Submitted by Dr. Justin Robinson, Department of Management Studies, UWI Cave Hill
The Prime Minister of Barbados has stated that his government has an interest in working with private players in Barbados to take a controlling interest in the Barbados National Bank (BNB). The Prime Minister’s statement has generated comments from highly trained and respected experts in Economics, Finance and Business, among others. The consensus among a number of commentators seems to be that the acquisition of a controlling interest in Barbados National Bank might not be best use of public funds at this time.
I certainly have found nothing in the Prime Minister’s comments to suggest that his government was interested in dipping into the public purse to acquire a majority stake in BNB. I have interpreted the Prime Minister’s comments to mean, that his 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. For example, to expedite the bailout of a troubled financial institution, such as the role played by First Citizens Bank in Trinidad and Tobago. If my interpretation of his position is correct, in my view it is an interesting position and one worthy of further debate.
Significant government ownership and influence over the operations of financial institutions is certainly not the prescription that the economic doctors have been serving up over the last two decades. We have become used to the mantra of free markets and the benefits that flow from private ownership and management of economic resources. However, over the last two years obscene amounts of tax payers funds have been called upon to support failing, privately owned financial institutions. There has been private incompetence, private profits but publicly shared losses. Governments around the world have in effect been forced to reverse economic policy and take significant ownership stakes in financial institutions. This development has led to a re-opening of the debate on the appropriate role for governments, in terms of the ownership and operation of entities in the financial services sector at least. I think it is a debate well worth having.
In the Trinidad example, as part of its policy response to the troubles of the CL Financial Group, the government has used the state owned First Citizens Bank to take over the operation of Caribbean Money Market Brokers, as well as to service the depositors of Clico Investment Bank. “National Banks” in the OECS were able to quickly form a consortium to take over the Bank Antigua which was suffering the fall out of the Standford Financial Group scandal. 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?
If we have learnt two things over the last two years they should be, that swift and effective policy responses to crises in the financial services sector are critical to a nation’s economic well being, and your national government is the only source of a bailout if a financial institution fails. As an aside, the latter lesson poses real challenges for the future of offshore financial services. 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. Such a perspective goes against my many years of training, but economic orthodoxy has been found so sorely lacking in this crisis that I am open to new ideas. New answers often require new questions and a willingness to engage in fresh open minded debate. In academic circles, many of the searching new questions are often raised by those not so steeped in the prevailing orthodoxy.
Barbados Underground 
Repeatedly in the just concluded no confidence debate mention was made of the BNB being sold for the foreign exchange to assist with the building of Hilton at the time. This last claim was made my MP Stephen Lashley who mentioned how the former government frustrated the effort of the credit union to be involved in the purchase as well as to appoint members to the BNB board.
If we are to believe Lashley the national bank was made an economic transaction and not nationalist weight was applied to the decision. Yet Arthur was the one to introduce national heroes, rename heroes square etc.
We are confused. The BNB had become a national symbol of excellence in the 3 years before the sale.
I agree with your thinking totally dr robinson.
The old assumptions and way of doing things have not worked so it is time to re consider what was previously unthinkable.
I am sure that the americans who have lost their jobs and homes no longer care whether the U.S. government intervention in the market would seem to be some form of socialism.
This is one of the debates in Barbados that is so woefully inadequate. I salute Dr. Robinson.
What would have motivated Professor Michael Howard to misrepresent the truth in a recent article on BNB? He said that when he became a Director of BNB (under the BLP) he found an inefficient Bank and that he and Grenville Phillips turned it around. Poppycock!
PM Thompson (then Minister of Finance) and his team dealt with the sugar debt, CARICARGO, Heywoods, BADC debts and cleaned up BNB, as he said on TV last Sunday. Obviously Howard was sitting pretty at Cave Hill in his armchair when the creative, difficult decisions were made. I was working at IADB at the time.
These guys at Cave Hill really irk me.
