We should never judge our present circumstances in isolation. There will always be a wider context.
Late 2008 the world experienced the most severe recession since the 1933 Great Recession. This global crisis coupled with our countries still recovering from natural disasters such as hurricane Ivan, meant that our financial systems’ ability to absorb risk was tested.
Eight years later our regional Central Bank has been left to manage and/or resolve 3 insolvent banks and two of our larger insurers have left many persons without a pension and other similar safety nets.
Compounding these problems, our Governments did not have the fiscal capacity to absorb these shocks and therefore a number of regional Governments were left having to restructure or default on debt, much of which was lent by commercial banks.
One of the most significant obligations of a Bank is to keep its depositors funds safe. Banks in effect borrow from and lend to the public. Therefore lending decisions must be carefully considered to ensure that depositors will always have access to their funds.
Over the last six years all Banks within the ECCU have struggled with high levels of loan defaults. Most of this has been due to the declines in economic growth within our countries.
This has meant that Banks have had to draw on its capital (rainy day funds) to ensure depositors remained protected. The capital of the industry has been significantly reduced to address recent crises.
Historically Banks have cross subsidized services. That is, when banks lent money during periods of high interest rates and high returns, services such as chequing accounts, processing of deposits, casual queries could all be provided at a nominal or no cost because lending was highly profitable.
With the 2008 financial crisis lending opportunities of an acceptable risk have been very few. Low opportunities to lend and high defaults have significantly reduced the profitability of lending.
In recent times we have seen an increase in local and international regulations as the financial world grapples with the issue of money laundering and the financing of terrorism. These threats have necessitated increased supervision by Central Banks, and increased laws and regulations by local and international governments.
Banks have had to implement additional policies and procedures, install new systems to monitor and control money movements, attract and retain staff for key positions in the Banks to spot, detect and report dirty money; all in an effort to keep the financial system safe. All of this has increased the cost of the Bank’s operations.
In response the industry has been increasingly investing in technology to reduce the cost of doing business with the ultimate aim of reducing the cost to the consumer. The traditional branch network is a contributor to increasing costs. Therefore as consumers who seek convenience and move towards the technological channels they will likely see a reduction in the cost to do business. Those customers who continue to use the traditional channels are likely to incur the higher costs associated with in-branch banking.
Banks play a critical role in any economy and this is why they are regulated. Regulators focus on the safety and soundness of the financial system. A critical part of a sound financial system is having well managed, well capitalised and profitable banks, which protect the financial wealth of our economies. Therefore each market participant has an obligation to ensure they are well managed to prevent any issues of insolvency.
Well capitalized, well managed Banks protect depositors and ultimately the wealth of our economies. Like any well managed business, this includes properly pricing all services offered. Changes in our sector have come from the need for survival and to ensure the wealth of our countries remain protected so we prevent the failures of the recent past as we move forward.