The Financial Services Industry in Bermuda, the Cayman Islands and the British Virgin Islands: An Analysis of Government Finances and Global Implications

Abstract

Based on the existing literature within the realm of Shadow Banking and the Financial Services Industry, this thesis addresses how domestic policy and international regulation/intervention in Bermuda, the Cayman Islands, and the British Virgin Islands affect local government finances. Where international standards demand coherence to a uniform set of rules, the rules governing this industry in each respective offshore financial center are anything but uniform. Most acutely, when it comes to local participation and the portion of government revenue and GDP that can be directly linked to financial services, there are large differences between the three case studies examined in this thesis. In calculating the portion of expenditures destined for financial assistance over the ten-year period of this thesis, we can make informed conclusions as to how these outflows relate to overall government expenditure, revenue, and GDP for each case study.

Bermuda, for instance, takes in much less in financial services taxes, licenses, and fees as a portion of their overall government revenue than Cayman or BVI. Perhaps not uncoincidentally, Bermuda’s government expenditures have consistently been more than government revenues in the period from 2008 to 2017. Cayman, on the other hand, having implemented the Principles for Responsible Fiscal Management as required by the UK in 2009, went from operating in the red to finishing 2017 with revenues $100 million higher than expenditures. What is most certainly not a coincidence is that these Principles mandated a substantial increase in government revenues – largely funded by significant increases in financial services licensing fees, which played an integral part in the Cayman government’s ability to balance its budget over this period. If Cayman’s experience is illustrative of one thing, it’s that reputation, prestige, and capacity to provide professional services may well outweigh a not inconsequential rate increase. For an industry that deals in the trillions of dollars, the higher cost of doing business in Cayman has not resulted in a mass exodus of clients to the next lowest bidder.

Using Cayman as the counterfactual that improved its financial situation, this thesis highlights paths by which Bermuda and BVI could similarly improve regulation of such a vital industry. Also, in looking at financial assistance levels between the three, this thesis assesses how each has attempted to redistribute some of the wealth flowing from an industry that arguably contributes to rising levels of inequality both at home and abroad. Finally, this thesis addresses the question of sovereignty as it relates to a government’s inability to regulate financial flows within its territorial confines and in light of Britain’s intervention in Cayman (and nonintervention in Bermuda).