the bank’s rehabilitation, was finalised early in fiscal 1998/1999. It included the purchase without recourse of the non-performing portions of the loan portfolios of NCB and NCB Trust & Merchant Bank Limited. These loans amounted to $13.5 Billion at face value. It also included the injection of $4.67 Billion into NCB Group and NCB through FINSAC’s acquisition of Preference Shares in exchange for FINSAC Notes, and $1.33 Billion in ordinary and zero coupon preference shares in NCB. 

This second tranche of the financial package initiated in February 1997, took effect on October 1, 1998 after FINSAC had worked closely with NCB to ensure their qualification for further assistance. The capital injection increased NCB’s capital base to approximately $6.7 Billion - the largest of any Jamaican bank. FINSAC has continued to monitor NCB’s progress in the agreed rehabilitation plan and positive results are now evident. The branch network is being rationalised, with staff counts already down from 3,110 to 2,614. The FINSAC assistance has enabled NCB to show a net profit for the first quarter of 1999. The bank has also been able to come closer to achieving compliance with statutory lending limits, having been in violation due to inadequate capitalisation. FINSAC has also started proceedings for the eventual divestment of its holdings in NCB. International investment banking houses have been contacted to review the options and make recommendations.

CASH MANAGEMENT WORKING GROUP
Liquidity has been at the core of the problems in the banking sector in Jamaica, and in the FINSAC controlled banks in particular. An analysis of liquidity flows and their relationship to various government departments was conducted in the latter part of 1998. It was considered that liquidity would be best managed by means of a centralised working group comprising representatives of the Bank of Jamaica, the Ministry of Finance, FINSAC, and the Accountant General. Consequently the Cash Management Working Group was formed in January 1999. Short-term objectives are to improve FINSAC intervened banks’ and insurance companies’ liquidity. In the mid-term, ongoing cash support may need to be provided in exchange for FINSAC Notes, which are providing long term liquidity support. The group’s working process is as follows:

• Liquidity is monitored by FINSAC on a daily basis. The cash requirements submitted by FINSAC controlled entities are analysed and adjusted, and the performance of each institution is monitored, based on a scorecard of key indicators - liquidity, profitability, capitalisation and credit quality, cost management and productivity. These benchmarks encompass performance measures for the banks developed by the Bank of Jamaica, and take into account targets that have been agreed on for the financial year.
  
• The Cash Management Working Group meets fortnightly to review requests for liquidity support. It then provides recommendations to a Steering Committee comprising the Financial Secretary, FINSAC’s Managing Director, and the Governor of the Bank of Jamaica. This Steering Committee makes final decisions regarding the allocation of funds.

Liquidity support of $2.4 Billion to meet the first quarter cash requirements of the FINSAC controlled entities for the first quarter of 1999 was allocated by the Financial Secretary. The government placed $854 Million of this amount on a fixed deposit with Union Bank, and $1.55 Billion went towards the redemption of FINSAC Notes from the entities. The breakdown of the latter was: Union Bank -- $1,050 Million Mutual Life -- $400 Million Crown Eagle -- $100 Million These funds were disbursed by the Accountant General’s Office between February 5 and February 19, 1999. The Government, through the Accountant General’s Office, also provided short-term liquidity assistance to Union Bank on two occasions during the last month of the 1998/1999 fiscal year. The first was a deposit of $1.3 Billion to Citizens Bank on March 10 and the second, a deposit of $700 Million was placed on March 17. In addition, FINSAC provided $145 Million to Mutual Life from its own resources on March 29, 1999.

PROSECUTORIAL & FORENSIC UNIT
Formed in early March 1999, this unit has been established to enable FINSAC to assume direct responsibility for all investigations into the activities of Blaise Merchant Bank Group, the Century National Bank Group, and FINSAC intervened entities where possible civil and/or criminal wrongdoing may have occurred. Previously these matters have been dealt with on FINSAC’s or Financial Institution Services’ behalf by outside consultants. The objective is to reduce consultant costs and co-ordinate proceedings. An analysis of consultants’ fees has been completed, and reporting mechanisms and working procedures have already been put in place to ensure an extensive transfer of knowledge and skills to FINSAC in the forensic area.

All investigations are being carefully monitored to smooth the litigation process. A number of cases have been referred to the Director of Public Prosecutions for action in the criminal courts, while civil proceedings are being pursued against some former directors and shareholders. A major ruling in favour of FINSAC/FIS has been the May 25, 1999 judgement in FIS’s civil case against former principals and Directors of Century National Bank. The defendants have been ordered to pay approximately J$1 Billion plus US$35 Million and to assign a number of privately owned properties to FIS. An application for a speedy trial in FINSAC’s civil proceedings against the Eagle Group was granted. 

The trial is now expected to take place in October / November 1999. At this early stage, the unit is staffed by forensic auditors, but in the near future in-house legal staff will also be retained. Because of the highly confidential nature of its activities, the unit reports to a sub-committee of FINSAC’s Board of Directors and Executive Committee.