Banks as Utilities

Dec 06, 2009 Editorial

Last September 21, in our editorial “Banking Scam”, we pointed out the iniquity of having our banking sector wallowing in profits while the real economy was sinking into red ink. Well, the situation in the major sectors of Sugar, Rice and bauxite continue to deteriorate and still no word has been issued as to whether matters will be allowed to worsen until we all drown in the sea of red ink.
We pointed out: “After all banks were invented to service the financial needs of the businesses of a country by being allowed to accept deposits from the citizenry and loaning the monies collected to the said businesses – for a fee called “interest”.”
This fee is always permitted to be positive so that in effect, banks are always guaranteed to make a profit. No other businesses have this privilege.
In Guyana, depositors are given a measly three of four per cent while business borrowers at the very best are forced to shell out 14 per cent and up. And this is when they are granted the privilege of getting the loan. While there has been sustained criticism of the government’s supposed inability to generate substantial new investment into our moribund economy, no one mentions that this double-digit profit on loans has been the major cause of the lack of investment in the development of new businesses. Not crime or lack of opportunities or one of the most thoroughgoing liberalised financial sector – but the draconian interest rate on loans.
This high rate also acts as a disincentive to savings and creates a tremendous drag on the economy: very few companies can generate the level of profits needed to service loans at above 14 per cent interests – especially in the early start-up years. In the US, on the other hand, the business loans are typically around 7-8% with a spread of 3-4%.
To add salt to the wound, the conservative lending practice – which has now fossilised into a culture – and the profitability of the banks are further backstopped by the Bank of Guyana’s (BOG) continuous intervention to sop up “excess liquidity” from the banking system. That is, when the money piles up in the banks because their exorbitant interest rates drive away borrowers, the BOG gives them an out by offering them T-Bills that pay these banks billions of our tax dollars to have their money “sterilised” in the BOG!
We concluded, “Since we are underwriting them from the public trough, the banking industry should be treated just as another public utility, here intermediating funds for the public weal. Their rates and charges should be determined by regulation, with the objective of ensuring their shareholders a return comparable to the government bond rate.”
We thought that perchance the lack of response might have been that we were too radical. So we would like to bring to the notice of the powers-that-be the comment of Lord Adair Turner, Britain’s chief financial regulator the day after our editorial. What good are banks, he asked, if all they do is push money around and enrich themselves?
As he sees it, Banks take too much from British society and give back too little. Lord Turner proposed a tax on financial transactions – the Tobin Tax that was supported by Dr Jagan, and the proceeds to be used to fund development projects.
Then late last October he was followed by the head of the Bank of England, Mr Mervyn King, who reacted to the backstopping of banks as “too big to fail” by calling drawing a clear distinction between “utility banking” and other activities that can be left to the control of market discipline, restricting government guarantees to what he deemed banks’ socially necessary functions. In other words, stand behind those banks that fulfil their social role – to fund development.
Last week, of course, there has been Chavez’s threat to nationalise banks that “collect people’s money … to make more money” rather than funding the developing of the country. But we are hoping that we will not have to go down that road. Maybe we should follow Brazil’s lead and pump money into a development bank that will offer competition even to the utility banks?

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Banks as Utilities

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