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Puerto Rico's top banking regulator inviting fintech innovation — cautiously

➤Telecommunications failures shocked Puerto Rico's banking system in the wake of Hurricane Maria; "Sometimes it did feel like the end of days"

➤Puerto Rican banks held daily calls with U.S. regulators after hurricane to ensure they didn't run out of cash

With Maria in the rear-view mirror, an increasing number of companies are applying for the island's special fintech charter

When the U.S. Federal Reserve wanted to know how much cash to send to Puerto Rico in the wake of the unprecedented destruction wrought by Hurricane Maria in September 2017, they asked George Joyner, Puerto Rico's commissioner of financial institutions. After the hurricane, he was on calls daily with regulators on the mainland and the island's banks.

Joyner sat down with S&P Global Market Intelligence in his San Juan office to talk about how banks coped with the damage from Maria, the recovery efforts and the rising number of financial technology companies setting up shop on the island.

The following is edited for clarity and length. Read more about how Puerto Rico's banking system responded to Hurricane Maria here.

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George Joyner, Puerto Rico Commissioner of Financial Institutions
Source: Lindsey White

S&P Global Market Intelligence: In the wake of Hurricane Maria, there was a daily call between local banks and regulators. What were those calls like?

George Joyner: The Federal Deposit Insurance Corp., the Federal Reserve, Treasury, Homeland Security, the Federal Emergency Management Agency, the Conference of State Banking Supervisors, the National Credit Union Administration — it was an all-hands-on deck effort. All the presidents of the [island's] banks participated, and also the head of the Puerto Rico Bankers Association.

The very first order of business was making sure that we had an adequate supply of cash in Puerto Rico. The New York Fed had already pre-positioned about $350 million here in Puerto Rico in the reserve. After the hurricane struck, they were able to get another $700 million here within a week. It came in on pallets on one of the relief flights.

We had those calls daily, and we kept track of how many branches were opening. We were always trying to see what was going to be next week's problem. That turned out to be the logistics of getting fuel around, convincing FEMA and the other emergency management authorities that they needed to assist in getting fuel to the banks so the generators could continue to run so that the people could continue to withdraw money.

Within a month we had close to 90% of our branches and ATMs operational — jerry-rigged with standby generators — and at that point the cellular network had stabilized.

What lessons did the banking industry learn from this experience?

A lot of it has to do with the infrastructure of Puerto Rico, which is going to be addressed in the next several years by dividing the electrical grid into mini-grids so that if one part goes down, it doesn't all go down.

The thing that I think surprised most everybody was the communication failure. I was here for both Hugo and Georges [massive hurricanes that hit Puerto Rico in 1989 and 1998, respectively]. At that time, cellular wasn't such a big component of the telecommunications infrastructure.

It was very scary on Saturday or Sunday after the storm when AT&T, which was the only one of the carriers that still had some service up, went down. Sometimes it did feel like the end of days.

With that in mind, is the banking industry coordinating with other industries like telecommunications to prepare for the next hurricane?

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Street Talk is a podcast hosted by S&P Global
Market Intelligence.

In this episode, Lindsey White discusses a recent visit to Puerto Rico, where she spoke with bankers, regulators and members of the community about the aftermath Hurricane Maria, how banks responded and the market opportunities that lie ahead.

Listen on SoundCloud and iTunes.

Not us, but the secretary of the Department of Consumer Affairs, Michael Pierluisi. When the emergency first happened, he was instrumental in getting the telecommunications companies to talk to each other.

Everybody had to come together and forget who they worked for — the banks did that, the telecommunications providers did that. They had crews who would go from one tower to another and then they would service everybody's antennae.

The calls were very interesting, very open. Everybody was talking about their branch networks and what they were doing and how they were going to move cash around. We had the armored car company also involved in the calls. It was a lot of different people from a lot of different sectors coming together all cooperating with each other.

Puerto Rico offers tax incentives to international financial entities, or IFEs, that set up shop in the commonwealth, and post-Maria the island has gotten buzz as a haven for cryptocurrency. In April your office issued guidance for people interested in establishing financial services companies in Puerto Rico that offer blockchain or virtual currency services. Tell me about the companies trying to establish as IFEs.

We have probably 20 IFE applications in the pipeline. In the last nine months we've granted three permits to operate and three permits to organize.

The older IFEs were more traditional offshore banking-type enterprises with customers not based in Puerto Rico and taking deposits and loans — very much a traditional banking model. Now, a lot of the ones that are coming in are fintech-related — not necessarily cryptocurrency or blockchain-specific because it's such a large space that you can do a lot of different things in it — you could be a full reserve bank, you could be an exchange, you could be just a payment platform.

The IFE has sufficient flexibility and the Office of the Commissioner of Financial Institutions has sufficient flexibility that we can grant those permits, but we're doing them one by one on a very tailored basis.

How are you making your decisions about these applications?

A lot of nontraditional parties that are coming into the banking sector have a learning curve as to what it is to be a regulated financial institution. We're the primary regulator here, and the federal regulators look to us. We have memorandums of understanding with all of the federal agencies — with the FDIC, with the Federal Reserve, with the Financial Crimes Enforcement Network, with Homeland Security, with the U.S. Attorney's Office. We share all our information with them because in their eyes we're the first line of defense. And we view Puerto Rico's jurisdictional reputation as one of the most prized assets that Puerto Rico has. We don't want to see that jeopardized.

A lot of this is new especially when you're talking about the virtual asset, distributed ledger, cryptocurrencies — there's a lot of different kinds of business models.

We take our time — not a lot of time: I tell people we're not going to be the ones who are standing in your way, but we want to see their business plan, what resources they're bringing, what their level of knowledge is. They have to have the right people. We do all kinds of background checks on them.

First we give them a permit to organize, followed by a permit to operate. The permits to operate previously were very broad. Now we're construing the permits to operate very narrowly: Tell me exactly what it is you want to do and that's what we're going to put in the permit. When you want to do something else, come back to us and tell us how you're going to do it and we'll amend your permit to allow for it.

We're trying to take a careful, considered way of doing it and we're also trying to say in sync with what's happening at the federal level. So it's kind of like reading tea leaves.

We want to be on the leading edge of this industry, but we don't want to be on the bleeding edge.