Will more banks reduce interest rates? - Part 2
Published:Friday | October 29, 2010 | 12:00 AM
Wilberne Persaud, Financial Gleaner Columnist
Penning my initial reaction to Finance Minister Audley Shaw's prescription of more banks to enhance competition, hoping interest and service charges would trend down, I wondered whether he was clear on the reasons underlying the huge spreads our banks seem to require for their operation.
We had a plethora of banks a decade and a half ago. Competition then involved smaller, weaker banks competing for big deposits and paying interest on current or chequing accounts when the big two, National Commercial Bank and Scotiabank, did not.
Island Victoria Bank notoriously chased big corporate deposits and got them, whereupon its board advocated booking loans rapidly.
The result was collapse, as their operations mimicked bottom feeding for borrowers turned down or leaving delinquent loans elsewhere in the system. This is a piece of datum, not conjecture. Clearly, therefore, competition does not necessarily have to lead to reduction, in our specific case, of interest and service charge rates.
We always make decisions with incomplete information. I was only hoping Minister Shaw had reduced the level of ignorance of the field within which he operates. In other words, does he have the data and information to support the diagnosis and treatment regime he proposes?
Despair
Instead of informed comment, however, the first appearing in my inbox led me to despair. It was knee-jerk, high-order partisan 'dieheartedness'!
Hans Hamberg writes: "Persaud, the next time you take time out to criticize someone else's suggestions have the gauze [sic] to suggest a better solution. You have attacked the minster's suggestion, but at the same time you have not given an advice that one could look at and at least say this guy is thinking. You PNP economist does [sic] not get it that we are living in different world from the last 20 years and Jamaica cannot continue to go down the same economy destructive part [sic].
"What is your solution Persaud, to the imbalance in the our banking system? Give your solution or else you know what to do. Over to you sir."
The communication though, ends politely: "Regards, Hans."
What can I say? I don't know who or what a 'PNP economist' is and did not 'attack' the minister. I merely wondered if he and/or his advisers had a firm handle on the problem - a proper diagnosis.
One needs to be privy to internal numbers of the commercial banks. I suspect their range of expenses reflects inefficiencies, including 'out-of-whack' compensation packages associated with Jamaica's extreme and long-standing 'status by ascription', which requires leaders of these institutions to live demonstrably rich lives, host the most fabulous functions, etc.
Everyone resists change, and if it requires adjustments they consider negative, their resistance can be passionate.
But the next two comments give me hope.
Room for competition
Chris Berry of Mayberry Investments says: "I disagree, I believe that we should have more banks, but not only international banks, Jamaican ones too. There is a lot of room for competition in the local banking sector. If the GOJ wants to bring down interest rates one step they could take would be to remove the stamp duty on debt instruments. This would allow the commercial-paper market to thrive. Based on my calculations average lending rates would drop by a minimum of 30 per cent within three months."
This is fine. It does, however, hold the drawback that it reduces government revenue at the very moment the coffers cannot support it.
The next comment is altogether constructive.
"We have not corresponded for a while but I am provoked to write to you on the need for more banks (FG 15/10/10). I agree with you that we do not need any more (foreign) banks. But the story cannot stop there. My support is specifically for the award of a banking licence to the Jamaica National Building Society. All without exception (I think) of the commercial banks have foreign owners or have foreign connec-tions - even NCB which was given away to Lee Chin. JN has assets third in line nationally. The two in front are NCB and BNS. It has assets in excess of RBTT which is third in line in the commercial group. The former governor never approved and this governor having promised a response months ago is still stalling while every puss and dog (PanCaribbean linked to Sagicor being one) gets a licence. JN wants to be a bank that is service-oriented rather than profit-oriented and to be owned by the people of Jamaica. And it has a huge shareholder base and its profits would stay in Ja. How about rooting for them?" writes Alfred Sangster.
Once we observe capital adequacy, there appears little reason for JN not to be granted a commercial banking licence. One caveat: our financial services regulatory authority must ensure firewalls exist among the entities in formation of such a group.