Why Do Banks Disappear?: A History of Bank Failures and Acquisitions IN TRINIDAD, 1836-1992 Sean NG Wai

WHY DO BANKS DISAPPEAR?
:
A HISTORY OF BANK FAILURES AND ACQUISITIONS
IN TRINIDAD, 1836-1992
SEAN NG WAI
ABSTRACT
Using the historical approach this paper examines the determinants of individual bank
failures and acquisitions in Trinidad from 1836 to 1992. The historical approach is
useful for diagnosing the origins of banking failures since it takes a long-term
perspective and isolates the fundamentals of the problem. The historical perspective
therefore, helps to avoid the mistake of diagnosing the symptoms of a problem for its
causes. This paper argues that bank failure and acquisitions result from poor
responsiveness to market structure and the competitive environment, lax lending and
investment behaviour of banks, ineffective recruitment and retention of staff, government
intervention and financial instability.
Keywords: bank failures; bank acquisitions; Trinidad

SEAN NG WAI / 165
1.0 Introduction
As the worst economic crisis in decades takes its toll, many banks will
disappear from the market because of failure or through consolidation.
Bank failure occurs when a bank is unable to meet its obligations to
depositors or other creditors, owing to unwarranted depositor
withdrawals during events characterised by contagion or panic, or as a
result of fundamental bank insolvency. To avert imminent failure, some
banks may consolidate their operations with other banks through
acquisitions or mergers. An acquisition refers to ―an arm‘s length deal,
with the shares of the target firm being acquired in an act of mutual
exchange and the owners of the acquired firm accepting cash, securities or
some combination of both, in return for their shares. While in a merger
one or both of the firms cease to exist, in an acquisition the acquired firm
becomes a subsidiary‖ (Khan 2001). In cases where one company acquires
all the assets of another company, the target company becomes merely a
shell and will eventually liquidate. Contrastingly, a merger refers to a
combination of two or more companies, generally by offering the
stockholders of one company securities in the acquiring company in
exchange for the surrender of their stock. A merger results in the creation
of a new reporting entity formed from the combining businesses. Bank
consolidation is not only a mechanism for rationalizing the operations of
weaker firms, but can also be viewed as part of a normal process of
growth.
While there is a rich array of literature on the history of bank
failure and firm consolidation, many of these surveys focus on large
economies at the centre rather than those at the periphery. This is partly
due to the fact that banks in the periphery prior to 1970 were merely
―branches‖, which took instructions from multinational banks at the
centre. As such, the domestic environment in which the branch operated
was deemed to be irrelevant in the decision-making process. An
examination of the history of banking in Trinidad, however, shows that
such a perspective is misleading and inaccurate. In modern times,
Augustine Nelson (1995) and Glenn Khan (2001) have researched the
166 / BUSINESS, FINANCE & ECONOMICS IN EMERGING ECONOMIES VOL. 5 NO. 1 2010
issue of bank failure and bank consolidation in post-1962 Trinidad and

Tobago. Additionally, there has been some attempt to examine the history
of the banking sector in Trinidad and Tobago by Deryck Brown (1989)
and in the corporate histories of Republic Bank (1987), Scotiabank (2004)
and First Citizens (2007). With the exception of First Citizens‘ corporate
history, little attempt has been made by these texts to investigate why
banks disappear.
The subject of bank failure and consolidation has been the
speciality of economists, who use various mathematical models to
measure bank performance, asset quality, operating efficiency and
managerial competence among other criteria. These models, however,
often disregard the heterogeneity of decision rules and the impact of
societal changes on firm performance. Moreover, economic models are
based on the assumptions of ―rational expectations‖ and a representative
agent.1 As a consequence, economic models often fall short of capturing
and measuring the dynamic nature of competition and idiosyncratic
investor behaviour. What previous and current financial crises have taught
us, is that ―mathematical models are a powerful way of predicting
financial markets, but they are fallible‖.2
This paper does not propose to critique the use of history against
economic models, but rather to highlight the fact that we need to
construct economic models, that are capable of capturing the dynamic
nature and interactions in market competition and to fundamentally
rethink how financial systems are regulated (Shiller 2000). Although
historians are accused of having a retrospective bias in analysis, the
1 Rational Expectations refer to the assumption that people look to the

government‘s current macroeconomic policy to form their expectations of
future costs and price inflation. A representative agent model is a model in
which all agents act in such a manner that their cumulative actions might as well
be the actions of one agent maximizing its expected utility function.
2 The Economist, January 24th -30th 2009 pp10-14, David Colander, Hans
Föllmer, Armin Haas, Michael Goldberg, Katarina Juselius, Alan Kirman,
Thomas Lux and Brigitte Sloth, 2009. ―The Financial Crisis and the Systemic
Failure of Academic Economics‖, Kiel Working Papers 1489, Kiel Institute for
the World Economy.
SEAN NG WAI / 167
historical approach can play an important role in this quest to find more
robust, better equip economic models and theories. 3
To commence this exploratory process, this paper investigates why
some banks disappeared in Trinidad‘s long history of commercial banking
from 1836 to 1992. As a preface to the study, a general history of the
commercial banking industry in Trinidad is provided. Following this, the
paper examines the various causation factors for the disappearance of
commercial banks in Trinidad. In order to examine these causation
factors, it is convenient to divide this study into four time periods. The
first deals with the period 1836-1900; the second examines the years 1900-
1939; the third 1940-1970 and the last considers the period 1970-1992.
Throughout these periods, we discuss: (i) the factors driving growth in the
banking sector; (ii) the competitive strategies of banks; and (iii) the impact
of industry structure on bank competition and profitability. These
discussion areas are useful for revealing the sources of an industry‘s
current profitability, but also provide a context for understanding how
and why competitive strategy is formulated and modified over time. The
concluding section provides a summary of the major findings.
2.0 Historical Context
The history of commercial banking in Trinidad begins in 1837 with the

establishment of a branch of the Colonial Bank. For most of the
nineteenth century, the British-based Colonial Bank maintained a
monopoly over the banking industry except for short episodes with the
entry of the West India Bank (1846-1848) and the International Bank
(1864-1866). At the turn of the twentieth century, commercial banks from
Canada and the United States of America established branches in Trinidad
3 There are several reasons for this. Firstly, it may be argued that history allows us
to see how economic change occurs through the changing relationship of
economic and non-economic variables defined by time and space. Secondly,
history provides ―better economic facts‖ to test economic models and theories.
Thirdly, history utilises inductive reasoning which takes us ―beyond the
confines of our current evidence or knowledge to conclusions about the
unknown‖.
and elsewhere in the Caribbean region. In 1902, the Union Bank of

Halifax became the first North American bank to open a branch in
Trinidad, but was later purchased in 1910 by the Royal Bank of Canada.
The Bank of Nova Scotia and the National City Bank of New York also
established branches in Port of Spain. However, these closed shortly after
they were opened. The Canadian Bank of Commerce, the forerunner to
the Bank of Commerce (Trinidad) also established a branch in the 1920s.
By the 1950s, several foreign banks entered the banking industry
owing to profitable opportunities arising from the North American trade.
By the end of the 1960s, there were seven foreign banks operating in
Trinidad—one British, three Canadian, two American and one jointly
owned by British and Canadian interests. The eruption of social unrest in
the 1970s caused the Government of Trinidad and Tobago to embark
upon a policy of making foreign banks incorporate locally by offering
their shares to locals. This localization policy was accepted with some
reluctance by the Canadian banks, but was resisted by the American
banks, Citibank and Chase Manhattan. Citibank eventually accepted to
incorporate locally in 1984 following a government ultimatum, but later
reconverted to a full foreign bank as the country entered into a process of
economic and financial liberalization. Chase Manhattan opted to
discontinue its operations in Trinidad and Tobago.
In response to the social upheavals of the 1970s, the Government
of Trinidad and Tobago also embarked on a programme of indigenising
the commercial banking industry. This led to the establishment of the
National Commercial Bank and Workers Bank in the 1970s. The Trinidad
Cooperative Bank, a saving institution formed in the early twentieth
century, was also granted a license to carry on the business of banking in
1976. By the 1980s, the three indigenous banks found it increasingly
difficult to sustain their operations and had to be merged into a single new
entity in 1993.
SEAN NG WAI / 169
3.0 The Establishment of Monopoly, 1836-1900
(i) Growth Factors

