A tradition of conservative banking leads to profits during global financial crisis

It might surprise some people to learn that banking in the Cayman Islands is not all about mysterious international accounts in pursuit of tax-driven financing schemes. That tired stereotype does not square with the reality of a local Cayman banking system that is actually very conservative, where banks competing in the local retail market habitually limit their loan volumes to 50 cents for every dollar of deposits, and where standards of due diligence and know-your-customer practices are more stringent than those prevailing in traditional “onshore” markets like the United States and United Kingdom.

Stuart Dack, CEO of Cayman National Bank (CNB), knows this reality better than most. Arriving in the Cayman Islands 18 years ago following a career with HSBC/Midlands Group in the UK, Dack has deep familiarity with the standards and practices of London and New York, as well as detailed hands-on knowledge of how banking is done in Cayman. CNB is the market leader in the Cayman retail market, with what Dack estimates to be about a 22 percent market share. “We are the only truly local retail bank,” notes Dack, explaining that competition in the retail market comes from banks such as Butterfield Bank, Royal Bank of Canada, and Scotiabank, all of which originate from other jurisdictions. In a year where the global leaders of the banking industry are hemorrhaging losses in the multiple billions of dollars and relying on life support from government bailouts, CNB is headed towards a profit for the year, supported by a strong balance sheet. The bank recently was named “Bank of the Year – Cayman Islands” by “The Banker” magazine, a publication of the Financial Times Group.

“At CNB, and in the Cayman banking sector generally, we have a strong due diligence culture,” says Dack. He attributes this culture to several factors: the resident expertise of senior banking executives who have prior careers at global firms like HSBC, Barclays, Citigroup and others; a strong local regulatory environment led by the high standards of compliance enforced by the Cayman Islands Monetary Authority (CIMA), the primary banking sector regulator; and a tradition of conservatism wherein banks tend to shy away from the type of speculative practices, assumption of high levels of leverage, and cursory credit management methods that resulted in the financial sector cataclysm starting in the summer of 2007. “The banks here have done a good job at managing risk,” says Dack, “and the regulators have done a good job in monitoring and enforcing high quality standards.”

CNB engages in both the local retail business as well as providing offshore banking services to an international clientele. Dack reckons the mix of local to offshore business is about a 60-40 ratio. The bank provides expertise in areas such as structured finance and joint ventures that constitute a major part of offshore banking. “Most people think of offshore banking as tax-driven,” observes Dack, “but that is not really where offshore banking is today. If a client comes to us and we, for whatever reason, suspect that the primary motivation of his approaching us is tax avoidance, we do not take on the client.” CNB emphasizes to all international clients the importance of relying on competent tax counsel in their home jurisdictions to understand the tax implications of their overseas business.

As the global economy turns down and international regulators, policymakers, and politicians grapple for solutions, there is a great deal of concern that “onshore” decision-makers will increasingly point the finger at offshore locations like the Caymans as being sources of the problems, despite the abundance of evidence to the contrary. Dack echoes these concerns and notes that this is not the right time to make ill-informed decisions to satisfy short-sighted political agendas. “What is vital is to get the global economy moving again,” says Dack. “This economy consists of a number of moving parts, and places like the Cayman Islands contribute vital functions that keep the overall engine moving forward. Everyone who can contribute should contribute – that is the only way we will get moving again.”