@ Wuh, you praise Dr Robinson (from Cave Hill) then say “these guys at Cave Hill really irk me”…
I have not heard the argument that what the government wants to do is intervene in the financial market. There is an enormous difference when governments stand in for the private sector when markets have failed–a common role of government–which is what is the case in the US, UK, Europe with banking failures. None of the governments are taking over or seeking to get control of healthy, well-functioning banks. That is a major difference with Mr. Thompson’s proposal and almost every thing else going on internationally.
If the idea is that ‘national’ ownership gives some assurance on policy direction, then that is a huge fallacy.
If the idea is that the government needs a bigger share in anticipation of needing to help the financial sector (part of Dr. Robinson’s argument), then that pre-emptive strike begs questions about the health of the financial system, which the central bank governor tells us repeatedly is sound.
Those who wish to can read my blog and my response to Dr. Robinson (see http://livinginbarbados.blogspot.com/2009/03/thoughts-on-possible-national.html).
@livinginbarbados
We had a quick read of your response and even from a non-economist view we see you using the very same assumptions which Dr. Robinson has challenged. Barbados as many of our family have been saying needs to challenge the status quo and create its own model for success. Many of the comparisons you have used in your response to Dr. Robinson have FAILED if we are to judge from the current financial turmoil the world finds itself. We commend Dr. Justin for challenging the orthodoxy as he terms it. It takes courage to challenge concepts gotten whether grad or post grad training. This is what we need to do, become free thinkers!
I just had a quick glance at the livinging barbados response. It is quite a good piece and I encourage readers to have a look and take it seriously.
One of the key issues I am confronting at the moment is that the financial services sector may be especially prone to market failure with significant knock on costs to the rest of the economy.
If we take the Jones’s view (the writer on the other blog) that the role of the government is to address market failure, then a major issue is the efficacy of the policy tools available to the government in dealing with market failures.
The point I am throwing out for discussion is the efficacy of a “national financial institution” as a policy tool in a small developing country.
For example, in the USA there is a range of large private institutions that can “takeover” a distressed financial institution. In the ongoing crisis, Bank of America (took over Merrill), JP Morgan Chase, Wells Fargo (took over Wachovia) to name a few have played this role in the USA.
Many suggest that the failure to agree on a deal with a private player is what lead to the collapse of Lehman Bros and all the hell that broke loose after that collapse.
In Barbados we might have such a range of institutions. To me, a national financial institution seems especially useful in such circumstances. But I am open to persuasion otherwise.
s.
this replaces the earlier post, which missed out a key word.
I just had a quick glance at the livinging barbados response. It is quite a good piece and I encourage readers to have a look and take it seriously.
One of the key issues I am confronting at the moment is that the financial services sector may be especially prone to market failure with significant knock on costs to the rest of the economy.
If we take the Jones’s view (the writer on the other blog) that the role of the government is to address market failure, then a major issue is the efficacy of the policy tools available to the government in dealing with market failures.
The point I am throwing out for discussion is the efficacy of a “national financial institution” as a policy tool in a small developing country.
For example, in the USA there is a range of large private institutions that can “takeover” a distressed financial institution. In the ongoing crisis, Bank of America (took over Merrill), Wells Fargo (took over Wachovia) , JP Morgan Chase, to name a few have played this role in the USA.
Many suggest that the failure to agree on a deal with a private player is what lead to the collapse of Lehman Bros and all the hell that broke loose after that collapse.
In Barbados we might not have such a range of institutions. To me, a national financial institution seems especially useful in such circumstances. But I am open to persuasion otherwise.
If the PM’s proposition is to ‘challenge the status quo’, then one needs to read carefully and ask what happened in the short space of 8 months to come to this radical shift.
Challenging the status quo is a neat term but it merely means creating another status quo.
The PM has said that he envisages broad ownership by Bajans, without knowing that these buyers are there. They were not in 2003. If in the recession they now exist, then that is wonderful.
If the government is not be the main owner, what is it that gives convidence that the new Bajan private owners will act in a particular way. One cannot assert a desired outcome and take that to be a truth.