The establishment of banking corporations as the dominant
organisation of the modern economy was not an abrupt event, but rather
the culmination of a long history of financial innovation. Prior to 1837,
finance was provided to estate proprietors and local merchants using the
consignee credit system. Under this system, merchants advanced credit in
the form of goods and estate supplies at commission fees of between 2½
and 5%. The ramification of such a business transaction was a
commitment by the planter that his crop would be consigned to ―the
same merchant who would arrange its sale on the British market‖
(Williams 1972). At the end of the sale, deductions were made for both
supplies shipped to the estates and commission charges and the remaining
balance was deposited in the estates‘ accounts. Consignee credit, however,
became a risky financing instrument owing to the attack on the BWI sugar
monopoly at the start of the nineteenth century.
The commencement of banking in Trinidad marked an
evolutionary phase, in which ―the banker [was] the transition from
tradesman to merchant and then the further progression from merchant
to banker‖ (Williams 1997). Unlike the consignee merchants who suffered
unlimited liability, the subscribers to shares in the royal chartered Colonial
Bank enjoyed limited liability up to the amount of their subscriptions—a
right not given to ordinary individuals. The banking corporation also
helped its owners (largely merchants) to reduce their agency costs by
establishing branches in the host-country and recycled capital with the
integrated mercantile firms thereby eradicating the need for associate
merchant-bankers to raise capital externally. In addition, banking involved
less credit risk than consignee financing since banks were confined by
their charters to provide loans of a short-term nature with a high premium
on security. The innovation of banking firms, therefore, was designed to
minimise risk in a capitalist economy.
On May 15th 1837, the Colonial Bank (CB) became the initial
occupant of the commercial banking sector in Trinidad and by extension,
several West Indian islands as well, which afforded the bank with certain
incumbency advantages such as the pre-emption of scarce assets and
consumer loyalty. As the first-mover firm, the CB easily captured demand
for banking services amongst the island‘s small mercantile community and
secured the responsibility to manage the Colonial Government‘s funds.
These benefits can be attributed in part to the CB‘s ownership and
locational advantages. In terms of ownership advantages, the CB‘s
mercantile base provided the institution with a resourceful and well-
networked directorship, which not only provided ‗know-how‘ but the
contacts necessary to create and capture demand. Although the CB
maintained no domestic banking operations in London, its ―free-standing
nature‖ conferred crucial locational advantages. These included: (i) the
ability to raise capital successfully on the London Stock Exchange by
leveraging its reputation; (ii) access to valuable information at the centre
for making informed business decisions at the periphery; and (iii) the
capability to transfer business and technological skills since Trinidad had
no prior experience in banking or capital investment. 4 Taken together,
these incumbency, locational and ownership advantages created an almost
insurmountable barrier to entry, which made it extremely difficult for new
entrants to penetrate the market or operate successfully.
The CB‘s monopoly was temporarily halted with the entry of the
West India Bank (WIB) in December 1840. The WIB was formed by a
group of regional merchants and planters, who were dissatisfied with the
incumbent bank‘s limited credit facilities and high interest rates on loans.
Additionally, the local proprietors felt that the CB exclusively served the
English mercantile interest, which were intrinsically linked to the bank‘s
London-based Board of Directors. To ameliorate this situation, the WIB
promoters‘ assured its supporters that the local bank would restrict its
loans to local planters and merchants. From its inception, the CB
forcefully retaliated to the entry of the WIB. In a letter to the President of
4 A free-standing company may be defined as legally separate entity which is

neither controlled by an operating enterprise in Britain nor functioned as an
operating extension of a foreign multinational enterprise. Mira Wilkins, ―The
free-standing company, 1870-1914: an important type of British foreign direct
investment‖, Economic History Review, XLI, 2 (1988) 262
SEAN NG WAI / 171
the Board of Trade dated June 3, 1840, the CB Directors contended that
there was no need for further banking firms since ―as much
accommodation has already been afforded by the Colonial Bank as the
West India public has any legitimate use for or as can be advanced with
safety‖.5 Recognising that its condemnation was not sufficient to impede
the new bank‘s entry, the CB Directors contended that the WIB should
not be granted a charter or privilege of issuing bank notes given its small
capital base.6
There were also attempts to damage the reputation of the WIB. In
September 1840, a rumour circulated in Trinidad that WIB shareholders
would be responsible to the extent of twice the amount of their
subscribed shares in the event that the bank was unable to cover its
engagements. The rumour appeared to have originated from the CB to
forestall the sale of WIB shares. Despite the publication of the WIB‘s
charter in the newspapers and attempts by the WIB Directors to pacify
the situation, no less than 52 subscribers including James Kavanagh, joint
manager of the WIB in Trinidad, withdrew their financial support for the
bank. This resulted in the retraction of approximately 645 shares, or
nearly one-half of the total subscription at the Trinidad branch. By
October 1840, several disaffiliated members and opponents of the WIB
proposed the establishment of a Bank of Trinidad. The plan never got off
the ground possibly because it was unable to raise the necessary capital
from the already financially strapped local planters and merchants.
Trinidad‘s financial landscape also changed briefly with the
establishment of the London and Colonial Bank, which began operating
in Port of Spain on April 1st, 1864. The bank had branches in Barbados
and Jamaica and had grand plans of expanding its operations to Australia
and China. The new bank was formed on the London Stock Exchange
with an authorised capital of £150,000 ($720,000). By June, however, the
London and Colonial Bank, at an extraordinary meeting gained its
shareholders‘ approval to merge with the British and American Exchange
5 Trinidad Standard, 14th December 1838

6 The West India Bank‘s capital base was just $2 million (£416,666) compared to
the CB‘s large capital base of $9.6 million (£2,000,000).
Bank, which would give them a combined subscribed capital of £3 million

($14.4 million) and a paid up capital of £450,000 ($2.1 million). As a
result, the name of the bank was eventually changed to the International
Bank Limited. The International Bank, however, faced many challenges.
At the outset, several of its promoters went into bankruptcy, including its
chairman John Gladstone and W. J. Ferreira7. This inevitably caused
investors to lose confidence in its operations even before it started. In
February 1865, the British and American Exchange Bank was removed
from the London Stock Exchange because it failed to inform the stock
exchange about its merger and for failing to follow certain prescribed
guidelines. To protect the inhabitants of the colony, the Trinidad
Government passed an ordinance making the note circulation of the
International Bank illegal.8 The International Bank discontinued its
operations following a shareholders‘ meeting on March 2, 1866.9
(ii) Competitive Strategy

An important competitive strategy utilized by the Colonial Bank to
retain and expand its monopoly position was the use of predatory tactics.
From as early as February 1840, for example, the CB began mopping up
excess liquidity in the market by calling in outstanding cash credits and
reducing discounts. Consequently, ―only an extremely small and
prosperous group of planters received accommodation from the CB‖
(Brown 1989). In an attempt to further undermine its competitor (the
WIB), the CB directors‘ devised a malicious clearing system, which called
for the periodic (not less frequent than once a week) exchange of notes
and payment of balances. Although the CB recommended a weekly
settlement, it proceeded to clear banknotes on a daily basis and even more
than once a day, should they amount to a large sum. This had the effect of
reducing the liquidity position of the WIB, which was already strapped for
7 W. J. Ferreira was the sole shareholder of 15,000 shares belonging to the British
and American Exchange Bank.
8 Colonial Bank Correspondence (thereafter CBC), Calvert to Oscar Marescaux,
12th October 1865 [C/1865/19]; See also Ordinance No. 18 of 1865: Issue of
Bank Notes.
9 CBC, Calvert to Alex Reid, 1st February, 1865 [C/1865/2]
SEAN NG WAI / 173
cash. The WIB as a result was unable to provide optimal accommodation

to its customers, causing many individuals early on to lose confidence in
its operations.
The CB also used threats of violence or blackmail against its rival‘s
suppliers. In December 1840, the WIB faced one of its greatest challenges
when Messrs H & J Johnson and Company, its London Correspondent
Agent, prematurely stopped making payments on its behalf and
immediately withdrew its services from the bank. The WIB sought to allay
its customers‘ fears by making arrangements with another prominent
banking house in London—Messrs Smith, Payne and Smiths to act as its
agents. By February 1841, Messrs Smith, Payne and Smiths also declined
to act as its agents. In a letter to the editor of the Trinidad Standard,
Henry Moore and Company of Liverpool tried to calm the sceptical
public by telling them that Messrs. Smith, Payne and Smiths would
continue to operate as the bank‘s agent until a replacement was found.
Furthermore, Henry Moore blamed the ―CB and another old and
respectable house‖ for throwing obstacles in the WIB‘s way towards
gaining a permanent correspondent agent in London. Eventually Messrs
Mortimer and Company and the Union Bank assumed the role of London
correspondents for the WIB.
As a late-mover, a major challenge for the WIB was the entry
barrier posed by product differentiation. Given its initial occupation of
the banking industry, the CB established a substantial level of brand
identity and customer loyalty. The WIB therefore, had to spend heavily to
conquer existing customer loyalties. In the area of deposits, the WIB lured
customers by offering 2½% interest on the balances of current accounts,
which undeniably was differentiated from the CB‘s zero percent of
deposits. Fixed deposits lodged for twelve months received 4% interest
and 3% for shorter periods. The CB offered only 3% for monies lodged
on a twelve-month fixed deposit. Several customers were enticed by the
new entrant‘s rates, which caused some consternation for the CB‘s
Trinidad manager.10 In an attempt to capture Government funds, the
10 CBC, Calvert to Rennie, 14th November 1844 [C/1844/46]

