Development Bank: Time for government to cut our losses

With no capital funds to lend, two-thirds of its business loans delinquent, a board that for the past 16 months has been leaderless and nonfunctioning, and more than $30 million of its own loan debt — which it can’t afford to pay — coming due next year, the Development Bank more closely resembles a public funds trough than a reputable financial institution.

This Editorial Board has previously noted the irony of Cayman, one of the preeminent banking capitals of the world, playing host to a government “bank” with such a record of spectacular failure. On a more basic level, how can our cash-strapped government, which has more than $1 billion in long-term unfunded liabilities, justify running this type of operation? If anything, the government needs loans for itself (but under the Framework for Fiscal Responsibility can’t obtain them without the U.K.’s permission). It certainly doesn’t need to be handing out loans to anyone, and competing with the private sector in the process.

The embarrassing situation of the Development Bank is analogous to how our public sector cannot manage to produce auditable financial statements, the lowest threshold for anything approaching accountability, despite our islands being home to arguably the greatest concentration of world-class financial professionals on Earth.

In June, before EY’s report on reducing the size of government was published, we wrote: “The Development Bank’s bleeding needs a tourniquet — now. For too long, the Development Bank has been a one-way street for the transfer of public funds from the politically controlled treasury into private pockets.

“Lawmakers and bank officials need to reverse the flow of cash: Stop making new loans, continue taking payments from solvent borrowers, and, after recovering as much debt as possible, close the local piggy bank for good.”

That was our layman’s perspective. Since then, the experts from EY looked deeper into the Development Bank and came away with similar conclusions.

The EY consultants examined three options: 1) Sell the Development Bank to a private commercial bank; 2) “Recapitalize and commercialize” the bank; 3) Abolish the bank altogether.

The consultants rejected the first option, saying, “We do not view a trade sale as a viable option for a range of reasons, particularly that commercial banks will not have an appetite or ability to absorb the functions.” No surprises there. Few in the private sector would be foolish enough to take responsibility for any Cayman government-run “business” and its liabilities, and even fewer would do so with the stipulation that they continue to provide unsustainable, loss-generating functions previously defrayed from the Public Treasury.

In order to revive the Development Bank from its deathbed, the consultants estimated that government would have to invest an additional $10 million in capital over five years. That’s on top of the routine central government subsidies the Development Bank already receives, including $2 million slated for this budget year.

Thankfully for taxpayers, the consultants noted a current lack of “political will and support” for the Development Bank. We hope their assessment of the political environment remains accurate.

That leaves abolishment as the only rational solution. Given that its past, present and future existence is inextricable from the artificial life support of central government funds, closing the Development Bank would be allowing, finally, the nature of economics to run its course.