Central Bank of Trinidad and Tobago
Encyclopedia
The Central Bank of Trinidad and Tobago is the central bank
of Trinidad and Tobago
.
The Central Bank of Trinidad and Tobago is located in the Eric Williams Financial Complex
. The complex consists of the central bank auditorium
and two sky-scrapers, locally known as the twin towers. The first tower houses the central bank of Trinidad and Tobago and the second tower houses the ministry of finance. It was only the second Central Bank to be established in the English-speaking Caribbean
, the first being the Bank of Jamaica
which was established in 1960.
on December 12, 1964. In particular, the Bank's main responsibilities are to issue and redeem currency; maintain monetary and financial stability; act as banker to the government as well as the commercial banks and protect the external value of the Trinidad and Tobago dollar
(TT dollar).
The Central Bank is the only institution in the country which is authorised to issue currency notes and coins. The Central Bank is responsible for:
the design of the currency;
the maintenance of its integrity and
providing an adequate supply of currency to satisfy the needs of the public.
which provided for full convertibility of the local currency into sterling
. The Ministry of Finance administered exchange controls against other currencies.
The late 1960s and early 1970s were characterized by great turmoil both at home and abroad. The external source of turmoil was linked to continuing concerns about the strength of sterling and the TT dollar/sterling peg. In November 1967, when the pound sterling was devalued, the TT dollar was adjusted by the same amount to maintain its sterling parity. In 1970, the administration of exchange controls was delegated to the Bank, sterling was subject to exchange controls and the TT dollar peg was shifted from the pound sterling to the US dollar at a rate of TT$2.40 per US dollar. The Defence Finance regulations of 1942 under which exchange controls had been administered was replaced by a new Exchange Control Act in 1970.
The domestic turmoil of the early 1970s came in the form of socio-political upheaval, and what came to be known as the Black Power Revolution
. One outgrowth of this upheaval was the movement towards the localisation of commercial banks, initiated by the Government but with the Bank playing an important role.
In the mid-1980s, the Bank faced a major threat to the financial system when oil prices slumped
and the economy slipped into recession. Several non-bank financial institution
s (NFIs) failed due to weak internal controls and excessive exposure to the real estate
market. Initially, the Bank, in conjunction with the commercial bank
s, provided short term financial support. When it was clear that the problem was not one of liquidity but insolvency
, the Bank moved to close down five of the NFIs. The crisis of the finance companies was to absorb a great deal of the energy of the Bank’s leadership in the mid-1980s.
In 1986, as a result of lessons learnt from the NFI crisis, several amendments were made to the Central Bank Act and the Financial Institutions (Non-Banking) Act. The amendments conferred special emergency powers on the Bank to intervene in financial institutions to protect the interests of depositors and creditors. They also established the Deposit Insurance Corporation as a subsidiary of the Bank. The amendments were quite timely as the Bank utilized them that same year to close five NFIs. The Bank was also called upon to intervene in the Trinidad Co-operative Bank
in 1986 and in the Workers’ Bank in 1989.
In 1993, the Bank moved to merge the three indigenous institutions – National Commercial Bank, Workers' Bank and Trinidad Co-operative Bank – to form the First Citizens Bank
(FCB). These actions were designed to avoid losses for depositors and forestall systemic problems in the banking system. The role of the Bank in the formation of FCB is considered as a major achievement in the Bank’s history and represents a shining example of an innovative and successful restructuring exercise in the Caribbean.
From its inception, the Bank saw itself as having a developmental role. Consistent with this orientation, from the start of the decade of the 1980’s, the Bank became involved in a number of institution-building initiatives. Thus, for example, the Bank worked to establish the Trinidad and Tobago Stock Exchange
and the Trinidad and Tobago Unit Trust Corporation
in 1981. In 1986, in collaboration with the commercial banks, life insurance companies, the National Insurance Board and the International Finance Corporation
, another familiar institution was established: the Home Mortgage Bank.
, monetary policy and management were largely conducted by several different institutions. The British Caribbean Currency Board, which was established in 1951, issued and redeemed currency with little or no consideration of prices or credit conditions in the domestic economy. The credit policies of the foreign banks were managed by Headquarters and foreign exchange matters were administered by the Exchange Division of the Ministry of Finance.
With the passage of the Central Bank Act (No. 23 of 1964), the Bank took responsibility for the conduct of monetary policy. Monetary Policy refers broadly to those actions and decisions undertaken by the Bank to create appropriate monetary conditions in line with the developmental objectives of the country. The conduct of monetary policy is influenced significantly by the pace of real economic activity, the fiscal operations of the government, capital inflows and the operations of the commercial banks. These factors impact on liquidity and in turn affect inflation
, foreign exchange reserve holdings and the exchange rate
.
