Thoughts On A Possible 'National' Repurchase Of Barbados National Bank

The following was offered today to the main local papers, The Barbados Advocate and the Nation.

A letter by Dr. Justin Robinson in today’s Advocate entitled 'Nothing wrong with seeking controlling interest in BNB' (see http://www.barbadosadvocate.com/newsitem.asp?more=letters&NewsID=2354) raises some interesting arguments concerning a possible ‘national’ repurchase of shares in Barbados National Bank.

His initial premise is that "government sees net advantages to the existence of a financial institution whose ownership structure would make it more likely to act in the national interest if called upon to do so... to expedite the bailout of a troubled financial institution, such as the role played by First Citizens Bank in Trinidad and Tobago”. This is an interesting line of argument. It is in a way a ‘pre-emptive strike’. The argument suggests that one way to deal with possible failure in the financial system is for the state to ‘join them’ so that it is better able to help. This may work, unless the financial institution that runs into trouble is not that owned by the state. It’s worth recalling that one of the problems of BNB before it was sold in 2003 was that it did run into trouble and needed to have its balance sheet cleaned up of bad loans and be reorganized to function better.

The argument that “Governments around the world have in effect been forced to reverse economic policy and take significant ownership stakes in financial institutions” is true but leaves out the important feature that one of the well-known roles of government is to deal with ‘market failures’. This is why it is not uncommon for a government or its agent in the financial system, the central bank, to act as lender of last resort or buyer of last resort, and this is more critical when the risk is that the problem will become systemic, i.e., spread across the whole range and contaminate the good and the bad financial institutions. It could also be lender of first resort, as needed, and that is akin to the role played recently by the Central Bank of Barbados with regard to CLICO/CL Financial with its B$ 10 million deposit and line of credit.

Dr. Robinson is right to say “I think it is certainly legitimate to raise the question as to whether or not the existence of such “national” institutions, enhance the efficacy of the policy response to a financial crisis in small states, with a limited number of institutions capable of effecting a takeover of a struggling financial institution. How valuable is the flexibility such “national” institutions provide to policy makers in a crisis? Are there far more effective alternatives in a small developing country, or do the costs of having such institutions outweigh the costs?” National financial institutions do not save financial systems (except in the case of a communist or command economy, where everything belongs to the state). It also sends an odd message if one seeks to play a role in a sector because of the fear of failure in the sector: that undermines the system, I would argue, and risks tainting otherwise healthy institutions.

The other aspect is whether the creation of a national institution is a permanent situation or temporary. In the recent instances that have been seen in the US and UK, the increases in the governments’ stakes in banks has been put forward as essentially a temporary solution, with the view that the government will not become a majority owner, and would look to reduce its stake as things improve. If the general view is that the private sector has failed, and the public sector needs to run things, then there is a wider political and philosophical discussion that needs to take place about how the economy should be structured and the country run. While we may show that the private sector has failed, public ownership has rarely been associated with commercial success. If that is not the concern, and we have some other social objective, then public ownership may be the way to go. But, remember, someone will have to pay if the commercial side is not working: that ‘subsidy’ may be implicit or explicit, but it will be there.

Dr. Robinson also poses the point, “If in fact, “national financial institutions,” enhance the capacity of a national government to respond to crises in the financial services sector, the question may well be, not whether a country can afford a “national financial institution,” but whether it can afford not to have one.” There is no way to answer this hypothetical question. What does ‘afford’ mean? One can argue that having a national institution would be better but time will tell whether that is true. But there will always be the question of how things would have been resolved without the national institution. Barbados’ central bank governor tells us that the banking system is sound. Her words do not suggest that since ownership of BNB changed that soundness has worsened. Corporate data suggest that BNB’s performance has improved, when measured by those things that usually mark commercial success. So, what is wrong with the bank and how it is functioning?

Ownership structure does not guarantee a particular line of action unless the owner is the state and therefore does the government’s bidding. If national ownership is broad and largely private, then the ‘national’ owners need not act in what is viewed as the ‘national interest’ if it is not in their interest, possibly driven by things like profit or some other return on capital. In the past, when BNB was up for sale to nationals, they took personal interest to mean ‘do not buy now’, and national ownership was less of a concern. Now the bank is majority foreign owned. BNB, under Trinidadian management and majority ownership does not appear to have ever acted in a way that could be viewed as not in the national interest of Barbados, as far as I am aware. So, if it has not acted against the national interest in the pursuit of its own corporate interest why should one presume to tamper with that? For, the repurchase of a majority national stake to make sense that is a question to be answered. If the issue is the name, “Barbados National”, when the bank is no longer fully Bajan, then there are other ways to deal with that other than buying shares.

Dennis Jones
Economist