If, however, the PM is not being absolutely truthful and foresees government majority ownership of banks then history has shown that that status quo has never been a success.
In socialist and communist countries, where state ownership is the norm, banks perform as part of the government machinery. If that is what people want then they need to make sure they see clearly what it means. Look a little at the history or state controlled banks over a range of countries and time periods. They tend to end up giving directed loans and end up with bad credits. That was part of BNB’s history from the mid-1970s to the mid-1990s, and the history is there to be read.
There is nothing wrong with the state owning banks but don’t let’s dress it up as something else.
Once ownership changes there is a new reality to deal with. That reality may mean that the new bank is less desired than others. Conversely, people may wish to move quickly from other banks, feeling that they are less trustworthy. We could see some interesting (undesired?) shifts in deposits. But let’s not run off into the future too fast.
Dr Robinson’s remarks came in as I was writing.
I am glad to him for making clear that part of his argument is anticipating market failure, a point I presumed and highlighted. “One of the key issues I am confronting at the moment is that the financial services sector may be especially prone to market failure with significant knock on costs to the rest of the economy.” to quote Dr. Robinson.
The financial services sector is prone to failure because in many cases it is largely about taking risks; and knock on effects can be significant given the nature of financing. But, those risks are supposed to be controlled, and well monitored, and have various forms of get out at the level of the institutions and those who oversee them. For example, rules on connected lending [loans to part of the same group] are important and should be part of internal control and external control (but if you read the CLICO case one sees that this was something not controlled by CLICO/CL Financial or by regulations and was highly excessive by many international norms). Another example is funding. Many models are there and funding long term assets with short term inflows is a recipe for disaster. Supervisors are supposed to look carefully at these things as are the institutions themselves.
There are many other possible ‘safeguards’ but if they are not in place or ignored then they are for naught.
What I take from Dr. Robinson’s arguments are several questions about whether the risk of failure is better dealt with by ownership or by regulation/supervision. I am personally not convinced that ownership helps. I have doubts too about supervision if it is weak or non-existant. However, badly run banks can be dealt with well by a well supervised system.
But I go back and say BNB is not a badly run bank and changing this good bank’s ownership to be ready to save the system stretches logic.
With no wish to dominate the discussion.
The US case is not good as a model for Barbados.
Bank of America’s take over of Merrills was essentially because the latter needed a different and wider funding base, which as an investment bank/broker dealer it could not get as it existed. It tried to move to move to universal banking status ahead of the take over but events were moving fast against it.
When the climate turned sour in the US it became clear that the traditional investment bank model they had was no longer working. Remember that the US had odd rules about what banks can do and where they can do it, with a key separation between commercial and investment banking (dating from past bad experiences in the 1920s/30s). (Not a problem for UK and Europe, where universal banking is the norm.)
An alternative argument but one that runs counter to ‘national’ views is to think of banks for the region. The argument being that breadth is better than narrowness. This has been the approach of those who took over the former Canadian banking structures and that of Republic Bank of Trinidad (of which BNB is part) and largely seems to have worked well. I just leave it for thought.
We are trying to follow the arguments and the lowly BU household is becoming confused. Livinginbarbados seems to be in favour of strengthening oversight to mitigate risk which by the definition of how financial institutions operate is par for the course. Correct us if we are wrong but your argument seems to be directed more at managing financial risk more than systemic risk. BU is concerned about systemic risk given the interconnectivity of global financial markets and given that most of the banks in Barbados are international banks.
The other point which we are unclear is the concentration of asset/market share in the credit union sector. We believe based on reading, COB and BPWCCU own over 50%??. To pursue Dr. Robinson’s argument i.e.market failure, what happens if the government needs to intervene? i.e. what financial tools are available?
Another clarification required:
Why focus the argument on managing risk only? What about a national institution being able to execute a strategy which meshes the financial with aspirational? If as a people we need to fully unleash our economic potential can we do so in the prevailing environment? This is an important point when you consider that government/quasi government institutions is the largest institutional investor in Barbados.