WIB offered competitive interest rates of 3% on current accounts and 4%

for monies lodged for twelve months. This differed from the CB‘s offer
of 2% on all sums deposited for six months; 3% for nine months and 4%
for monies lodged for twelve months. The CB having an established
clientele and more experience exercised greater caution and adopted the
view that it was better to ―sacrifice profit than to run the risk of losing
capital‖.11
Notwithstanding its cautious stance, the CB was required at times
to respond to the WIB‘s predatory pricing tactics. In the 1840s, the CB
typically discounted bills of exchange for 8%. The WIB however, seeking
to penetrate the market discounted at 6%. Many customers were attracted
to the WIB‘s lower rates. The CB therefore, was forced to reduce its
discount rate to 6% in 1841 but this reduction in the discount rate was
only limited to bills of exchange from larger, more creditable planters. 12
The CB undoubtedly displayed tremendous experience and conservatism
despite competitive pressure from a new entrant. On the other hand, the
WIB in its quest to differentiate its brand accumulated significant start-up
losses.
From early on, the WIB showed signs of financial difficulties and
poor liquidity. In mid-1843, the WIB Manager, for example, requested a
one-day moratorium from the CB on redemption of its drafts amounting
to ₤4,000 ($19,200). Without any overt hostility, the CB insisted on
payment and advised its Branch Manager to avoid as far as possible
collecting paper belonging to the WIB since as the Secretary noted that
―such an establishment cannot fall without dragging many others with it‖
(Republic Bank, 1987). By November 1847, the WIB again found itself in
financial difficulties and was forced to invoke its 60-day suspension
clause. This allowed the WIB to defer cash payments until it could collect
its receivables and pay off its outstanding liabilities. The WIB never
11 CBC, Calvert to Rennie, 1st September 1841 [C/1841/28]

12 CBC, Calvert to Rennie, 1st September 1841 [C/1841/28]
SEAN NG WAI / 175
resumed operations after its 60-day hiatus and was completely liquidated
in February 1848.13
The WIB‘s liquidity problems were partly due to its inability to
raise paid-up capital. In the nineteenth century, commercial banking
required a large investment in financial resources and working capital
since Trinidad was a non-moneyed economy and a sugar-producing
colony—a seasonal industry. Being a British mercantile-based bank, the
CB found it much easier to raise capital on the London Stock Exchange.
In contrast, the WIB was an indigenous bank, which did not enjoy the
same prestige as their British counterparts. Thus, the WIB found it
extremely difficult to raise the much needed capital to finance its
operations. Up to 1847, the WIB had been unable to raise the $2 million
(£416,666) in paid-up capital required by the charter. At the time of its
demise, the WIB‘s paid-up capital was estimated at just $533,000
(£111,041). The WIB‘s strategic mistake, therefore, was to assume that the
capital needed for such a venture could be raised exclusively in the
colonies.
(iii) Bank Performance

Although bank managers play an important role in risk
management and overall bank performance, external factors such as
changes in the macro-economic or socio-political environment can
adversely affect the ability of borrowers to repay their loans. When the CB
launched its operations in 1837, Trinidad‘s economy faced numerous
challenges including a recession in the sugar industry 14; the impending
emancipation of slaves; and a shortage of labour. 15 As a new firm, the CB
had high start-up costs which minimised its profit performance. In its first
13 In 1847, The West India Bank‘s liabilities far exceeded its liquid assets with the
amount in hand standing at a mere ₤34,167 to meet constant liabilities of
₤413,510. Port of Spain Gazette, 11th January 1848
14 The recession could be attributed to the fall in demand for West Indian
commodities following the defeat of Napoleon after 20 years of war and peace
at Vienna in 1815.
15 Trinidad became engaged in sugar production only ten years before the
abolition of the slave trade. Consequently, its slave population was very small
given the large size of the island.
year, the Trinidad branch made a gross profit of $24,620 and by 1840, this
figure increased to $49,786. Increased competition from the WIB in 1841,
however, led to a sharp decline in the CB‘s profitability. In 1841, for
instance, the CB‘s Trinidad branch made a gross profit of just $26,286—a
47% reduction from the previous years performance. Although industry
competition reduced the CB‘s profitability, the greatest blow to the
banking industry came from the enactment of the Sugar Duties
Equalisation Act in 1846. This led to the collapse of several sugar-cane
estates and a huge increase in loan losses. The CB, for instance, had to
write-off considerable losses amounting to $67,433 and $316,986 for 1849
and 1856 respectively.
During the 1850s, the island‘s economy gradually improved
because of an increase in the value of exports and the introduction of
Indian immigration. This momentary prosperity renewed interest in
investment by the 1860s and Trinidad experienced a mini-construction
boom. The sugar industry also received substantial investments in all
kinds of machinery and tools including centrifugals and steam engines
(Lobdell 1993). This improvement in Trinidad‘s economic state was also
reflected in the bank‘s profit performance. In the ten-year period (1857-
1866) for instance, the Colonial Bank‘s Trinidad branch average net profit
increased to $131,649 per annum from $37,450 per annum for the
previous ten-year period (1847-1856). Besides improved economic
growth, the CB also assumed greater credit risks in the 1860s and 1870s to
augment their profits. In an effort to capture more business and gain scale
economies, the CB also opened a sub-branch in San Fernando in July
1873.
The last two decades of the nineteenth century were difficult ones
for the BWI sugar industry, which faced considerable worldwide
competition. As sugar production spread to countries in Asia and Africa,
the British Caribbean‘s market share decreased from 15% in 1860 to a
mere 7%. To worsen the situation, the beet sugar industry expanded its
production and benefitted from ‗bounties‘ or direct subsidies, which
allowed them to sell below the BWI‘s production costs. It was during
these testing times that the CB began to lend to advance credit to some
SEAN NG WAI / 177
large cocoa proprietors. Cocoa enjoyed a tremendous boom between 1866

and 1920. Despite this, the CB did not adequately diversify its loan
portfolio, which consisted mostly of loans to sugar cultivators. The beet
sugar crisis had a devastating impact on the CB‘s performance. In 1877-
1886, net profits averaged $1,447,313 but declined in 1897-1906 to just
$690,108 or a 52% reduction. There was also an enormous rise in the
amount of written-off bad debt. In 1877-1886, written-off bad debts
amounted to just $55,084 but had risen sky-high to $617,326 in 1887-
1896—a 1021% increase. Under these devastating circumstances, the CB
found it extremely difficult to remain afloat and was forced to engage in
acquisition discussions at the turn of the twentieth-century.
In summary, the banking industry in nineteenth century Trinidad
was almost exclusively monopolized by the CB except for short
interruptions with the entry of the WIB (1840-1848) and the London &
Colonial Bank (1864-1866). The CB‘s monopoly was partly sustained by
its incumbency advantage, which created considerable difficulties and
entry barriers for new competitors. The CB also benefitted from
ownership and locational advantages, which stemmed from its free-
standing corporate nature and experienced British mercantile base.
Although these competitive advantages provided the CB with some
measure of protection, unstable economic conditions were found to have
a negative impact on bank profitability and performance. Recessionary
conditions, for instance, made credit risk more acute and threatened the
operations of even the CB, which enjoyed a monopoly in the last two
decades of the nineteenth century. The probability of bank failure also
seemed to increase when a bank was undercapitalised as demonstrated in
the collapse of WIB and London & Colonial Bank in 1848 and 1866
respectively. Towards the end of the nineteenth century, it has also been
shown that the CB‘s excess concentration of loans in the sugar industry or
inadequate diversification contributed to its poor performance and
struggle for survival.
4.0 From Monopoly to Oligopolistic Competition, 1900-1939
(i) Growth Factors

At the start of the twentieth century, Trinidad witnessed the entry
of several multinational banks from Britain, Canada and the United States
of America. These new entrants were not only attracted by the prospects
of achieving huge profits, but also expanded overseas owing to
encouragement from their respective home governments, increased
intensity of competition at home, the need to follow and lead customers
into new markets, and as a means of risk diversification and gaining scale
economies.
The arrival of the Union Bank of Halifax (UBH) in 1902 marked
the end of the CB‘s monopoly. It is plausible that the UBH opened a
branch in Trinidad because of the strong influence of a bank director J.F.
Stairs, who was also responsible for the establishment of the Trinidad
Electric Company (Armstrong and Nelles, 1988). Although the UBH
made some attempt to expand its operations regionally and abroad, it
failed to recognize the need for further expansion into the growing
national market. By this time, Montréal, and to a lesser degree Toronto,
were becoming the financial centres for all of Canada. Within a few years,
increased competition from much larger financial institutions meant that a
merger with another bank was essential for the capital-starved UBH‘s
survival (McDowall, 1993).
Royal Bank of Canada (RBC) recognised this and proposed a
merger with the UBH given its strong regional branch network and well-
trained staff. A deal was eventually struck and UBH‘s shareholders were
asked to exchange their stock at a rate of five UBH‘s shares for two RBC
shares. There was little reason for hesitation to this proposal since RBC‘s
shares were nominally worth $100 and trading at nearly $250 whilst
UBH‘s shares were nominally valued at $50. In addition, RBC promised
to boost its dividend to 12%, take UBH‘s chairman onto its board and to
retain the UHB employees for at least a year at existing salaries. On
September 7, 1910 the deal won unanimous approval at a UBH special
shareholders meeting. The following morning RBC held a special
SEAN NG WAI / 179
shareholders meeting and successfully approved an increase of $1.2