The Bank’s monetary policy objectives and tools have had to constantly adapt to the needs of a rapidly changing domestic and international economic environment. The monetary policy framework of the Bank has as its primary objectives, the maintenance of:
As noted earlier, Trinidad and Tobago passed through a major economic and financial crisis in the second half of the 1980s consequent to the slump in oil prices. In addition to a rapid rise in inflation, the country experienced acute balance of payments and debt servicing difficulties.
In an effort to help address this situation, initially, the Bank was called upon to administer a dual exchange rate regime and an exchange control system to severely curtail foreign exchange outflows - the system known as the EC zero system. This was essentially a form of strict foreign exchange budgeting to permit traditional importers and other users to receive an allocation of foreign currency on a quarterly basis for the year ahead.
When the reliance on these controls proved to be ineffective the Government adopted a new strategy involving the negotiation of a stabilisation and structural adjustment programme with the International Monetary Fund
and the World Bank
and the negotiation of debt rescheduling agreements with creditor banks and the Paris Club
. In the context of these agreements, the Bank, in the early 1990s embarked on a comprehensive programme of financial sector reform geared to liberalise the financial system as well as to modernise the Bank’s prudential and supervisory framework.
In recent years the Bank has continued to refine its monetary policy framework and upgrade its regulatory and supervisory regime to bring it more in line with international best practices. The new monetary framework introduced in 2002 uses the repo rate (the rate at which the Bank is prepared to provide overnight financing to commercial banks) as the principal instrument to indicate the desired direction of bank interest rates and to convey the desired monetary policy stance. The Bank has also implemented a phased reduction in the reserve requirement applied to commercial banks.
The business of the Bank will continue to evolve as the domestic and international financial environment changes. In addition to its traditional functions such as monetary policy, financial system supervision, its responsibility for currency and management of reserves and its research function, new horizons are emerging. These include improving the country’s infrastructure
, as evidenced by such initiatives as the reform of the payment system, strengthening the government securities market and participation in the regional credit rating agency
and the Automated Credit Bureau.
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
of Trinidad and Tobago
Trinidad and Tobago
Trinidad and Tobago officially the Republic of Trinidad and Tobago is an archipelagic state in the southern Caribbean, lying just off the coast of northeastern Venezuela and south of Grenada in the Lesser Antilles...
.
The Central Bank of Trinidad and Tobago is located in the Eric Williams Financial Complex
Eric Williams Plaza
Eric Williams Plaza, also known as the Eric Williams Financial Complex, located on Independence Square, Port of Spain, is the tallest building in Trinidad and Tobago, as well as in the English-speaking Caribbean. It consists of a pair of skyscrapers 22 stories high and 302 ft tall, locally known...
. The complex consists of the central bank auditorium
Auditorium
An auditorium is a room built to enable an audience to hear and watch performances at venues such as theatres. For movie theaters, the number of auditoriums is expressed as the number of screens.- Etymology :...
and two sky-scrapers, locally known as the twin towers. The first tower houses the central bank of Trinidad and Tobago and the second tower houses the ministry of finance. It was only the second Central Bank to be established in the English-speaking Caribbean
Anglophone Caribbean
The term Commonwealth Caribbean is used to refer to the independent English-speaking countries of the Caribbean region. Upon a country's full independence from the United Kingdom, Anglophone Caribbean or Commonwealth Caribbean traditionally becomes the preferred sub-regional term as a replacement...
, the first being the Bank of Jamaica
Bank of Jamaica
The Bank of Jamaica is the central bank of Jamaica located in Kingston. It was established by the and was opened on May 1, 1961.It is responsible for the monetary policy of Jamaica on the instruction of the Minister of Finance.- History :...
which was established in 1960.
Functions
The Central Bank of Trinidad and Tobago undertakes many functions in its day-to-day operations. The Central Bank of Trinidad and Tobago was established by an Act of ParliamentAct of Parliament
An Act of Parliament is a statute enacted as primary legislation by a national or sub-national parliament. In the Republic of Ireland the term Act of the Oireachtas is used, and in the United States the term Act of Congress is used.In Commonwealth countries, the term is used both in a narrow...
on December 12, 1964. In particular, the Bank's main responsibilities are to issue and redeem currency; maintain monetary and financial stability; act as banker to the government as well as the commercial banks and protect the external value of the Trinidad and Tobago dollar
Trinidad and Tobago dollar
The dollar is the currency of Trinidad and Tobago. It is normally abbreviated with the dollar sign $, or alternatively TT$ to distinguish it from other dollar-denominated currencies. It is subdivided into 100 cents...
