Bank fees debate needs to go beyond emotions

The prime minister and finance minister seem to be appealing to the emotions of the banks rather than bringing the necessary data and analysis to the debate. The Government, central bank and banks involved need to provide all the necessary information to the public.

Need better debate on bank fees

30 Jan 2022

THE MOST curious bit in the latest instalment of Jamaica’s episodic debate of banking fees is the public whingeing by Prime Minister Andrew Holness and his finance minister, Nigel Clarke, over the decision by the institutions to raise their rates. Dr Clarke called the banks “tone deaf” and Mr Holness suggested that they weren’t acting in the best interest of the country.

This posture is wanting in three critical respects. First, with regard to Mr Holness, his statement about his obligation to “protect the vulnerable of the country” blithely glosses over the fact that in 2018 his Government voted down a bill by Opposition parliamentarian, Fitz Jackson, to regulate banking fees and provide greater protection for consumers of banking services. Insofar as the public is aware, the central bank hasn’t advanced its promised work on this matter, which the Government promised at the time.

Second, these two constitutionally most senior ministers gave the impression, perhaps unintended, that they had no, or little, authority to act other than to appeal to the better angels of the banks. Which is not the way hard-nosed entrepreneurs, who are obligated to produce profits for shareholders, generally conduct business.

But the more egregious failure of the PM and the finance minister is that they, like all the protagonists in this debate, have offered no, or insufficient, data for a serious analysis of the issues. There is an absence of empiricism. Yet, the information required to aid a cogent analysis of the matter ought to be at the fingertips of researchers at the Bank of Jamaica (BOJ), which regulates the institutions.

In the absence of such data, what we will have is an emotive rather than rational, quantitative discourse, which serves no one well. This approach usually leads to bad policy.

FIRST TABLED A SOLUTION IN 2013

The shame of this is that Mr Jackson has pursued this matter for the better part of nine years, having first tabled a solution on the issue in 2013, while sitting on the backbenches of the People’s National Party (PNP) Government. At the time, he had the support of many of the current Cabinet ministers, including Audley Shaw, who had lately been the finance minister, but had moved to the Opposition side of the House. Mr Shaw, and other opposition members, sat on a parliamentary committee whose report formed the basis for the bill that Mr Jackson formally presented to the House.

Indeed, in February 2014 when Bruce Golding, the former prime minister, in whose 2007-2011 Government Mr Shaw served, warned against “sensationalism and populist tendencies” in the public critique of the decisions by banks to charge new and higher fees for services, saying that they were necessary to cover the cost of their operations, including the instruction of new technologies, he faced pushback from his former Jamaica Labour Party (JLP) colleagues.

“A bank, like any other business, must cover its costs if it is to survive, and make a profit for its shareholders if their investment is to be sustained,” Mr Golding argued at the time. “Failure to do so imperils not just the shareholders, but the thousands of depositors that are the backbone of its business.”

But responding to what he apparently felt was cockeyed cover for rapacious banks, Mr Shaw, the shadow finance minister, sitting next to his party leader, Mr Holness, insisted that the JLP “can’t go down that road”. In 2018, with the JLP back in Government and Mr Shaw returned to the finance portfolio, and the administration about to vote down Mr Jackson’s bill, Mr Shaw said: “I want to make it absolutely clear that we on this side too are concerned about certain excessive charges in the banking system. The question is how you deal with it in a manner that is internationally acceptable and transparent.”

The answer to that, of course, starts with the acceptance of two basic principles, the first of which was outlined by Mr Golding eight years ago, and which remains relevant today. And as we understand his position, that principle is embraced by Mr Jackson.

PROFITABLE TO STAY IN BUSINESS

Banks have to be profitable to stay in business – and merely marginally profitable. They have to be sufficiently strong to be able to ride out bad patches and not in such periods buckle in a fashion that induces systemic failures, with great risk to depositors and the broader economy. Jamaica knows well the consequences of such a catastrophe.

But, while banks must be strong, that strength can’t be overly disproportionate to the underlying economy which they serve and which might suggest that their business model is extortionate. Banks need strong customers for themselves to remain strong, without pushing those customers to the margins of profitability and existence, or to the point that undermines or threatens financial inclusivity.

The second principle is the factual determination of whether Jamaica’s banks are indeed gouging their customers with fees, charges, or on their margins between the cost of their loans and interest income. Fees can be disaggregated between those now at the centre of the debate, such as what customers pay for using automatic teller machines and basic in-branch transactions, and those that are earned from higherend money market-type operations. These returns can be measured against the rates of regional and international peers and whether they are out with reasonable benchmarks for sustainability.

Additionally, it might be worth bringing into the debate whether it is better for consumers and the wider economy if banks shifted more of their earnings to fee rather than interest income or vice versa, and what would result from either scenario. Bankers, no doubt, will say that regulating their fees could mean that they seek to earn more from interest rate spreads, which might lead to higher rates, which would be bad for the economy. Data-driven analyses can bring us close to the truth of any such assertion.

There is a claim that Jamaica’s banking sector is essentially, with some justification, an oligopoly in need of more rigorous oversight. That is a debate worth engaging. In that regard, the Government might provide an update on Mr Shaw’s promise during the debate that voted down Mr Jackson’s bill, of the establishment of a bank services consumer agency of some type. Its expected launch was during the 2018/19 fiscal year. The BOJ was also developing data on banking services costs.

It’s not only the Government and the central bank that owe the public information. The banks should do the same, offering more than public relations waffle.

 

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