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Caribbean Commercial Banking: Myths, Realities and the Way Forward. by Ronald Ramkissoon Ph.D. Senior Economist, Republic Bank Ltd. 3 rd International Conference on Business, Banking and Finance, May 27-29, 2009 UWI, St Augustine, Trinidad. Outline. Background to Paper
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Caribbean Commercial Banking: Myths, Realities and the Way Forward by Ronald Ramkissoon Ph.D. Senior Economist, Republic Bank Ltd. 3rd International Conference on Business, Banking and Finance, May 27-29, 2009 UWI, St Augustine, Trinidad
Outline • Background to Paper • Attempt to clear up misunderstandings • Myths • Realities • Way Forward • Conclusions
Caveats • Paper done in 2007 • World’s financial system has changed radically since then • Major focus on banking system
Myth #1: Banks Lend More for Consumption • Data proves otherwise • Is consumption lending bad? • Note urging of advanced economies • Is the problem re- “productive” loans, on the supply side or on the demand side? • Is the Caribbean open for business?
Way Forward • Address business environment • Address capital market development etc.
Myth #2:Bank Spreads are Too High • Spreads are highest for more risky performers. The reverse is also true. • On the deposit side deposit rates are higher in Jamaica and Suriname compared to Barbados-no surprise here • Lending rates are higher in the same countries with higher deposit rates • Risk free rates are higher in developing countries • If deposit and loan rates are consistent then spreads must be
Way Forward • Reduce/mitigate risks in Caribbean countries • Be careful about the level of reserve requirements- these represent costs which are reflected in deposit rates
Myth #3: Bank Profits are too High • Absolute dollar values are not as meaningful • ROA’s in the Caribbean are generally on par with those in other jurisdictions • Banks in more risky environments with higher intermediation costs should have higher profits • “…banks stand a better chance of surviving the vagaries of banking and risk mitigation if their margins are larger than is the case in more developed environments where banking structure is presumably superior and shocks are likely to be weaker.”
Myth #4: Banks do not Compete • T&T banking system comprises Central Bank, 5 foreign-owned banks, 1 government-owned bank and 1 privately-owned local bank • A wide range of non-banks • Caribbean has always been host to a range of international banks • Way forward: continue to ensure competition • Be aware that there is something as “unhealthy competition” i.e. non-bank institutions that compete with banks without being properly regulated
Myth #5: Banks do not Take Enough Risks • That banks look for “opportunities of lowest risks” in the economy is positive not negative • Banks should not be encouraged to take risks for which there balance sheets are not suited • Central banking regulation typically plays an important role here • Indeed higher risks typically generate higher returns which is one of the criticisms!
Myth # 6: Banks not Interested in Extending “Development Loans” • Be careful about what might be defined as “development” loans • Such longer term loans tend to be made by the longer term lending arm of banks i.e. merchant banks etc.
Conclusions • Caribbean commercial banks plead “not guilty” to the charges • Banks ought not to be asked to do what they are not equipped to do • To the extent that there is a gap for additional longer-term funding, cheaper funding and venture capital funding more remains to be done. • “When your neighbour’s house is on fire….” • While Caribbean banks have remained largely unscathed by the global financial meltdown we nevertheless have work to do
Conclusions • Make improvement to the Caribbean business environment the # 1 priority by • Addressing limitations of the business environment (demand side) • Developing/providing the appropriate financial institutions/products (supply side)
