Mon | Jun 25, 2018

Hylton Dennis | Manifestly separate banks from securities dealers

Published:Tuesday | May 22, 2018 | 12:00 AM
Hylton Dennis
Governor of the Bank of Jamaica, Brian Wynter.
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It is a canonical or fundamental regulatory principle, and the practice of prudent fiscal governance, to manifestly separate banks from securities dealers - capital from credit - based on their distinctly opposite risk profiles.

Capital is raised, primarily, by the sale of mitigated risk securities facilitated by broker intermediaries. Credit is extended primarily by banks, as loans, mainly for the guarantee of pledged security.

Despite having distinct regulatory agencies, namely, the Bank of Jamaica (BOJ) and the Financial Services Commission (FSC), Jamaica does not conform with this prudent convention. The new minister of finance, Dr Nigel Clarke, must give the order for the separation as a matter of urgency.

Ironically, the dominance of bank representatives on the board of the Jamaica Stock Exchange (JSE) revealed the intolerable regulatory breach.

Like all other business enterprises, banks can use the capital-raising facility of the stock exchange to soundly finance their operations as an alternative to the significantly more burdensome option of borrowing. That is what stock exchanges are for. They should compete as the rivals of banks and other moneylenders.

So if banks end up controlling the stock exchange, it is very likely, as it is in Jamaica, to have a stifling effect on the capacity of the productive sector to raise cheap capital for expansion. It is anathema to growing the national economy.

The Fair Trading Commission and the Consumer Affairs Commission should have been aware of this and taken effective legal steps to challenge and change the composition of ownership of the Jamaica Stock Exchange. Like the BOJ and the FSC, they fail to adequately justify their existence and give credible accounts of their stewardship.

Therefore, it is little wonder that the finance minister is about to set up one duplicitous entity called a fiscal council to replace another called Economic Policy Oversight Committee. When the BOJ was worthy of its calling, the functions of all the named and contemplated entities were subsumed within its remit.

 

RECKLESS MANAGEMENT

 

The controversial, long-overdue report of the Financial Sector Adjustment Company (FINSAC) enquiry is not needed to establish that reckless fiscal management by the Jamaican Government of the 1990s was the greatest contributing factor to the financial meltdown of the national economy during that period.

It follows from that also that the then Government lost its moral authority to clean up its own mess and, not surprisingly, made a mess of what it claimed to be a resolution, through FINSAC, resulting in genocidal decimation of indigenous entrepreneurial participation in the economy. The focus of the economic holocaust was disingenuously narrowed to a business-sector crisis, denoted by the creation of FINSAC. However, the required intervention proved otherwise.

Instead of using the effective agency of revolutionary national regulatory adjustment, the Government used FINSAC as the politically expedient resolution. As it now turns out, this was no solution. The stillborn enquiry report and the persistence of regulatory laxity, as cited with the board of the Jamaica Stock Exchange, among other recurring fiscal lapses, decades later, prove this.

It is appalling that BOJ Governor Brian Wynter regards as mere evidence of healthy competition the oligarchic shifting of the national banking culture from interest-driven core savings and loans to an untenable fee-based earning model.

Without the alternative facility of the Jamaica Stock Exchange to raise cheap capital, the export manufacturing and other economic sectors cannot survive under the existing banking regime. So manifestly separating banks and securities dealers by forbidding banks to continue being dominant securities dealers and controllers of the JSE is absolutely imperative!

I hope Minister Clarke will heed my call to let good fiscal sense prevail, proving that the recent resistance of a member of parliament to fix it legislatively was not indicative of the powerful sway of graft over the current Government.

- Hylton W. Dennis is a journalist and publisher. Email feedback to columns@gleanerjm.com and denscriptions@yahoo.com.