On March 25, 2010 the front-page story in CARIBBEAN BUSINESS, entitled: “Consolidation of the local banking industry” began this way: “It’s finally happening, and there’s no turning back. Bank executives, financial analysts and industry insiders agree that a consolidation of the (Puerto Rico, B.F.) local banking industry will occur before year’s end. After several years of speculation and rumbling among bank executives, financial analysts and industry insiders about a consolidation of the island’s banking industry, it seems like the planets are finally aligning to make it happen within the next three to six months – with the “assistance” of federal regulators.”
In the said article, Richard Carrion, the Chairman and CEO of Popular Inc., who suspected that banking consolidation was a real possibility, is reported as saying: “I believe it’s inevitable and will be beneficial in the sense it will aim at the problem banks and institutions will seek adequate levels of capitalisation in line with the assets they have available.”
Clearly, developments taking place in the local economy and the performances of banks in Puerto Rico at the time forced some pundits and industry analysts to conclude that the federal authorities were about to take serious action in order to “save” troubled banks and hence protect the interest of shareholders and customers alike.
Against that backdrop, it is not surprising, therefore, that some bankers in the OECS remain sceptical about the real intent of the Eastern Caribbean Central Bank (ECCB) when it proposed what can appropriately be categorised as sweeping changes to our current Banking Act.
Let us face it. The new Banking Act which was passed in the OECS countries (except Anguilla and Montserrat) establishes one banking domain across the monetary union. On the positive side, this development should lead to inter alia the: (i) harmonisation of the requirements for the operations of these powerful financial institutions, (ii) opportunities for banks to expand into neighbouring territories, and (iii) increasing competition among banks.
On the negative side, it is conceivable that the new Banking Act could be the first step into forced consolidation by the ECCB and the creation of one large bank in the sub-region. An OECS or even Caribbean Mega Bank will be a colossal mistake. On the face of it, some may think that a Mega Bank will be stronger financially and by extension protect the depositors’ interest. While this may be the case, a Mega Bank will also create a systemic risk.
The 2008 US crisis taught policymakers of the risk of “too big to fail”, an institution whose failure may create a havoc in the financial markets. In our context, if one country sustains any economic shock at all, that state of affairs can potentially cause the collapse of the “One Bank” and by extension the entire financial system in the OECS.
After all, the ECCB has made it clear in recent years that the region is “overbanked” and it wishes to see the amalgamation of banks.
Indeed, the former Bank of Antigua, which failed during the Stanford saga, was taken over and renamed Eastern Caribbean Amalgamated Bank.
It is often said the intention behind that move was for the ECCB to use the entity to consolidate since the ECCB had taken over a bank in Anguilla and the ABI Bank of Antigua remains up in the air.
There is no doubt the OECS has too many banks and while a consolidation should operationally generate cost savings, if this process is not managed delicately the adverse effects could be significant.
Further, if indeed we are on track for a “One Bank”, consumers should be wary of a monopoly in creation. This will likely result in higher lending rates, tighter lending conditions and worse services to customers since the Mega Bank will more than likely focus on the bottom line and not on serving rural areas, just to cite one example.
One can just look at our aviation industry and imagine a bank modelled off of LIAT.
Bank regulators should be more concerned about the larger bank holding companies having interest in both banks and insurance. This activity has long been prohibited in the US to prevent a failure of a holding company which not only can impact depositors but also insurance coverages.
Perhaps we need to be looking also at regulating costs of transactions by banks. The cost of a simple ATM withdrawal is exorbitant compared to other countries. Fees such as printing of statements, non-sufficient-funds, and for wife transfers are on the rise across the region without any oversight by the regulators.
Going forward, we all in the region ought to tread with caution before setting the OECS on a path for a Mega Bank. While, no doubt, there are too many banks in the region (40 for a population of 600,000), we don’t need to repeat mistakes made by other countries.
Our economies are too fragile to sustain a Mega Bank failure.
Above all, we cannot ignore the obvious question: with all these banks operating in the sub-region, why is it that so many people and businesses keep complaining about the level of service and tight lending conditions?
(Dr. Brian Francis, a former Permanent Secretary in the local Ministry of Finance, is currently a Senior Lecturer in the Department of Economics at the Cave Hill Campus in Barbados of the University of the West Indies)