Added to all written so far, what complexity in financial products has BNB (Republic Bank) offered so far which suggests that Barbados has benefitted in real terms by its presence? We are not talking about car loans or BOLTS!
@David.
Systemic risk does not come from nowhere: it starts with an institution and whatever it does, and it’s the spread from one place to others that is the concern. The spread may go to other places in the country or cross borders.
I am not sure what you mean by financial risk, because the risk taking by financial institutions is financial risk.
A small bank going under is less of a concern because the belief is that its interconnections are small and/or limited. There will be sufferers but they are felt to be fewer. Hence arguments such as ‘too big to fail’ as related to AIG.
The fact that most banks in Barbados are part of international banks can be their strength if their parents are sound and well supervised. Canada took 1st place in that regard in a recently published report, when Barbados got 3rd place. But you cannot look at international and say that equals bad. A national bank by definition has a narrower base and when things go wrong can usually only go to one place, the government/central bank/domestic investors, if they dont go down.
If you read my piece carefully you see I address the ‘aspirational’ as you term it. But that gives a bank a different mandate. If the desire is for a certain type of bank then that’s what you build, and it can happen irrespective of national ownership. You need to spell out what unleasing economic potential means and then tell us where the bank fits into to that vision.
Sophistication of financial products? I see ATMs but largely left unused as people line up to do basic banking. Barbados is regarded as a risk averse society (not my personal view, and challenge it do). Sophistication may mean more risk. Again, spell out what you would have liked to see the bank offer that it does not.
I have no other data on credit union market share. But one word. If credit unions change their nature and act more like banks, then they cannot continue to be treated as credit unions are now. I’m not sure that people see this. There may be a tension to resolve between those who like the credit unions for what they are now (communal, etc.) and what a bank may need/want to be.
“Complexity in financial products” was the recent undoing of the US, UK system. Many people, even those selling and managing them, had no ****ing idea what they were dealing with. Is that what you are seeking?
Hally Haynes wrote in the Nation (March 1):
As at the period ending October 31, 2008, membership in credit unions stood at 156 769 people, total assets were at $1 186 752 404, share capital at $223 566 833, reserves at $96 366 022 and investments at $103 299 287. Loans to members accounted for $941 803 549.
The Hally Haynes figures can be compared by those in the recent IMF report ‘Barbados: Financial System Stability Assessment—Update,
including Reports on the Observance of Standards and Codes on the following topics: Banking Supervision and Securities Regulation’ (see http://www.imf.org/external/pubs/ft/scr/2009/cr0964.pdf). See especially table 4.
Part of the ‘success’ of local credit unions is an illusion because they treat certain things like delinquent loans quite diefferently than banks.
Would BNB survive without government deposits? Or government business?
@ David
Mitigating risk by strengthening oversight is not particular to financial institutions and does not mean that the oversight is from outside. Businesses generally control what they do with internal systems and outside oversight. When banks etc have failed one usually sees a great breakdown in both internal and external oversight, whether that is the single rogue trader or the area of operation (eg subprime lending) that took the ship to the bottom of the sea.
@Wuh
The impact on BNB of moving government business cannot be dealt with in isolation. Depends on the why, and how long, and what else the government may do with its deposits/business. Push it to the central bank? Push it to other commercial banks? Push it to other institutions?
I see no need for LivinginBarbados or anyone else to defend the record of BNB under private ownership. I have nothing negative to say about BNB under its current ownership and management. The bank seems to have done well.
I do seem to remember BNB being bank of the year,before going private (maybe someone can coprrect me).
I find it rather interesting that so many seem to attribute anything good about BNB to the wonders that flow from its post-privatization. It would seem to me
that BNB, like many other financial and other institutions has grown with and contributed to the growth of Barbados.
Getting back to the core issue.
I think most would agree that the CL financial affair has the potential to wreak havoc with the economy of Trinidad and Tobago and the region.
