WILD COOT: Trini to the bone
There is an essential difference between a mortgage bank and a commercial bank. This is why Barclays established Barfincor to take care of its mortgages. Most banks in Barbados have a subsidiary that looks after mortgages.
A commercial bank raises funds by savings accounts, by current accounts and by fixed deposits. Fixed deposits allow a commercial bank to hold deposits sometimes for a maximum of five years, seldom more.
This is because it contracts to lend the same money mostly on a yearly basis, ensuring that its loans can be demanded any time within a fixed agreement.
Its savings accounts are essentially on a call basis and its current account funds can be called simply by a cheque request.
Therefore a commercial bank’s philosophy is to lend short because it borrows short.
A mortgage bank, on the other hand, supports 25 or 30 years of a mortgage and enters into a contract with customers to support the mortgage for the duration of the mortgage. So long as the mortgagor pays his mortgage, the bank is obligated to maintain it.
Therefore its funds have to be different. It seeks funds from sources that are able to lend on a long-term basis – such as an insurance company, which has funds deposited for long periods.
For example, an insurance policy on a young man or woman’s life may not be paid out until after 30 or 40 years. There are also other sources of long-term money that a mortgage company can access.
For a commercial bank to be able to lend its short-term money on a long-term basis, it has to be very careful and cannot do it willy-nilly. It must examine how its funds are needed and how best it can siphon off a part of those funds for long-term use.
If the exercise is not done right, the bank may find itself “scrunting” to get long-term funds – usually at a high rate because of the market. It is not an ideal position. In this case if the entities are in separate countries, cross-border vigilance is necessary.
Of course one may say that with the resources available to the commercial bank it may be able to avoid a crisis, but a crisis is often not predictable – as happened in the United States and is happening right here in Barbados.
The Barbados National Bank (Republic Bank of Trinidad) is proposing to absorb the Barbados Mortgage Finance Company Ltd into its banking fold. This is a nail in the coffin of the raison d’être of finance for low and middle-income housing.
There is another dimension to this short-term lender’s move. There must be attrition and staff must be warned.
Besides the obvious social impact, I am not sure that it should be permitted.
With our Central Bank reviewing best practices, what better practice to review? It should be aware of the situation and the implications even though it may be legal, and the amalgamation should be dissuaded.
I have often spoken about the deleterious affect that Trinidad investors are having on Barbadian life.
Am I blowing in the wind?
The CLICO disaster has a Trinidad origin.
I am glad for Mr Tony Marshall. He is now relieved of a stressful situation. Perhaps the minister did not comprehend his professional stance. Just look at the Hilton funding with NIS money. Change the conditions?
You “firetrucking” serious? (Firetrucking is the latest addition to the Barbadian lexicon. The word is of dubious etymology or etiology and may have been first used in the 18th century in Trinidad when the natives were uncertain whether to speak Spanish, French, English or Trini).