Editorial | Banks must respond to BOJ

It is surprising that the island’s commercial banks haven’t responded to Richard Byles’ suggestion that they are stifling depositors out of interest income, while benefiting from the central bank’s sharp upward adjustments in the rates it pays on the cash they have to park with it.

It’s probable that Mr Byles, governor of the Bank of Jamaica (BOJ), the central bank, doesn’t have a handle on the internal dynamics of the commercial institutions and that there are quite rational explanations for wide differential between what the BOJ pays on the cash it holds and what the banks, in turn, pay depositors. In that event, the banks’ customers should know. The banks have an obligation to tell them.

But in a matter like this, the responsibility for ensuring transparency and fairness in the market shouldn’t rest only with the banks. Which is why Parliament’s Standing Finance Committee (SFC), must schedule broader hearings into the matter and invite the banks to defend their policy stance.

Under the new legal arrangements that gave the BOJ independence to ensure low and stable inflation, the central bank’s leaders are obliged to make periodic appearances before the SFC to update legislators on their actions and the logic that underpins them.

Mr Byles attended one of those sessions last week, in the aftermath of the BOJ’s November 17 decision to increase its policy rate (what the central banks pays commercial banks on their deposits with it, which should signal what it hopes will happen in the market) by half a percentage point, to seven per cent. It was the eighth time in 13 months that its Monetary Policy Committee had raised rates, to reach a cumulative six-and-half per cent.

AGGRESSIVE STANCE

The central bank’s aggressive stance is aimed at restraining demand/consumption in the economy and thereby containing the inflation that emerged as a consequence of post-COVID-19 supply chain problems, but was exacerbated by the fallout from Russia’s invasion of Ukraine.

The central bank’s inflation target is four to six per cent, but as its Monetary Policy Committee noted after last month’s meeting, and Mr Byles reiterated to the SFC last week, it was at 9.9 per cent in October and could end 2022 as high as 10.5 per cent.

But it wasn’t only the minutiae of monetary policy, and the technical reasons that impelled the central bank’s latest decision that concerned Mr Byles at the SFC hearing.

While Mr Byles would perhaps prefer not to have couched in these terms, he essentially also raised questions of equity – the fairness with which banks deal with their customers on the issue of deposit rates. He didn’t believe banks were being fair, and argued that the lopsided nature of the market, with two dominant players, was, in part, to blame for the situation.

“Every institution that has to leave money with us is getting seven per cent, and they are giving hundreds of thousands of depositors at the base, who constitute the bulk of their funding base, half (of a) per cent, or one per cent,” Mr Byles said. “These are peculiarities and rigidities in our system that make the transfer of our policy signals quite muted.”

Yet, at midyear, as the BOJ continued to hike its policy rates, commercial banks announced a raft of increases to the rates at which they lend to their customers.

Even before Mr Byle’s appearance before the SFC, the BOJ had taken the unusual step of publishing as press advertisements the mostly marginal upward adjustments individual commercial banks made on savings and demand deposit accounts rates over the period the central banks added the six-and-half per cent to its policy rate.

“Two institutions hold 60 per cent or more of all the deposits and credits, so unless one of those two institutions moves nobody moves,” Mr Byles said, in explaining the inertia in the market. “And even if the others move, it doesn’t have a big impact on the system.”

BIG INSTITUTIONS

Obviously, the big institutions to which the BOJ governor referred are National Commercial Bank of Jamaica (NCB) and Bank of Nova Scotia (Scotiabank), which, between them, account for $1.34 trillion of the $2.18 trillion of commercial bank assets. They also hold nearly $882 billion of the $1.49 trillion in deposits.

By referring to these banks’ dominant role in the market – and implicitly raising questions about competition in the market – BOJ might be perceived to be assuming the role of consumer and, possibly, competition advocate rather than merely being a regulator focused on the technical aspects of the banking system.

Unfortunately, these issues – as well as how to deal with what Mr Byle’s characterised as an “asymmetry” in the bank sector that weakens the BOJ’s authority to get timely heft to the BOJ in getting responses to its interest rates signals – weren’t deeply explored by the SFC.

With respect to deposit rates, though, Mr Byles suggested to depositors that they ask banks why they are being paid so little. We agree.

For the issue highlighted by the BOJ governor is a double-whammy especially for small savers, whose deposits are being eaten into by inflation, with little or no compensatory cushion from higher interest rates to help soften the impact.

However, as important, and in need of attention as that is, the issues raised by Mr Byles are deeper than the immediate question of how much interest is credited to savers’ passbooks. In them are also profound matters of policy, including of the structure of the banking market and of competition within it. If the central bank raises such questions they deserve serious discussion and debate.

The SFC, should therefore convene the hearings soon, allowing for rational airing of the issues.