From where I sit it seems to me that the ability to use First Citizens Bank made a huge difference to the ability of the TT government to effect a relatively smooth bailout to date. Is that not a powerful policy lesson.
I wonder what the state of play would be in TT and the wider region today, if the government had to rely on the good offices of another financial institution to effect its policy response.
I cannot help sensing a heavy dose of ideology underlying livinginBarbados’ comments.
For me,the private ownership and management good, public ownership bad, truism has been blown out of the water over the last two years. The private sector seems at lesst as capable of mucking it up as the public sector.
The losses racked up by these super efficient and effective private owners and managers dwarf the losses of the much maligned public institutions.
Its time for a new pragmatism.
Those who say the government cannot be trusted to allocate capital efficiently sound unconvincing these days. After all, it’s not as though the private sector did a very good job. No peacetime government has wasted resources on the scale of America’s private financial system. Wall Street’s incentives structures were designed to encourage shortsighted and excessively risky behavior. The bankers were supposed to understand risk, but they did not understand the most elementary principles of information asymmetry, risk correlation and fat-tailed distributions.
Thats a quote from nobel prize winning economist Joseph Stiglitz.
@ Dr Robinson
For clarity, my contention is that ‘national’ ownership does not guarantee the policy response desired, though ‘government’ ownership may.
The PM confirmed in his presentation on March 1 that he is not looking to use government money or for the government to repurchase shares in BNB. Instead, he is looking for a ‘consortium’ of private interests, including the credit unions, to be buyers. He is hoping that ‘national’ interest will then be consistent with whatever government intention there is in the future.
If you are arguing for government control of BNB, the PM has said that’s not his desire.
First Citizens Bank is government-owned/controlled, and so is a very different animal from what PM Thompson says he wants.
My view is less ideology and more experience.
The quote from Prof. Stigliz is not a universal truth, and most banks in the Caribbean have not acted like those in the US.
I should not have said ‘like those in the US’, but said like major ‘major Wall Street banks’ (as the attached article will make clearer, http://www.bloomberg.com/apps/news?pid=20601109&sid=anmrn4H8hXfw&refer=home)
Push it to other commercial banks?
______
Yes!
@livinginbarbados
The too big to fail concept does not apply to Barbados, we agree. Our economies/markets are too small therefore ANY failure of a financial entity creates proportionally greater hardships on our small economies. To use the jargon, the catastrophic destruction of money in a country like Barbados cannot be absorbed when compared to the developed economies which have greater productive capacities.
In other words Barbados and the other small economies in our region CANNOT allow financial institutions to fail as is the case in the USA. However we have to accept the financial institution will fail and it is for this reason the government as the LARGEST investor in the country may want to entertain financial contingencies, as Dr. Robinson is suggesting. An indigenous safety if you will.
Forgive our explanation of risks we did not explain very well. In simple terms all we are saying is that with a heavy concentration of international banks contraction in the international markets can influence policy in our market even if local management of financial risk is sound i.e. global market contraction may effect how international banks negotiate sovereign risk???
@David
My own thinking on ‘too big to fail’ does not exclude its application in small economies, because it can be seen as relative, not absolute. A bank that is responsible for say 50% of activity in a small economy may be viewed as too big to fail. So, it seems we are broadly agreed. However, it’s salvation can come from various directions, including government bail out or sale to another investor (likely foreign to avoid further concentration at the locla level), as two options. But, I stress again the difference between government ownership action ahead of failure (‘pre-empitve’ and maybe unnecessary), on which I am not convinced, and after failure, where I am not opposed).
I now understand the explanation on concentration of international banks. We need to try to avoid contagion nationally and internationally. That is easier if we have good systems of reporting nationally, regionally, and internationally, so that we can see who is linked to whom and to what extent. This we do not have in the region, and is a major obstacle in dealing with the problems that are emerging in the region (and has already been clear in other countries). Bumbling along with 3 year old data and not dealing with identified weaknesses in supervision and regulation–as we are with CLICO/CL Financial–is an unwarranted luxury.
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