million in the bank‘s paid-up capital to cover the 12,000 shares issued to
UBH shareholders. By November 1910, the transaction was approved by
the Ottawa Finance Department. In consequence, the UBH ceased to
exist and resulted in the establishment of RBC into Trinidad via
horizontal integration (McDowall, 1993).16
From as early as 1901, the General Manager Henry McLeod of
the Bank of Nova Scotia (BNS) resisted pressure to establish a branch in
Trinidad because of the difficulties involved in reaching the island.
McLeod also complained ―that there were very few men in service having
the necessary experience, ability and caution that we would be justified in
sending…so far away that control of their actions would be particularly
nullified‖ (Quigley, 1989). In 1906, McLeod was persuaded by the
prospect of receiving substantial commercial loans to open a branch in
Trinidad. Within six month of opening, however, BNS Port of Spain‘s
first manager, E.T. Hammer died from yellow fever (Schull and Gibson,
1983). McLeod used this event to abruptly close the branch in 1907. In his
correspondence to the Board of Directors, McLeod disclosed that the real
problem was that ―the deposits on 23 March [1907] were less than
$30,000; the loans $217,000, fully 80 percent of which are objectionable
and dangerous…the place is hopeless in comparison with Canadian,
Cuban, or Jamaican fields‖ (Quigley, 1989). Despite the BNS‘ exit, the
Canadian Bank of Commerce in 1920 became the third Canadian bank to
establish a branch in Trinidad.
Unlike their Canadian competitors, American banks faced
tremendous difficulties penetrating the banking industry in Trinidad. In
July 1919, the National City Bank of New York (NCBNY) was the first
American bank to open a branch in Port of Spain; it promised to be a
more competitive bank by providing ―complete bank service for all
people‖ regardless of age and occupation.17 From the onset however, the
CB and RBC protested against NCBNY‘s entry, arguing that banks of the
16 Horizontal integration refers to the combination or acquisition of a company at

the same level of the value chain.
17 Trinidad Guardian, 29 June 1919
British Empire were not afforded the same rights of entry in the State of
New York.18 Despite attempts by the British Government to resolve this
issue, the New York State Legislature upheld its restrictive policy barring
British multinational banks from establishing branch banks in New York.
In retaliation, the British Government drafted a bill regulating businesses
carried on by aliens and brought it before the Trinidad Legislative Council
in October 1919 for ratification. The Attorney General in his opening
submission argued that the generative force behind the bill came from the
Secretary of State for the Colonies and had not, as was generally believed,
emanated from Trinidad. The bill therefore was imperial in its purview.
He maintained:
British banks operating in foreign countries are subject to certain
disabilities, whereas foreign banks operating in British countries are free
to act without any such restrictions and I submit that as a matter of
common sense such a condition is absolutely unfair to British enterprise
and British trade, of which British banking is a very important part, and
legislation has been adopted as a matter of Imperial policy. 19
Dr Enrique Prada and Adam Smith, however, doubted whether
the Alien Bankers Ordinance was in fact part of an imperial policy since
the Mother Country and Australia were yet to adopt similar legislation
restricting the operations of alien bankers. The local business community
also rejected this claim, and called on the government to open up the
economy to foreign competition, which they felt would increase
competition and reduce the effects of collusion between the CB and RBC.
Despite the attempts of the Chamber and the local business community,
18 Foreign banks were subject to range of regulations governing their entry and
operations in New York. Firstly, before a bank could establish an agency, it had
to secure a license from the New State Banking Department, which had the
right to inspect their accounts. Secondly, they were prohibited from accepting
deposits from any corporation, firm or individual in the State of New York,
even those made from British firms with offices in New York. Thirdly, they
were required to pay a tax of 5 per cent on the gross amount earned on funds
loaned, used or employed in the State. No deduction of any kind was permitted
in arriving at the amount on which this tax has to be paid. In addition, banks
were also required to pay federal income tax. See WICC, 15 May 1919
19 Hansard, 14 November 1919: Debate on the Ordinance Regulating Banking
Businesses carried on by Aliens
SEAN NG WAI / 181
the Government enacted the Alien Bankers Ordinance, which placed

American banks on the same footing as British banks operating in New
York. NCBNY, however, was dissatisfied with this arrangement and
wound-up its operations in Trinidad.
Having broken the monopoly in the banking industry, RBC in
1911 attempted to restore a monopoly in the banking industry by offering
to acquire the CB‘s assets in the West Indies. RBC was willing to pay as
much as £9 per share. Negotiations, however, broke down in 1912
causing the CB‘s share price to drop from a high £8 5/8 to £6 9/16. A
few years later, the CB was again targeted, but this time by Barclays Bank
to form a strategic alliance. In 1917, the Chairman of Barclays Bank, F.C.
Goodenough, conceived the idea of an ―Empire Bank‖ carrying on
domestic banking on British lines throughout the sterling area and able to
transfer funds through London to any part of the organisation as required.
The CB was a prime target for this scheme since the Colonial Bank Act of
1916 extended the powers of the CB to carry on the business of banker in
the United Kingdom or anywhere in the British Empire. This allowed the
CB to expand into Africa. In 1917, the legislation extended the bank‘s
powers to carry on business anywhere in the world where British citizens
were able to transact business (Jones, 1993). In a note which he drew up
for discussion with members of his own board, Goodenough showed
how a strategic alliance with the CB could be beneficial to the business
needs of the two banks as follows:
(i) Barclays could be a source of the badly needed capital for the
Colonial Bank; (ii) Barclays could provide in depth throughout its
branches in the United Kingdom a much needed potential of new
business connections to stimulate the flow of business to the Colonial
Bank‘s overseas branches; and (iii) the close association with one of the
principal London clearing banks would enhance the standing of the
Colonial Bank with the general business community both at home and
overseas (Crossley and Blandford, 1975) .
By December 1917, Barclays Bank Limited (BB) issued a circular
to its branches announcing that a joint working arrangement had been
entered into with the CB, under which BB would act as its principal
banker and in return direct to the bank all its business relating to those
areas overseas where it had branches. As part of this arrangement, BB
made a modest investment of £40,000 in the CB by subscribing for 5,000
new ordinary ‗B‘ shares of £20 each (£6 paid) at a premium of £2 per
share. In that same year, BB merged with the London Provincial and
South Western Bank, which held 18,501 shares in the CB (Crossley and
Blandford, 1975). Goodenough also persuaded the Bank of Montreal and
the National Bank of South Africa in 1919 to invest in the CB, which
allowed them representation on the Board of Directors. 20 The following
year, Goodenough bought 95% of the shares in the Anglo-Egyptian Bank
(Ackrill and Hannah, 2001). After a thorough examination, BB in 1924
also decided to buy the National Bank of South Africa, which had
encountered serious financial problems. Having the majority shareholding
in these banks, BB embarked on creating a unified multi-regional banking
group.
The first step in this process towards creating a unified multi-
regional banking group involved reorganising the CB‘s capital and
extending its powers. This would have provided the CB with ―the
foundation on which a much larger and more comprehensive institution
might be built‖ (Baster, 1929). By August 1925, the CB was duly
reincorporated by special Act of Parliament with an authorised capital of
£10 million. In the month following, the CB‘s name was changed to
Barclays Bank (Dominion, Colonial and Overseas) to reflect its new
persona. During the months of November and December 1925, the
shareholders of the Anglo-Egyptian Bank and the National Bank of South
Africa agreed to participate in this scheme (Jones, 1993). Barclays DCO
therefore, was controlled by BB, but not wholly owned by it.

By 1920, competition in the banking industry intensified because
of the introduction of RBC and CBC thus contributing to an oligopolistic
industry. The CB/ Barclays Bank DCO, having the benefit of incumbency
20 The Bank of Montreal purchased 10,000 of the new Colonial Bank ‗B‘
shares.
SEAN NG WAI / 183
advantages, led the way in formulating collusive agreements, which

reduced the level of price competition within the industry. The banks
adhered loyally to these collusive agreements since they recognised that
much benefit could be derived through cooperation. Interest on deposit
and savings accounts was one area controlled by these agreements. In the
period 1921 to 1928, the cartelised banks paid 3% on all interest-bearing
accounts. The banks however were forced to collectively reduce this rate
on all deposits to 2% in 1932 and then again to 1½% in 1935 owing to
the negative impact of the Great Depression. 21 Although Barclays Bank
DCO was able to exert tremendous influence on the other banks given its
large market share, the Canadian banks were not mere bystanders in the
construction of these collusive agreements and at times did influence the
price at which banking services were offered. In 1937, for example, the
Canadian banks thwarted Barclays Bank DCO‘s attempt to reduce the
interest on deposit and savings accounts from 1 ½ % to a meagre 1%.
This was largely owing to Canadian bankers‘ fear that such a reduction
would allow outside competitors to penetrate the market and would put
their institutions into disrepute with members of the public. 22
Furthermore, firms engaged in non-price competition, which
included activities such as expanding the branch network, product
differentiation, improving customer service, selection of quality personnel
and the establishment of foreign agencies to facilitate trade. The Canadian
banks were pioneers in this type of competitive strategy but were
immediately imitated by Barclays Bank DCO, which enjoyed the benefits
of first-mover advantage. Barclays Bank DCO consequently continued to
dominate the market but was soon faced with even greater challenges as
new entrants from Canada and the United States penetrated the market.
21 ACC0080-3554 Interest Rates and Turnover Charges (September 1932-March

