Government authorities here are bracing for what could be a serious threat to this country's lucrative banking industry. Starting in October, the US Federal Reserve Board intends to permit American banks to conduct international business from the United States in the same regulation-free way as those operating from offshore banking centers like the Bahamas.
Deposits made in these "international banking facilities" would be exempt from US reserve requirements, interestrate ceilings, and state and city taxes on large international transactions booked in the US.
Citibank, the largest US bank and a major presence in Bahamian banking, has already announced it intends to shift a portion of its Eurodollar operations (Eurodollars are US dollars on deposit in banks outside the United States) from Nassau to New York, the first free-banking zone.
The fear is that Citibank's lead may be followed by other US banks, as the Fed moves to repatriate some of the multibillion-dollar Euromarket business domiciled abroad.
Faced with the prospect of more US free banking zones and increased competition from already established offshore centers, Bahamas is preparing for a major challenge to its position as the biggest offshore banking center in the Caribbean and the most important Eurolending center after London.
Overall the Bahamas accounts for about 10 percent of the global Euromarket, reflecting the expanded activity of US banks in the Caribbean. Of the more than recorded in the Bahamas.
To date, 114 Eurocurrency branches of foreign banks have located in Nassau, 86 of them American.
Direct "fallout" from the more than 300 banks and trust companies was estimated at well over $50 million last year, or about 13 percent of the national income. Thus any significant reduction in their operations is certain to have economic repercussions.
The Bahamas has succeeded as a financial center largely because of location, the absence of income tax, and a proven record of secrecy and stability.
Much of the recent growth has been triggered by investor anxiety over political and economic developments in Europe and Latin America.
The result has been a sharp movement of trust account business from both areas. Of the 23 Swiss banks and trust companies here, nine were licensed in the past three years.
The number of Latin American institutions jumped from four to 14 during the same period.
On the surface it might appear the Bahamas has little to worry about. With the new international banking facilities exemptions available only to non-US residents, and with foreigners still wary over the American seizure of Iranian assets, it seems unlikely there will be any mass transfer of offshore banking to the US.
"The prospective impact of such a shift would appear to fall most heavily on Caribbean shell branch business, which for the most part is already conducted from the US," says David Willey, vice-president of the Federal Reserve Bank of New York.
Most bankers believe the Bahamas can remain an important financial center so long as secrecy, stability, and the country's competitive tax advantages are maintained. These factors may be the rub.
Long-standing social and economic pressures are starting to surface with grave implications for the future.
Severe youth unemployment, the presence of thousands of illegal Haitian immigrants, and a crime and drug problem of epidemic proportions are rapidly undermining law and order in the country.
At the same time the governing Progressive Liberal Party has proposed constitutional and property investment legislation that is highly discriminatory in its treatment of foreigners.
The backlash from the accumulated grievances has sparked an unprecendented wave of antigovernment sentiment.
Worried over the repercussions on the financial sector, the administration is working quickly to reassure the banking community of its continued support.
As a start, the Property Bill has been withdrawn for revision, and there are strong indications the government may not pursue the constitutional changes.