(TT dollar).
The Central Bank is the only institution in the country which is authorised to issue currency notes and coins. The Central Bank is responsible for:
the design of the currency;
the maintenance of its integrity and
providing an adequate supply of currency to satisfy the needs of the public.
Challenges
In its 40 years of existence, the Bank has faced many challenges, some a direct result of exogenous shocks, others because of the impact of domestic policies. When the Bank was established in 1964, Trinidad and Tobago was part of the sterling areaSterling Area
The sterling area came into existence at the outbreak of World War II. It was a wartime emergency measure which involved cooperation in exchange control matters between a group of countries, which at the time were mostly dominions and colonies of the British Empire...
which provided for full convertibility of the local currency into sterling
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
. The Ministry of Finance administered exchange controls against other currencies.
The late 1960s and early 1970s were characterized by great turmoil both at home and abroad. The external source of turmoil was linked to continuing concerns about the strength of sterling and the TT dollar/sterling peg. In November 1967, when the pound sterling was devalued, the TT dollar was adjusted by the same amount to maintain its sterling parity. In 1970, the administration of exchange controls was delegated to the Bank, sterling was subject to exchange controls and the TT dollar peg was shifted from the pound sterling to the US dollar at a rate of TT$2.40 per US dollar. The Defence Finance regulations of 1942 under which exchange controls had been administered was replaced by a new Exchange Control Act in 1970.
The domestic turmoil of the early 1970s came in the form of socio-political upheaval, and what came to be known as the Black Power Revolution
Black Power Revolution
The Black Power Revolution, also known as the "Black Power Movement", 1970 Revolution, Black Power Uprising and February Revolution, was an attempt by a number of social elements, people and interest groups in Trinidad and Tobago to force socio-political change.-History:Between 1968 and 1970 the...
. One outgrowth of this upheaval was the movement towards the localisation of commercial banks, initiated by the Government but with the Bank playing an important role.
In the mid-1980s, the Bank faced a major threat to the financial system when oil prices slumped
1979 energy crisis
The 1979 oil crisis in the United States occurred in the wake of the Iranian Revolution. Amid massive protests, the Shah of Iran, Mohammad Reza Pahlavi, fled his country in early 1979 and the Ayatollah Khomeini soon became the new leader of Iran. Protests severely disrupted the Iranian oil...
and the economy slipped into recession. Several non-bank financial institution
Non-bank financial institution
A non-bank financial institution is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market...
s (NFIs) failed due to weak internal controls and excessive exposure to the real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
market. Initially, the Bank, in conjunction with the commercial bank
Commercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
s, provided short term financial support. When it was clear that the problem was not one of liquidity but insolvency
Insolvency
Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...
, the Bank moved to close down five of the NFIs. The crisis of the finance companies was to absorb a great deal of the energy of the Bank’s leadership in the mid-1980s.
In 1986, as a result of lessons learnt from the NFI crisis, several amendments were made to the Central Bank Act and the Financial Institutions (Non-Banking) Act. The amendments conferred special emergency powers on the Bank to intervene in financial institutions to protect the interests of depositors and creditors. They also established the Deposit Insurance Corporation as a subsidiary of the Bank. The amendments were quite timely as the Bank utilized them that same year to close five NFIs. The Bank was also called upon to intervene in the Trinidad Co-operative Bank
First Citizens Bank
First Citizens Bank is a bank based in Trinidad and Tobago. First Citizens has assets of over TT$15 billion, 22 branches in Trinidad and two on Tobago. It wholly owns First Citizens First Citizens Bank is a bank based in Trinidad and Tobago. First Citizens has assets of over TT$15 billion, 22...
in 1986 and in the Workers’ Bank in 1989.
In 1993, the Bank moved to merge the three indigenous institutions – National Commercial Bank, Workers' Bank and Trinidad Co-operative Bank – to form the First Citizens Bank
First Citizens Bank
First Citizens Bank is a bank based in Trinidad and Tobago. First Citizens has assets of over TT$15 billion, 22 branches in Trinidad and two on Tobago. It wholly owns First Citizens First Citizens Bank is a bank based in Trinidad and Tobago. First Citizens has assets of over TT$15 billion, 22...
(FCB). These actions were designed to avoid losses for depositors and forestall systemic problems in the banking system. The role of the Bank in the formation of FCB is considered as a major achievement in the Bank’s history and represents a shining example of an innovative and successful restructuring exercise in the Caribbean.