1933)
22 ACC0080-3553 Reports of Visits to Branches by A.P.G Austin, Local Director
in the West Indies (March 1935-December 1938)
(iii) Bank Performance

According to an internal report by Barclays Bank DCO in 1934, it
was estimated that Barclays Bank DCO controlled some 65% of the
exchange business in Trinidad whereas the Canadian banks, RBC and the
CBC, accounted jointly for the remaining 35%. Added to this, the report
claimed that Barclays Bank DCO maintained a good retail business and
managed most of the big accounts on the island. 23
Barclays Bank DCO‘s dominance in the industry was also reflected
in its note circulation position.24 In 1933, Barclays Bank DCO‘s note
circulation in Trinidad reached £150,761 ($723,652.80), which was
approximately 50% more than its closest rival. Comparatively, RBC had a
note circulation of about £72,744 ($349,171.20) whilst the CBC circulated
just £14,475 ($69,480). In 1938, Barclays Bank DCO came close to
exceeding its note circulation limit of £750,000 ($3.6 million) and also
suffered a run on its operations at San Fernando, following the
announcement that Britain was going to war with Germany in 1939. The
―run on the bank‖ fortunately was averted when the Port of Spain
Manager sent the bank van on its regular trip with a large set of coin bags,
which had been ostentatiously filled with rocks. Barclays Bank DCO
though, still had a shortage of funds and had to stock up on the notes of
its competitors until it could get permission from the Treasury to increase
its note circulation.25 Despite reaching full capacity, Barclays Bank DCO
continued to dominate the banking industry and maintained much of its
initial market share.
And Statement Of West Indian Branches (March 1926-December 1934).

23 ACC0011-0197 Review
24 According to business historian Kathleen Monteith, ―the significance of the
level of note circulation by a bank as an indicator of its market share lies in the
fact that a bank‘s notes are indicative of its level of business‖. Kathleen
Monteith, ―Barclays (DCO) In the West Indies 1926-1962,‖ PhD
diss.University of Reading, 1997 161-164.
25 Republic Bank Ltd, From Colonial to Republic 111.
SEAN NG WAI / 185
5.0 The Challenge of Local Responsiveness, 1940-1970
(i) Growth Factors

During the period 1940 to 1970, commercial banks were faced
with several competitive challenges and new demands, which necessitated
the shift from a purely global strategy to an international strategy. There
were several factors which facilitated the implementation of an
international strategy. Firstly, the events of World War II (WWII) exposed
the multinational banks‘ home-country operations to serious danger and
threatened the communication system between the multinational banks‘
headquarters and their overseas branches. The transfer of knowledge and
expertise to foreign subsidiaries in consequence came to be seen as being
important. The war also facilitated an internally-generated economic
boom in Trinidad, which enhanced the liquidity position of the state and
ordinary individuals. Politically, Trinidad became a member of the British
West Indian Federation and ultimately gained the right to self-
determination in 1962 in its quest towards achieving greater local
autonomy. Racial hostility also came into sharp focus during this period
because of the American influence at the bases and the commencement of
mass electoral politics. By the 1950s, the colonial government was
managed almost exclusively by locals, who changed the direction of public
policy towards supporting an industrial-centred economy. Given these
changes in the local environment, it became progressively clearer that the
multinational banks‘ global business strategies were not sufficiently locally
responsive. In addition to these challenges, six new banks with varying
degrees of success penetrated the banking industry, including Bank of
Nova Scotia (1954), the Bank of Trinidad (Gordon Grant) Ltd (1959), the
Bank of London and Montreal (BOLAM, July 1960), the Swiss West
Indies Bank (October 1960), Chase Manhattan Bank (1963) and First
National City Bank (1965).
By the 1960s, therefore, the banking industry was oversaturated,
which made it difficult to acquire market share. In 1963, for example, the
Bank of Trinidad (Gordon Grant) Ltd (1959) found it extremely difficult
to penetrate the market and decided after four years of operation to sell its
assets to Barclays Bank DCO. The BNS and First National City Bank also
faced a similar battle to acquire market share. BNS attempted to get
around this situation by focussing on a new niche area in consumer
financing, which proved to be viable in the long-run. In contrast, Citibank
moved away from retail banking to focus almost exclusively on corporate
and merchant banking in the 1980s. Although some of the other
commercial banks have become involved in providing merchant banking
services, Citibank retained a competitive edge over the other banks
because of its huge capital base and international operations that span
over 100 countries—a tremendous economies of scale advantage.
Government intervention was another factor that led to the exit of
banking firms. In 1969, the Government of Trinidad and Tobago
enunciated a policy in its Third-Five Year Plan, in which no new foreign
commercial bank would be permitted to establish in the country unless a
new kind of service of great priority in the development effort (such as
development banks or mortgage banks) would be involved.
Coincidentally, however, the triumvirate owners of BOLAM agreed to go
their separate ways. In the process, BOLAM was allocated to the Bank of
Montreal (BOM), which did not operate in the island. The BOM, in
consequence, requested a license to operate in Trinidad. Dr. Williams,
then Prime Minister of Trinidad and Tobago, however, did not see this
transaction as simply a transfer of shareholding from one bank to the next
but rather the entry of a new foreign bank, which had no special services
to offer the people of Trinidad and Tobago. In consequence, Williams
blocked the Bank of Montreal from purchasing the bank‘s shares, and
commenced negotiations in March 1970 for the purchase of BOLAM and
its finance company, BOLABAR, which was promptly purchased for
TT$1.4 million. By July 1, 1970, BOLAM was nationalised and converted
into the National Commercial Bank of Trinidad and Tobago (NCB).
By 1972, the Government also decided to encourage the
localisation of foreign banks. Six foreign banks heeded the call and
became locally incorporated. Citibank and Chase Manhattan Bank resisted
these attempts and were eventually given an ultimatum to incorporate
locally or have restrictions placed on their operations. Citibank reluctantly
SEAN NG WAI / 187
complied and offered its first share issue in 1984. In 1989, Citibank
reconverted to full foreign ownership. Chase Manhattan, however,
discontinued operations in Trinidad and Tobago. According to Philip
Rochford, Chase Manhattan appeared perturbed by Government‘s
intrusion into the banking sector and more so since, it came from a
measly ―Banana Republic‖. Joy Caesar conversely believed that Chase
Manhattan Bank experienced tremendous difficulties penetrating the retail
banking market, which was oversaturated with six commercial banks
competing for the same market-segment and saw this opportunity to exit.
Another reason for the disappearance of banks might be attributed
to fraud. In October 1960, the Swiss West Indies Bank announced its
intention of making $480 million available as credit for approved projects
to the Federal and all unit governments of the Federation. 26 Initially, the
Swiss Bank started operations in Trinidad as a Bureau de Change on
Fredrick Street and later relocated to Chacon Street in Port of Spain.
Interestingly, the Swiss Bank‘s registered office was located at Main Street,
Scarborough in Tobago and not in the federal capital where all the major
federal decisions would be undertaken (Brown, 1989). This was surprising
since the Swiss Bank‘s main objective was to attend to the needs of the
Federal Government. After a few months of operation, the Swiss Bank
fell into disrepute following the publications of various statements and
letters between bank officials and government officials in the opposition
paper – The Statesman. In September 1961, one of the published
statements by the Swiss Bank Managing Director Archibald Chapman
alleged that certain PNM Government Ministers had been actively
soliciting the Swiss Bank to make a donation of ₤100,000 (BWI$480,000)
towards the purchase of a newspaper press for the PNM, in the event of
business materialising.27 The Swiss Bank was expected to raise funds for
26 Chronicle of the West India Committee, October 1960

27 The Statesman, 30th September 1961
FISA28, which was in negotiations with Compagnie Française de

Transactions Internationales, TRANSACO. 29
In September 1961, Opposition M.P. Simbhoonath Capildeo
exposed these allegations in the Legislative Council. Following this,
Chapman filed an affidavit on September 8th 1961 declaring that he had
been warned by a Government Minister to say nothing and was issued an
indirect threat on his life. This matter was eventually raised in the
Legislative Council where Government Ministers Dr Williams and
Kamaluddin Mohammed refuted these claims.30 Given the bank‘s
damaged reputation, the Swiss Bank‘s three directors filed a declaration of
solvency in the Port of Spain Supreme Court as a preliminary to voluntary
winding-up. The declaration was made by Archibald Chapman (of
France), Horace Whitaker (of Port of Spain) and Kenneth Good
(Tobago). Consequently, Dr Williams launched his own investigations
into the matter; and several implicated Ministers filed writs for libel
against the Opposition Party paper ―The Statesman‖ for damages. It was
not entirely clear what happened after the Swiss Bank‘s departure or with
Dr Williams‘ investigation (CO 1031/4078).31
(ii) Competitive Strategy/ Bank Performance

Notwithstanding the entry of several new entrants, the failure of
other banking firms was perhaps pre-empted by the existence of the price
cartel and the quick exit of some new firms. Although the BNS and
BOLAM were new entrants, they were easily assimilated into the existing
collusive agreements. Throughout most of the period, the collusive
28 OFISA was a Venezuelan company which had been contracted by the Trinidad
Government to carry out the $43,000,000 Sewerage Scheme.
29 Compagnie Française de Transactions Internationales, TRANSACO was
expected to supply materials and extending credit in connection with electricity,

equipment, shipyard facilities, buses and telephone to the Government of
Trinidad and Tobago.
30 Trinidad Guardian, 9th September 1961
31 In 1965, West Indian Cricketer and PNM Minister Learie Constantine was
awarded monetary compensation for defamatory comments made in the

