Lucayas Bank Bahamas stops trading and placed under administration

25 November 2021 – Lucayas Bank Bahamas Stops Trading and Placed Under Administration:

The Central Bank of the Bahamas placed Nassau based Lucayas Bank under statutory administration on the 27th of October 2021. The special administrator initially resumed control over the banks management and operations to ensure financial stability and maintain confidence in the system. Yesterday, the 24th of November 2021, all operations of Lucayas Bank have been frozen until further notice. Resolution decrees aim to protect the public interest and the interest of bank depositors and other creditors. Bank depositors have been informed by the special administrator about his appointment and that card services and e-banking facilities have been blocked. A resolution plan for creditors of Lucayas Bank Bahamas is in the making. Yet, the implementation of measures to safeguard stakeholders interest may take some time.

Lucayas Bank Profile

The origin of the Lucayas Group traces back to 1982. The group currently acts as a non-resident financial institution in the Bahamas providing bank, trust and wealth management services to a global clientele, mainly high net worth individuals and offshore companies. The group is a Supervised Financial Institution holding a bank & trust license awarded by the Central Bank of the Bahamas. Its mandate is provided for under master code LIC0114. However, such license prohibits the bank from dealing in gold and currencies, and act as a custodian to maintain foreign currency securities and related deposits. At the same time, the designation as a non-resident enables the bank and trust company to operate with non-residents and transact freely in foreign currencies. Furthermore, the group holds a license issued by the Securities Commission of the Bahamas which permits them to deal in securities as an agent; managing securities; and advising on securities. The bank is headquartered in Nassau and employs 24 people. Its e-banking platform allows for swift access to portfolio management and bond investments.

Financial institutions can grow organically as well as by acquiring other financial institutions. The combination of such growth strategies accelerates the position of the bank, stimulates its presence, and expands the corporate activities. The Bahamian bank holding company Private Investment Bank Limited (PIB) was acquired in 2021 by private shareholders and rebranded as Lucayas Bank Ltd. PIB was previously associated with Geneva based Bank Cramer & Cie, IPG Securities Asset Management (Bahamas) Ltd, and IXE Capital Bahamas. The acquisition of PIB transferred the master code LIC0114 and license as a Supervised Financial Institution, as well as a license of the Securities Commission of the Bahamas from PIB to the Lucayas Group. The ownership structure of Lucayas is shielded, and there are no visible records for the group of a bank and trust company license in the public files of the Central Bank of the Bahamas prior to the acquisition of PIB. The same applies to the license granted by the Securities Commission of the Bahamas.

Capitalization of financial institutions is an important and ongoing concern. Bank capital requirements are governed on an international level to maintain confidence in the global financial system whilst protecting its creditors and ultimately the public interest. The acquisition and rebranding of PIB by the Lucayas Group was conditionally approved by the Central Bank of the Bahamas. Recapitalization was required after the bank was initially sold by Banque Cramer to IPG Securities Asset Management (Bahamas). The transaction was reversed when capitalization stayed behind and new bank management did not pass the fit and proper test for controlling persons and board members in financial institutions. Under IPG ownership of PIB, fixed assets, such as property, were purchased impacting the capital position of the bank. The value of the property was used to improve the balance sheet of the bank, whilst intangible assets could not be considered regulatory capital. As a new owner, Lucayas tried to raise capital from its clients via a bond issuance program.

Bank Capitalization and Risk Management

Bank customers have a unique and personal profile and use banking facilities in a way that fits their spending pattern. Some customers leave a positive account balance while others enter into overdraft. As such, the value of the total balance differs on a daily basis. This makes banking in general a very volatile business. Furthermore, access to capital and liquidity are the core drivers of the global economy. Liquidity provision and bank lending enable financial institutions to provide capital to the market. From a theoretical and contractual perspective, borrowers repay their loans on time and in accordance with the agreement. Reality shows that unexpected defaults happen and that risk is furthered by the strategies used by banks to leverage their lending potential.

Banking is a trust-based, yet unpredictable business. Confidence in the financial system allows financial institutions to enter into severe debt by issuing unsecured bonds and commercial paper that central banks lend against and investors can purchase. Financial institutions may in theory lend out all capital they have available. Mismatches between assets and liabilities, accounting values, and currency reserves determines banking risk. As such, regulators use bank risk modelling to predict future events. The result is that bank capital relates to the quantity and quality of the reserves. These reserves are an indication of the capital adequacy of a financial institution as a percentage of its risk-weighted credit exposures. Its ratio is used to protect depositors and promote the stability and efficiency of the financial system. The total regulatory capital ratio is defined as the ratio of Tier 1 and Tier 2 capital to risk weight assets. Tier 1 capital contains shareholder equity and retained earnings, and is complemented by the more volatile revaluation reserves, hybrid capital instruments and subordinated term debt, general loan-loss reserves, and the undisclosed reserves. Creative bookkeeping allows banks to book assets for the value on the day these were sold and convert long-term debt into capital creating a detrimental bias. Under the current capital requirements, financial institutions must hold at least 10,5% of the risk-weighted assets in regulatory capital.

In the matter of Lucayas Bank, the above is a theoretical, yet crucial determinant for the statutory administration imposed by the Central Bank of the Bahamas. Under previous management, real estate was used to cover the regulatory capital cushion. The current owner received conditional approval to run the bank for as long as capitalization was advanced. Until today, this has not been effectuated which resulted in the appointment of the statutory administrator to expedite the process and resolve the matter.