From its inception, the Bank saw itself as having a developmental role. Consistent with this orientation, from the start of the decade of the 1980’s, the Bank became involved in a number of institution-building initiatives. Thus, for example, the Bank worked to establish the Trinidad and Tobago Stock Exchange
Trinidad and Tobago Stock Exchange
The Trinidad and Tobago Stock Exchange is the main stock exchange in the Republic of Trinidad and Tobago. Currently the leading stock exchange in the Caribbean region , the Trinidad and Tobago stock exchange caters mostly to the strong financial position of many indigenous companies incorporated...
and the Trinidad and Tobago Unit Trust Corporation
Trinidad and Tobago Unit Trust Corporation
The Trinidad and Tobago Unit Trust Corporation is a mutual fund company based in Port of Spain, Trinidad and Tobago. Founded in 1981 through an Act of Parliament, the company describes itself as "the leading mutual fund company in the Caribbean". The UTC dominates the mutual fund market in...
in 1981. In 1986, in collaboration with the commercial banks, life insurance companies, the National Insurance Board and the International Finance Corporation
International Finance Corporation
The International Finance Corporation promotes sustainable private sector investment in developing countries.IFC is a member of the World Bank Group and is headquartered in Washington, D.C., United States....
, another familiar institution was established: the Home Mortgage Bank.
Reform of the monetary framework
Prior to the establishment of the Bank in 1964, and in the aftermath of World War IIWorld War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, monetary policy and management were largely conducted by several different institutions. The British Caribbean Currency Board, which was established in 1951, issued and redeemed currency with little or no consideration of prices or credit conditions in the domestic economy. The credit policies of the foreign banks were managed by Headquarters and foreign exchange matters were administered by the Exchange Division of the Ministry of Finance.
With the passage of the Central Bank Act (No. 23 of 1964), the Bank took responsibility for the conduct of monetary policy. Monetary Policy refers broadly to those actions and decisions undertaken by the Bank to create appropriate monetary conditions in line with the developmental objectives of the country. The conduct of monetary policy is influenced significantly by the pace of real economic activity, the fiscal operations of the government, capital inflows and the operations of the commercial banks. These factors impact on liquidity and in turn affect inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
, foreign exchange reserve holdings and the exchange rate
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
.
The Bank’s monetary policy objectives and tools have had to constantly adapt to the needs of a rapidly changing domestic and international economic environment. The monetary policy framework of the Bank has as its primary objectives, the maintenance of:
- a low and stable rate of inflation
- an orderly foreign exchange marketForeign exchange marketThe foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
- an adequate level of foreign exchange reserves
As noted earlier, Trinidad and Tobago passed through a major economic and financial crisis in the second half of the 1980s consequent to the slump in oil prices. In addition to a rapid rise in inflation, the country experienced acute balance of payments and debt servicing difficulties.
In an effort to help address this situation, initially, the Bank was called upon to administer a dual exchange rate regime and an exchange control system to severely curtail foreign exchange outflows - the system known as the EC zero system. This was essentially a form of strict foreign exchange budgeting to permit traditional importers and other users to receive an allocation of foreign currency on a quarterly basis for the year ahead.
When the reliance on these controls proved to be ineffective the Government adopted a new strategy involving the negotiation of a stabilisation and structural adjustment programme with the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
and the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
and the negotiation of debt rescheduling agreements with creditor banks and the Paris Club
Paris Club
The Paris Club is an informal group of financial officials from 19 of some of the world's biggest economies, which provides financial services such as war funding, debt restructuring, debt relief, and debt cancellation to indebted countries and their creditors...
. In the context of these agreements, the Bank, in the early 1990s embarked on a comprehensive programme of financial sector reform geared to liberalise the financial system as well as to modernise the Bank’s prudential and supervisory framework.
In recent years the Bank has continued to refine its monetary policy framework and upgrade its regulatory and supervisory regime to bring it more in line with international best practices. The new monetary framework introduced in 2002 uses the repo rate (the rate at which the Bank is prepared to provide overnight financing to commercial banks) as the principal instrument to indicate the desired direction of bank interest rates and to convey the desired monetary policy stance. The Bank has also implemented a phased reduction in the reserve requirement applied to commercial banks.
The business of the Bank will continue to evolve as the domestic and international financial environment changes. In addition to its traditional functions such as monetary policy, financial system supervision, its responsibility for currency and management of reserves and its research function, new horizons are emerging. These include improving the country’s infrastructure
Infrastructure
Infrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function...
, as evidenced by such initiatives as the reform of the payment system, strengthening the government securities market and participation in the regional credit rating agency
Credit rating agency
A Credit rating agency is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves...
and the Automated Credit Bureau.