Statesman. Constantine was accused of having shares in Metal Works
Company, a company associated in some way with the Swiss West Indian Bank.
SEAN NG WAI / 189
arrangement regulating prices remained intact. There were a few instances

where participant banks engaged in price competition or cheated on the
agreements. In spite of this, Barclays Bank DCO maintained tremendous
market power and continued to exercise price leadership over the other
participant banks. RBC however, proved to be a strong competitor. Even
though RBC was unsuccessful in its attempt to set the prices for the
collusive agreement in the early 1940s, it gained a much larger share of the
medium and smaller customer base than Barclays Bank DCO because of
its willingness to assume larger risks. RBC also adopted a locally-
responsive product differentiation strategy, but maintained its global
focus. This allowed RBC to increase its market share and capture new
demand. The CBC and new entrant banks maintained their globally-
centred strategies without making much effort to be locally-responsive. As
a result, they did not expand much beyond their existing customer base.
6.0 The Creation and Demise of the Indigenous Banks,

1970-1992
(i) Growth Factors

In the aftermath of the 1970 Black Power Revolution, the
Government of Trinidad and Tobago sponsored the introduction of two
indigenous banks: National Commercial Bank (1970) and Workers‘ Bank
(1971). The establishment of these indigenous banks were the result of
government intervention rather than boom conditions. In the 1970s, a
number of Indo-Trinidadian businessmen also promoted the
establishment of a branch of the Bank of Baroda in Trinidad and Tobago.
The PNM blocked this plan, which it considered to be contrary to its
policy of indigenising the banking system.32
During the oil boom years (1974 to 1982), the number of operating
commercial banks increased from eight to nine because of the entry of
another indigenous bank, the Trinidad Cooperative Bank in 1976. Even
32 Ryan and Lou Anne Barclay, Sharks and Sardines: Blacks In Business in
Trinidad and Tobago (St Augustine: ISER, 1992) 102.
though there was only one new entrant to the industry in the boom
period, there was a significant increase in the number of bank branches,
which rose from eighty-one branches in 1970 to 117 branches by 1985.
Correspondingly, the commercial banks‘ total assets increased
exponentially from TTS491.4 million in 1970 to TT$5,215.9 million by
1980. Economic conditions may have helped to mute rivalry amongst the
larger, established foreign commercial banks because of an expanding
profit pool; hence, their conservative and bland response to competition.
By 1983, Trinidad was plunged into an economic recession because
of falling oil prices, an ineffective petroleum tax regime and a decline in
petroleum production and exports.33 Another contributory factor was the
generous wage increases given to public service workers for the period
1981-1983, which ranged from 62% to 86%. Moreover, the excessive
demand for goods and services fuelled high inflation rates of 14.3% in
1981, 11.4% in 1982 and 16.7% in 1983.34 Given these unsustainable
expenditures, Trinidad experienced a fiscal deficit for a ten-year period
from 1982 to 1993. The slowdown of the economy negatively affected the
whole financial industry, which had been encouraged during the boom,
because of excess capacity, to make loans to previously ―uncreditworthy‖
customers. In terms of the commercial banks, the number of banks
operating in Trinidad dropped to eight in 1985 owing to government‘s
localization policy and/or arguably Chase Manhattan Bank‘s poor profit
performance.35 The recession did not result in a decline in the number of
33 Oil production and exports dropped by as much as 30% and 36% between
1978 and 1983 respectively.
34 Farrell, Central Banking in a Developing Economy, 88-90; Central Bank of
Trinidad and Tobago, Handbook of Key Economic and Financial Statistics
(Port of Spain: CBTT,2005).
35 Joy Caesar is of the view that Chase Manhattan Bank exited Trinidad because
of Government‘s localization policy but also due to its inability to acquire a
significant portion of market share. Joy Caesar, personal interview, San
Fernando, 19 August 2004. Joy Caesar joined Citibank in the early 1970s after a
short stint as a teacher at St Joseph‘s Convent, San Fernando. In 1993, Caesar
became the first female Vice President in charge of operations, technology,
human resources and public affairs at Citibank. Besides her successful career,
Caesar was a former Director at the now defunct Trinidad and Tobago
SEAN NG WAI / 191
bank branches (which totalled 121 by 1990) but significantly slowed the
rate of branch expansion and product innovation. By the mid-1980s, the
operations of the indigenous banks became unsustainable. This resulted in
the Central Bank of Trinidad and Tobago taking over Trinidad
Cooperative Bank and Workers Bank in 1986 and 1989 respectively. By
1992, the National Commercial Bank also found itself in financial
difficulties. On March 9, 1993, these banks were taken over by the Central
Bank and merged into a new entity called First Citizens Bank.

In the 1970s, the new entrant banks faced an important challenge
of having to gain initial market share. To start the process of capturing
market share, the new entrants established and expanded their branch
networks. Assuming that increased market power yields larger earnings,
the NCB expanded from just one branch in 1970 to 18 branches with
over 900 employees, 23 years later (Waterman, 2007). This involved
investing millions in buying and building branches and hiring and training
the staff to run them. By 1982, however, branch expansion slowed at all
the commercial banks with the exception of NCB, given the sudden drop
in petroleum prices and recessionary conditions. Rochford, the Managing
Director writing to shareholders, explained why it was necessary for NCB
to continue branch expansion during below minimum economic
condition as follows:
Branch growth is critical for future profitability so that the NCB
had to consciously accept a decline in profits in the short term to assure
increasing profits and being able to compete more effectively with the
longer established banks in the future…Branch growth was also necessary
to give coverage to the whole nation (Waterman, 2007).
Although branch expansion allowed NCB to increase its market
share from 3% for both total deposits and total loans in 1971 to 20% and
14% in 1992 respectively, the interest revenue collected was too small to
sustain the bank‘s branch operations (Nelson, 1995). WB, however, was
Television (TTT) and National Broadcasting Company (NBS and Radio 610).
Currently, Caesar is the Choir Mistress of the Southernaries Choir.
more conservative in its branch expansion initiatives. Starting with just

one branch in 1971, WB increased to four branches in 1978 and reached
its peak number with eight branches by 1988. Nelson revealed that WB‘s
share of total banking deposits grew from just 1% in 1972 to 7% in 1988,
while its loan share grew from 1 ½ % to 10%. Although asset growth in
the form of branch expansion did not guarantee increased profitability, it
did appear to confer NCB with a slightly larger market share of total
deposits and total loans.
Another competitive strategy utilized by the indigenous banks to
capture market share was price competition. Prior to the arrival of the
indigenous banks, the foreign-owned banks resisted price competition and
loss of market share by maintaining formal collusive agreements to
regulate interest rates and other competitive issues. By 1977, however,
increasing competition for market share dismantled the long established
price cartel and ushered in a new period of monopolistic competition. The
indigenous banks, being recent entrants to the banking industry and
perhaps having a social welfare objective, opted to offer higher rates of
interest on deposits and charge lower rates on loans than the foreign-
owned banks. Although the full extent of interest rate competition could
not be gauged owing to data limitations, the available statistics showed
that the indigenous banks were more aggressive price competitors. In the
last quarter of 1987, Workers‘ Bank (WB) offered between 8.7% and
10.2% on fixed deposits, which were among the highest rates available at
the time. NCB in contrast, offered 7% on deposits through its Chaconia
Accumulator Plan. Both WB and NCB‘s deposit rates were extremely
high, if compared to a weighted average deposit rate of 5% then
prevailing in the banking system (Nelson, 1995). Additionally over the
period 1986 to 1992, the rates on 3-month and 6-month deposits of the
indigenous banks were on average 55 and 15 basis points higher
respectively, than the other banks while the rates on 1-year time deposits
were on average lower by two basis points (Seepersad, 1994). These
competitive rates caused the deposit base of the indigenous banks to be
skewed towards longer-term and time deposits, which were
predominantly held by individuals rather than corporate clients, thus
SEAN NG WAI / 193
resulting in higher, and in recessionary times, unsustainable, cost

