Dennis Jones is a Jamaican-born international economist, who has lived most of the time in the UK and USA, and latterly in Guinea, west Africa. He moved back to the Caribbean in 2007. This blog contains his observations on life on this small eastern Caribbean island, as well as views on life and issues on a broader landscape, especially the Caribbean and Africa.







**You may contact me by e-mail at livinginbarbados[at]gmail[dot]com**

Friday, February 27, 2009

Cadogan, You're At It Again. Want To Buy A Bank?*

Every body's doing it. Governments around the world are getting their hands on banks. But why? Most of them are doing it because the banks, big and small, are going belly up after another wave of selective memory: excessive risk-taking, bad lending, poor oversight, related lending, conflicts of interest, overpaying people for what they do, etc. If governments are looking to take control of banks then they go for the major ones and let the minnows flounder and fail, believing that the system can lose the small and weak but not the big and weak. Governments are not looking to put their fingers in the pie of banks that are doing well. Why should they? Look at Citigroup, where the US government raised its common equity stake in a third bail out attempt (see Bloomberg report). Banks should really be private institutions and people in capitalist economies get nervous when they see government wanting to raise its stake. If the government wants control of things in the financial sphere they should rely on the central bank and finance ministry to set the right policies. So, why the rush in Barbados for the government to get its hands dirty again by repurchasing a majority stake in Barbados National Bank (BNB), which was sold off in 2003?

It's all in the name? So, the bank that was sold has 'Barbados' and 'National' in its title and these represent legal property. Of course, those words have value not least because everyone in Barbados knows them, loves them, and maybe trusts them with a lot of money. The bank carries the colour of the national flag--blue, yellow and green--in its logo. When Trinidad's Republic Bank bought BNB, a change of name would have raised more hackles than were necessary. The bank did not get an image make over to look like its Trinidadian parent. If it had been Citibank as the buyer, then they would have come with a bigger name and with a splash that many would regard as "Yes, we reach, now, Iyah!" Well, that would have been true up until a few months ago, now Citibank's name stinks.

Not a Bajan bank? Well, I don't know what a Bajan bank is. BNB has the colours of Barbados, is located in Barbados, has mainly Bajan customers, and more.Yes, it is run by Trinis. But so what? When it was run by Bajans it went into emergency care. When BNB was put up for sale, it was taken up by a foreign entity because the infamous risk aversion of Bajans meant that not enough of them wanted to stump up and take pieces of the bank that were on offer. So, one could say "You had your chance, and you decided that you had better use for your money."

The bank is not serving the people's needs? Seems that the bank has been ripping ahead as far as shareholders are concerned and they probably give wider service than their local competitors. When the original pieces of the bank were established they were there to meet certain needs, namely, Barbados Savings Bank – 1852; Sugar Industry Agricultural Bank – 1907; National Housing Corporation (Public Officers Housing Loan Fund) – 1958. As the bank developed from the mid-1970s, it continued to meet these needs. Into the early 1990s, the fact that the bank was failing became apparent and then over the next decade its balance sheet was cleaned up, and provisions and write offs were made, the bank moved from losses to profits and the bank improved its capital base. Like it or not, an 'unholy alliance' of the Government of Barbados, the Central Bank of Barbados, the Inter-American Development Bank, and the IMF was instrumental in showing the bank's bad loanss problems and setting out a way to get over them. All of this was happening at a time when Barbados' economy was at a modern nadir.

Balls of confusion and political football? When PM David Thompson made his Budget speech in July year, this is what he had to say about BNB (see Budget text):
  • The Barbados Government owns a substantial number of shares in both the Barbados National Bank and the Insurance Corporation of Barbados, but in both companies, the Government is a minority shareholder, and so is in no real position to direct the strategy of either company.
  • At the same time, Government has been advised that the value of its shareholding in those two companies is approximately $200 million and that the rate of the cash dividend that Government receives on an annual basis on these shares is less than the rate of interest thatGovernment pays on its borrowing. Since these shares are no longer useful in determining the strategic direction of either of these companies, Government has taken the decision to offer these shares firstly to Barbadian individuals, theNational Insurance Board and local companies and then, if necessary, to the current majority shareholders of the two companies, if Barbadians do not take up all of the shares.
  • The proceeds of these sales will be used to fund part of the upgrading and expansion of the QEH.
So, less than a year ago, the government felt no need to want to be the majority owner of BNB. What has changed to make for a reversal of a clearly stated policy? In current circumstances, some would speculate that the government smells trouble for the bank and cannot feel comfortable that the ultimate parent and its national government will stand up and assist if needed. So, it may be a pre-emptive strike.

Governments have a bad track record in running businesses? If governments go into owning a bank, many would suspect that its performance would deteriorate. A government can step in to stop a certain rot setting in or going too far, but that should be a temporary state. When government-owned banks exist they often end up being an extension of government policy. Loans get directed to individcuals, companies and projects the government prefers (see research report). Business decisions are always tinged with political consideration, as shown by some empirical research, which summarized that:
  • State-owned banks charge lower interest rates than do privately owned banks to similar or identical firms, even if the company is able to borrow more from privately owned banks. State-owned banks mostly favor firms located in depressed areas and large firms. The lending behavior of state-owned banks is affected by the electoral results of the party affiliated with the bank: the stronger the political party in the area where the firm is borrowing, the lower the interest rates charged.
Fear of CL Financial/CLICO fall out? This is the one thing that may make some sense. CL Financial Group is due to sell its holdings of Republic Bank. That puts a cloud over BNB. However, that has to be resolved. Republic Bank, meanwhile, says it has no intention of selling BNB. So, this will be an interesting wrestling match. Think of it. Bajans did not want BNB. The Barbados governments it wants to buy bank controlling shares in BNB. The onwer of the majority of BNB says it has no interest in selling them. Hee-hee!

Undermining the Central Bank of Barbados? One big concern is that the Governor has been saying repeatedly, even yesterday, that the banking sector is secure. The system is 'sound'; banking system liquidity has not been a problem; the banking sector has performed well. If all of that is correct, why does the government feel the need to be involved with the major bank? It is curious and even a bit baffling.

Who will pay for it? If the bank is to be bought there needs to be financing. The government said it needed money from selling the bank to implement a certain health policy. If it does not sell the bank it will need to fill that financing need--philanthropic capital has been mentioned. If funds are to be found to buy BNB, where will that come from? Barbados can borrow, but would borrowing to buy a healthy and profitable bank be the best use of such funds? What of other needs on the government's agenda--stressing again that there is already a set of policies laid out in the 2008 Budget. That higher borrowing will need repaying and I cannot see how owning the bank is going to address that future need. How will the new fiscal situation fit with other economic policy objectives?

The government's flip has come as a surprise and many will see nationalism or patriotism in this somersault. But those are not good reasons for making financial policy.

*To understand the role of Cadogan see previous post, Follow Fashion Kill Cadogan.

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