Legal Framework for Lucayas Bank Resolution

Financial institutions may be granted a bank and trust company license in the Bahamas. Without such license traditional bank activities like deposit taking and loan provision is prohibited. A license is granted when the business, its capital position, and controlling persons and owners correspond with the values of the jurisdiction. The Central Bank of the Bahamas considers an application as a bank and trust company on the following determinants: the incorporation and ownership structure of the company; the nature and sufficiency of the financial resources of the applicant; the soundness and feasibility of the business plan; the best interest to the financial system; and, the public interest. Controlling persons and higher management must pass the fit and proper test to establish honesty, integrity and reputation; competence and capability; and financial soundness. A conditional license can be provided for newly founded financial institutions and established bank and trust companies experiencing a change in ownership.

The Central Bank of the Bahamas is responsible for the protection of the local economy and financial system. As such, its tasks contain among other things the management of the Bahamian dollar and supervision of the commercial banking system. This supervision aims to prevent disruption of public confidence in the financial system and thus eliminate illicit activities and avoid capital depreciation. The central bank may alarm local banks to improve its position, and in more serious matters impose fines, penalties, or sanctions and withdraw the license of the bank.

Among other things, the Central Bank of the Bahamas has the power to withdraw the bank and trust license of banks that operate and are licensed in the jurisdiction. It can do so when the bank does not conduct banking or trust services anymore; when the bank goes bankrupt, enters into liquidation or dissolution; when it appears likely that the bank becomes unable to meet its obligations as they fall due; when the application for the license is false or misleading; but most of all if the bank conducts its business in a way that is detrimental to the public interest or the interest of its creditors, or that the bank violates the provisions of the Banks and Trust Companies Regulation Bill of 2020.

When a licensed financial institution fails or is likely to fail, the Central Bank may appoint a statutory administrator to manage the bank on its behalf. The objective of this special administration is to resolve the issues and mitigate risk for all stakeholders. These include maintaining financial stability; protecting and enhancing public confidence in the stability of the banking system of the Bahamas; protecting depositors including by ensuring prompt payouts of deposits of a bank in liquidation; minimizing the costs of resolution and avoiding unnecessary destruction of value; and the protection of public funds. The special administrator is initially appointed for a period of 12 months, that can be extended with another 12 months in complex matters.

The statutory administrator has full and exclusive powers to manage and operate the bank. This is furthered by the following actions necessary to carry on the business of the bank; exercise shareholders rights and powers; continue or discontinue any or all of its operations; stop or limit the payment of the banks obligations; remove or employ staff members and management; execute financial instruments in the name of the bank; and preserve and safeguard the assets and property of the bank. In the matter of Lucayas Bank, the statutory administrator currently investigates the mist feasible options for the bank.

Deposit Insurance, Liquidation and Dissolution

In 2021 Private Investment Bank Limited was taken over and rebranded into Lucayas Bank. The bank and trust license followed the takeover. Such a license contains value and a sale of the business and license is a realistic possibility. Yet, such transactions often take time and contain an uncertain element for stakeholders. As a consequence, corporate liquidation and dissolution of the bank remain possible as well. For account holders an unexpected and bothersome scenario.

The Deposit Insurance Corporation (DIC) of the Bahamas administers the domestic Deposit Insurance Fund. The scheme is tailored towards the local market and exclusively covers accounts in Bahamian dollar. The bank and trust license of Lucayas Bank holds a non-resident registration. Participation in the fund is mandatory for registered and licensed financial institutions that hold Bahamian dollar deposits. Neither Lucayas Bank, nor Private Investment Bank Limited was a participating member institution of the DIC in November 2021. Account holders therefore must pay attention to alternative solutions for asset and fund recovery.

Regulatory intervention and the following appointment of the statutory administrator to identify plausible solutions for all stakeholders, is therefore recommended. The statutory administration took office in October 2021 and contacted account holders one month later. Although it is premature to make any predictions on the future of the bank, it is important to understand the future options for creditors so they can act accordingly. Since the main concern for the bank is the capitalization of its core capital position, existing shareholders may be asked to increase this capital. Another possibility to reorganize and rescue the bank is to convert liquid account balances of regular bank customers into equity of the bank via corporate bonds. The latter is in particular hazardous and must be treated with utmost care due to the volatile nature of these bonds, the subordinated position in the debt hierarchy, and the way these bonds are traded via OTC markets.

The statutory administrator investigates the feasibility of the following options: a) to return the bank into compliance with the Banks and Trust Companies Regulation Bill of 2020; or b) compulsory liquidation of the bank. To conclude the probe into the financial stability and viability of Lucayas Bank, a moratorium to suspend temporarily or permanently some or all banking facilities is common. When no other solution is available, the bank is stripped of the bank and trust license to liquidate and eventually dissolve the legal entity.

If a liquidation is approved, an asset management vehicle is formed to receive the assets, rights and liabilities of the bank where liquidity is paid into the resolution funding account. Simultaneously, the liquidator delivers a notice of his appointment to known creditors of the bank and publish this notification in the national Gazette within 60 days after the appointment. Creditors are asked to present a proof of debt and a proof of claim for verification purposes and to avoid that future payments are made to the wrong receivers. A claim can be rejected and a creditor may object to this decision within a reasonable time.

The creditor hierarchy decides on the priority of claims. Secured claims hold the highest position in the hierarchy, paid directly from the banks assets. Unsecured claims are divided between those with preference over the general assets of the bank, and subordinated claims paid from the pool of funds available for distribution. The liquidator may make periodic distributions of recoveries on liquidated assets to claimants once an adequate reserve is made held for disputed claims against the bank. This means that creditors may receive repayment in tranches at different moments in time.