structures.
The indigenous banks also competed for and simultaneously
catered to, the needs of the low-and middle-income earners by charging
marginally lower rates of interest on some categories of loans. Data
available for 1988 showed that interest rates charged on instalment loans
were on average 26 basis points lower than the rates charged by banks
with expatriate origin (Seepersad, 1994). Although the expatriate banks
recognised the profit opportunities to be derived from consumer
financing and long-term lending, their credit policies remained biased
towards short-term, self-liquidating commercial loans. The large expatriate
banks therefore, preferred to trade off greater rates of return (from
mortgage financing and long-term lending) for lower risks. Additionally,
the expatriate banks enjoyed longer standing, which allowed them to
benefit from customer loyalty. This meant that intense competition
amongst the new entrants and the longstanding expatriate banks did not
occur. Instead, the indigenous banks found that they were competing
among themselves in an already saturated market.
The monopolistically competitive environment also encouraged
banks to engage in non-price competition. Product differentiation became
an important means of establishing a competitive advantage over rivals.
Interestingly, the indigenous banks were the earliest to install ATMs in
1974 and 1984 respectively. Following the BNS‘s lead, WB attempted to
construct a credit policy covering low income workers, small
businessmen, housing mortgages and education financing. A major
financial innovation of Workers Bank was in mortgage financing. In 1973,
Workers Bank began offering the Home Ownership Plan, through which
borrowers could get loans to cover furniture and appliances as well as
house and land, after making regular deposits over a two-year period. In
1978, Workers‘ Bank also introduced a series of Varinstall Graduated
Mortgage Finance Plans (acronym for varied instalments). These plans
offered inflation adjusted funding of taxes, insurance, maintenance and
furniture and appliance replacement. The other elements of the Varinstall
plans included using an initial base rate lower than the prevailing prime
lending rates, a reduction of rates in periods of low or falling prime rates

and possibilities for converting conventional mortgage loans (Central
Bank of Trinidad and Tobago, 2007).
NCB also tried to create a market niche in mortgage financing. In
the 1970s, NCB launched the Loansaver Plan, which allowed customers
to get into the habit of saving and repay a loan, by making a monthly
deposit of up to 25% of his wages for a period of one year, which would
have been comparable to a mortgage instalment. Besides allowing
previously unqualified individuals from accessing mortgage loans, NCB
offered as much as 90% financing whilst competing banks offered on
average 60% of the value of the property being acquired. Additionally,
NCB used a wife‘s earnings when assessing the qualifying income of
mortgage applicants and was the first to offer life insurance on mortgage
loans.36
Although this paper does not provide a comprehensive account of
the various price and non-price competitive strategies used, the
competitive nature of the industry made the new entrants‘ survival an
extremely difficult task given the cost structures attached to building a
branch network, advertising, product innovation and so on. In contrast,
the longer established banks would have managed better since they
already enjoyed the advantage of customer loyalty and fewer overhead and
start-up expenses.
(iii) Other Factors Affecting Bank Performance

(a) Gaining Public Confidence
As new entrants, the indigenous banks faced the big challenge of
gaining public confidence. In the 1970s, the public was quite sceptical of
36 Philip Rochford, personal interview, St. Augustine, 28th February 2004. Philip
G. Rochford served as Chief Executive of the National Commercial Bank of
Trinidad and Tobago and has held directorships on several large corporate
boards. His greatest He is also an Economist, a Fellow of the Institute of
Banking, both of the United Kingdom and Trinidad and Tobago, a Chartered
Accountant, a Chartered Secretary and holds a Master of Science degree in
accounting from the University of the West Indies. In 1975, he was awarded
the Humming Bird Medal (Gold) in the field of Economics.
SEAN NG WAI / 195
some banks given their ownership status and perceived racial biases.
NCB, for instance, was generally perceived to be an ―African bank‖ since
its management was largely of ―Afro-Trinidadian stock‖ and there was the
notion that the Government had established it to provide resources to the
so-called ―small man‖. The other banks were also perceived in ethnic
terms: BNS as the Chinese bank; Republic and RBC as the Caucasian
banks and BOC as the Syrian and Indian bank (Khan, 2001).
In retrospect, Philip Rochford contended that many individuals
(especially large businessmen and government ministers) did not want to
join NCB because it was a state-run bank since there was a general feeling
that having an account with a state-run bank would put them at risk of
their financial details being disclosed in the public domain.37 Additionally,
many citizens viewed the government-sponsored banks as venues through
which political supporters and politicians could share in bank funds. This
public perception gained greater creditability following WB‘s collapse
when it was revealed that the chairman of WB owed the bank
approximately TT$29 million. Another highly publicised loan was that of
a PNM minister, who was indebted to the tune of about TT$12 million.
(b) Threat of Substitute Products

The price cartel also collapsed because of the growth of the
finance companies, which were in direct competition until 1981 for the
commercial banks‘ depositors and same set of borrowers. Finance
companies became an instrument of inter-bank competition. Banks with
affiliated finance companies, for example, used them to attract deposits at
interest rates higher than those established by the commercial banks‘
interest rate cartel (Bourne, 1986). The banks that did not have affiliated
finance companies were therefore forced to secede from the cartel to
capture higher economic rents (Farrell, 1988).
37 Philip Rochford, personal interview, St Augustine, 28th February 2004

(c) Managerial Incompetence

The dominant view held that managerial incompetence was the
primary cause for the failure of the indigenous banks. At the indigenous
banks, attempts were made to recruit ―quality‖ staff members. The NCB,
for example, focussed on building a strong management team and
competent staff regardless of their race or ethnicity. 38 Despite these
efforts to hire knowledgeable and highly trained staff, the indigenous
banks found it difficult to attract or retain experienced bankers. 39 They
were therefore faced with the enormous challenge of having to build their
organisations and personnel from the ―ground up‖ by hiring university
graduates and conducting internal training programmes.
The indigenous banks also suffered from a high staff turnover,
which made it difficult for the banks to conduct their operations in an
efficient and consistent manner. WB, for example, was particularly
challenged by this problem and in fact faced the premature exit of its
General Manager, Neville Mitchell, who resigned suddenly in 1972. It was
not until 1974 that WB was able to find a replacement, not a local but an
Englishman, Lawrence Levack, who had formerly served as the General
Manager of the National and Grindlays Bank in Pakistan.
Psychological Factors
There is a growing body of evidence that suggests that
psychological factors play an important part in the disappearance of
banks. Following the closure of WB in 1988, for instance, a rumour
circulated that NCB had also collapsed. This caused the immediate
withdrawal of approximately TT$100 million in just ten days. NCB‘s
Chairman suggested at the time that the run was deliberately instigated by
the ―old banking order‖ to try and close down the last remaining ―Black‖
bank. The potential threat of rumour has also been sufficient for the
Central Bank to intervene to prevent possible ―runs‖ on troubled
38 NCB‘s management team included Philip Rochford, an economist and

accountant; Ganace Ramdial, a barrister-at-law and Andrew Mc Eachrane, a
LLB holder among others, some of whom went on to lead other commercial
banks and financial institutions.
39 Philip Rochford, personal interview, St Augustine, 28 February 2004
SEAN NG WAI / 197
institutions. A case in point, involved the merger of NCB, WB (1989) and

TCB into First Citizens Bank in 1993.
Government Intervention/ Neglect

One of the reasons suggested for the failure of the indigenous
banks was a lack of government support. In the 1970s, Government
provided initial support to meet the preliminary expense of the indigenous
banks. In retrospect, considering the market niche targeted by the
indigenous banks, it may be argued that inadequate safety buffers were
provided by the Government. As such, the indigenous banks were not
‗built to last‘ but rather built to crash.
There was also a suggestion that Government played a critical
role in the demise of the three indigenous banks in 1992. In his 2009
autobiography, the former NCB CEO Philip Rochford asserted that prior
to national elections a senior politician had approached him about the
possibility of writing-off a sizeable loan, which had been in considerable
arrears. Upon reviewing the loan, Rochford found that the supporting real
estate security had declined considerably in market value and the multi-
millionaire personal guarantor had died. In turn, Rochford pointed out
that NCB was a public company and that such an attendant write-off
would have been inappropriate. The senior minister objected and warned
that he would deal with the matter after elections in which his party was
expected to form the government. Despite these threats, Rochford and
the consortium members later reviewed the loan. The consortium
members decided not to write-off the loan, but rather to require that the
personal guarantees of the politician and his wife be called upon.
Rochford added:
It is interesting to note that the consolidation of the operations of
the three indigenous banks by means of a private company, owned 100
percent by government rather than maintaining the identity of a public
company with majority government ownership, provided an easier
process to write off significant delinquent loans of any politician
(Rochford, 2009).
(iv) Bank Performance

During the ―boom years‖ 1974 to 1983, the commercial banking
industry enjoyed high levels of profitability because of oil revenue
windfalls. This was reflected in the commercial banks‘ net profit accounts,
especially those of longstanding and expatriate origins. The newly
established indigenous banks were not particularly profitable (if at all
profitable) in their first years of operation, as they placed greater emphasis
on meeting their start-up costs and increasing their market share. WB, for
example, did not make a profit until 1975. The NCB conversely issued a
profit every year since its inception in 1970, but these were small profits
compared to the expatriate banks.
Unlike the NCB and WB, the TCB opened at the end of the oil
bonanza, which prohibited it from building its capital base or a sizeable
market share. In consequence, the TCB, being a late entrant, found it
much more difficult to become economically viable and recorded
successive losses from 1978 to 1985, except for 1983 when it made a
small net profit of TT$151,000. However, by 1984, the growth of the
commercial banks‘ gross and net profits slowed drastically owing to
recessionary conditions. In the period 1986-1989, the downturn in the
level of economic activity had a negative impact on the commercial
banking industry‘s profitability. Republic Bank‘s net profits fell drastically
from TT$34.2 million in 1984 to just TT$1.9 million in 1987—a decline
of about 94%. In comparison, Royal Bank‘s net profits for the same
period declined by 72.3%; BNS by 37.5%; BOC by 60.7; NCB by 89.8%
and WB by 42.9% (Scotland, 1988).
By 1990, economic conditions improved causing the commercial
banks‘ net profits accounts to recover with the exception of NCB, whilst
the profitability of the other two indigenous banks, WB and TCB was
sustained artificially through the injection of capital from the Central
Bank. From the foregoing data, there appeared to be some correlation
between overall bank profitability and the macroeconomic environment.
Farrell recognised this positive correlation, which led him to argue that
booming conditions helped to mask poor bank management given the
SEAN NG WAI / 199
commercial banks‘ weaker performance during the recession periods

