Fri | Jan 19, 2018

Letter of the Day | Rapacious banks must wheel and come again

Published:Friday | January 27, 2017 | 12:00 AM


The executive director of the PSOJ, Dennis Chung, stated on radio on Thursday that "Jamaica's banking sector, in terms of the return on capital, is the lowest sector in the economy".

Mr Chung may have been referring to return on assets, where the major banks in Jamaica typically record a return of two to three per cent. But this ratio is misleading because these assets include customers' deposits, loans and short-term investments that really don't belong to them. Interestingly, the rate of return on assets among commercial banks in the USA and Canada averages less than one per cent.

Far more relevant is the return on equity because that is what constitutes the bank's return on the capital it has actually invested and the profits to which its shareholders are entitled. That paints a completely different picture. The average return on equity over the last four years of each of our two largest banks, NCB and Scotiabank, is 14-15 per cent. As a comparison, the average return on equity over the same period for three of our most successful private-sector companies, GraceKennedy, Seprod, and Jamaica Producers, ranges between six and 10 per cent.

The banks owe their customers some rational justification for the charges they impose, but citing their low return on assets won't cut it.

I agree with Mr Chung that our banks are burdened with excessive regulations that add to their operating costs. After the financial sector meltdown of the 1990s, which occurred, in part, because of insufficient regulation, we put the screws on them and, indeed, this new, tight regulatory framework enabled them to survive the global financial crisis of 2008 when many banks across the world collapsed, but not a single one in Jamaica went under.

But we may have overtightened the screws and placed on banks not just heavy prudential restrictions, but a raft of administrative requirements that go far beyond what is required for safe banking or compliance with new international standards.

Dealing with some banking requirements is as tedious and bureaucratic as dealing with government agencies, about which we complain constantly. In some instances, the banks, perhaps out of an abundance of caution, have gone even beyond the regulatory requirements. For example, the simple business of moving your account to another bank is not so simple at all, and until difficulties like this are removed, the market forces on which Mr Chung depends for fair pricing will be held hostage.

That is where I suggest the PSOJ's advocacy should be directed, not in defending the banks' right to charge whatever their helpless customers can bear, insulated so greatly from market forces as they are by the weight of regulations.


Former Prime Minister