WHAT MATTERS MOST: Banks into price-gouging
IF I WERE the managing director of a commercial bank at this time, I would be the most optimistic CEO in the business community. After all, I am now able to buy money at almost zero interest and sell it with a markup of well over 1 000 per cent.
There is no better business in town.
Since the Government has allowed commercial banks to fix the interest rate on deposits, they have been offering rates as low as 0.5 per cent. This is five times less than what was being paid when the Central Bank set the minimum deposit rate.
There are several implications of this change in policy. First, it significantly reduces the interest income earned by depositors. Second, it makes Government securities much more attractive as an alternative to deposits at the bank. Third, Government securities which were not too attractive to the commercial banks will become so again because of the dramatically reduced cost of money to them. Fourth, if the third factor is realised, then the Central Bank will be able to offload some of its holding of Government paper that is now in excess of a billion dollars.
In short, the environment has been created for the commercial banks to realise greater profitability. They will be able to lend money at lower interest rates while still enhancing their profitability.
Not only will the cost of money increase the quantity demanded of loans, but there should be an increase in the demand for loans if there is some return of confidence.
No wonder, uncharacteristically, spokesmen in the sector are so willing to talk.
Let us demonstrate the benefits of paying 0.5 per cent on deposits. The table shows the relationship between what a commercial bank buys money for, called the deposit rate, and what it sells money at, called the lending rate. The concept of a markup is simply the benefit derived by the bank, which is called the markup/spread.
Table 1 shows three examples of how money bought at 0.5 interest will yield substantial returns for a bank when sold/loaned at the various interest rates. Cheap money does create extraordinary and unfair benefits for commercial banks in a deregulated market.
The concept of a markup/spread is the difference between the lending rate and the deposit rate. Every day, vendors in Barbados use this method to sell vegetables and other food items. There is nothing difficult about it.
The reason why the markup is expressed in relation to the deposit rate to get the markup in percentage in the table, is to show the relative, not just the absolute, benefit to the bank. The markup in percentage terms allows for comparison with other businesses and it is highly unlikely that mark-ups of 1 000, 1 200 or more are achieved in the latter.
It is remarkable that any business is allowed to mark up so heavily and nobody makes a fuss about price-gouging. It is even more remarkable that a Government would facilitate such in the first place, by blindly following advice. It could never have been intended that the deregulation of the minimum deposit would produce such scanty interest on deposits while providing the commercial banks with the opportunity to make excessive profits.
The strength of any public policy must be evaluated by what actually happens. The notion of deregulating a minimum deposit rate cannot be bad if its intention is to spur economic activity. But if it is to provide greater access to borrowing at lower cost for the Government, then this is absolutely wrong. Furthermore, if it results in giving depositors only one-fifth on what they previously received on their deposits and yielding unfair profits for commercial banks, then it is totally wrong.
There are some in this country who are able to use the cloak of professionalism to promote their self-interest without being labelled partisan, while some of us, no matter how truthful our analysis, have to carry the label of bias.
This will never deter me from providing professional opinion on what matters most in Barbados when it comes to economic and social commentary, in particular. For me, locking horns is nothing new. Thus far, my horns have not been broken because truth, when supported by evidence, can be challenged but not defeated, except in the political arena.
Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email: [email protected]