(Farrell, 1998).
A similar pattern is observed with regard to asset quality. In the
mid-1970s, the new entrant banks under the pressure of ―excess loan
capacity‖ and high liquidity were forced to make loans to borrowers
previously regarded as uncreditworthy. This undoubtedly affected the
asset quality of the commercial banking industry. Over the period 1986 to
1989, the ratio of non-performing loans to total loans for the entire
commercial banking industry rose from 11.7% to 24.6% respectively. This
figure however, decreased to 14.9% in 1990 to 1992 because of the
cleaning of two indigenous banks‘ balance sheets by the Central Bank and
tighter credit screening (Seepersad, 1994). It is important to note that the
indigenous banks‘ total non-performing loans to average total loans ratio
in 1986 averaged a low 9.7% whereas the medium and large banks
averaged 9.6% and 19.55% respectively. As economic conditions
deteriorated in the 1980s, so did the asset quality of the commercial
banking industry. By 1989, for example, the indigenous banks‘ total non-
performing loans to average total loans ratio peaked at 48.93% compared
with 12.1% and 29.3% for the medium and large banks respectively.
According to Seepersad, this substantial deterioration of asset quality at
the indigenous banks reflected the existence of weak credit controls and
the provision of loans to highly risky individuals. Asset quality at the
medium and large banks fared much better because they provided loans
to perceivably less risky customers. However, asset quality in the large
banks in comparison to the medium banks deteriorated significantly
during the recessionary period (1983-1989) because of the failure of
several large businesses. RBC, for example, was tested by Neal & Massy,
Centrin and Gulf City. Republic Bank (formerly Barclays Bank DCO) was
severely challenged by the retail giant Kirpalani‘s (which collapsed) and
the McAL Group; thus, resulting in a 78.6% decrease in the bank‘s
profits. Unlike the small and large banks which attempted to create niches
in mortgage and long-term financing, the medium-sized banks focussed
on short-term consumer financing instruments, which had a better asset
quality or lower risk, thus, resulting in less loan losses.
7.0 Conclusion
This paper has surveyed the long history of bank failures and acquisitions
in Trinidad from 1836 to 1992. In so doing, the historical data provided
shows that banks disappear or fail for a variety of reasons. A major
determinant of bank failure is the state of the economy. It was revealed
that banks are more susceptible to bank failure or acquisitions during
economic slumps, which aggravate mistakes made during periods of
buoyant growth. There is also a tendency for banks to exit markets that
are characterised by intense competition. Bank failures, however, were less
frequent in oligopolistic market forms, in which firms cooperate to
stabilise prices and minimise cut-throat competition. In the business of
banking, incumbents generally have a competitive advantage over new
entrants, who struggle to capture market share and enjoy little brand
loyalty. The new entrants that survive over the long-term do not compete
directly with incumbent firms, but must find new market niches to
capitalise. Government involvement also impacted on the competitive
nature of firms. This can be observed through the enactment of particular
competitive policies or through direct intervention in the market.
Although history is useful for highlighting areas of continuities, it also
presents several areas of discontinuities. In examining the issue of market
form, this paper has shown that the banking industry in Trinidad evolved
through three distinct market forms starting with monopoly, and evolving
to oligopoly and the monopolistic competition. Over time, these market
structures have impacted on the business strategies employed by
competing firms. In each of these market situations, competing banks
were required to make some modification to their competitive strategy to
fit the market form. However, firm survival depended not only on being
responsive to changing market conditions, but required a balance between
innovation and efficiency.
SEAN NG WAI / 201
REFERENCES
A. Published Material
Ackrill, M and L. Hannah. 2001. Barclays: The Business of Banking 1670-

1996. Cambridge: Cambridge University Press.
Armstrong, Christopher and H.V. Nelles. 1988. Southern Exposure:

Canadian Promoters in Latin America and the Caribbean. Toronto:
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Baster, A.S.J. 1929. The Imperial Banks. London: P.S. King & Sons Ltd.
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Bourne, Compton 1986. ―Potentials and Pitfalls of Rapid Financial Innovation in

Less Developed Countries: The Case of Trinidad and Tobago Finance
Companies”. Annual Monetary Studies Conference, UWI,
November 1986.
Brown, Deryck. 1989. History of Money and Banking In Trinidad and Tobago
from 1789 to 1989. Port of Spain: Central Bank of Trinidad and
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Central Bank of Trinidad and Tobago. 2007. The Residential Mortgage

Market in Trinidad and Tobago. Port of Spain: Central Bank of
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Crossley, Julian and John Blandford. 1975. The DCO Story, A History of
Banking in Many Countries 1925-71. London: Barclays Bank
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Farrell, Terrence. 1988. The Independence Experience 1962-1987, edited by

Selwyn Ryan. St Augustine: ISER, UWI.
Government of Trinidad and Tobago 1971. Interim Report of Commission of

Enquiry into Racial and Colour Discrimination in the Private Sector. Port
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1973, as approved by Parliament. Port of Spain: Trinidad and
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Gup, Benton E. and James W. Kolari. 2005. Commercial Banking: The

Management of Risk. New Jersey: John Wiley & Sons, Inc.
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Clarendon Press.
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SEAN NG WAI / 205
(a) The Nineteenth Century

The Port of Spain Gazette
The San Fernando Gazette
The Trinidad Chronicle
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(b) The Twentieth Century

Local/ Regional Foreign
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Philip Rochford, personal interview, St Augustine, 28th February 2004

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WHY DO BANKS DISAPPEAR?

Keywords: bank failures; bank acquisitions; Trinidad

issue of bank failure and bank consolidation in post-1962 Trinidad and

1 Rational Expectations refer to the assumption that people look to the

2.0 Historical Context

The history of commercial banking in Trinidad begins in 1837 with the

and elsewhere in the Caribbean region. In 1902, the Union Bank of

3.0 The Establishment of Monopoly, 1836-1900

(i) Growth Factors

4 A free-standing company may be defined as legally separate entity which is

5 Trinidad Standard, 14th December 1838

Bank, which would give them a combined subscribed capital of £3 million

(ii) Competitive Strategy

cash. The WIB as a result was unable to provide optimal accommodation

10 CBC, Calvert to Rennie, 14th November 1844 [C/1844/46]

WIB offered competitive interest rates of 3% on current accounts and 4%

11 CBC, Calvert to Rennie, 1st September 1841 [C/1841/28]

(iii) Bank Performance

large cocoa proprietors. Cocoa enjoyed a tremendous boom between 1866

4.0 From Monopoly to Oligopolistic Competition, 1900-1939

(i) Growth Factors

shareholders meeting and successfully approved an increase of $1.2

16 Horizontal integration refers to the combination or acquisition of a company at

the Government enacted the Alien Bankers Ordinance, which placed

(ii) Competitive Strategy

advantages, led the way in formulating collusive agreements, which

21 ACC0080-3554 Interest Rates and Turnover Charges (September 1932-March

(iii) Bank Performance

And Statement Of West Indian Branches (March 1926-December 1934).

5.0 The Challenge of Local Responsiveness, 1940-1970

(i) Growth Factors

26 Chronicle of the West India Committee, October 1960

FISA28, which was in negotiations with Compagnie Française de

(ii) Competitive Strategy/ Bank Performance

expected to supply materials and extending credit in connection with electricity,

awarded monetary compensation for defamatory comments made in the

arrangement regulating prices remained intact. There were a few instances

6.0 The Creation and Demise of the Indigenous Banks,

(i) Growth Factors

(ii) Competitive Strategy

more conservative in its branch expansion initiatives. Starting with just

resulting in higher, and in recessionary times, unsustainable, cost

lending rates, a reduction of rates in periods of low or falling prime rates

(iii) Other Factors Affecting Bank Performance

(b) Threat of Substitute Products

37 Philip Rochford, personal interview, St Augustine, 28th February 2004

(c) Managerial Incompetence

38 NCB‘s management team included Philip Rochford, an economist and

institutions. A case in point, involved the merger of NCB, WB (1989) and

Government Intervention/ Neglect

(iv) Bank Performance

commercial banks‘ weaker performance during the recession periods

Ackrill, M and L. Hannah. 2001. Barclays: The Business of Banking 1670-

Armstrong, Christopher and H.V. Nelles. 1988. Southern Exposure:

Bourne, Compton 1986. ―Potentials and Pitfalls of Rapid Financial Innovation in

Central Bank of Trinidad and Tobago. 2007. The Residential Mortgage

Farrell, Terrence. 1988. The Independence Experience 1962-1987, edited by

Government of Trinidad and Tobago 1971. Interim Report of Commission of

Government of Trinidad and Tobago 1969. Third Five-Year Plan, 1969-