As someone who tries to follow international business and economic developments as closely as such developments locally and regionally, I have been riveted by the LIBOR-fixing scandal that, up to Wednesday morning, had led to the resignations of the chairman, CEO and another senior executive of Barclays, the London-based bank that used to own Republic Bank Ltd.
It is alleged that bankers from Barclays colluded in the manipulation of the London Inter-Bank Offered Rate (LIBOR) between 2005 and 2009 with bankers from up to 17 other international banks. The LIBOR is an average rate set by banks each morning that measures how much they are going to charge each other for loans. Those rates affect rates on many loans for consumers, businesses and countries. US and UK financial regulators ( the Commodity Futures Trading Commission and the Financial Services Authority respectively) last week levied fines of £290 million (US$453 million) on Barclays to settle civil and criminal charges relating to the interest rate manipulation that affects, for example, the amount of money that countries like T&T pay to service some of its loans.
The Associated Press wire service, reporting on the settlement last week, stated that the CFTC argued that starting in 2005 Barclays based its proposed settings for the LIBOR on the requests of its derivatives traders who wanted to manipulate the rate to benefit their trading positions. The scandal arose, according to the regulators, because the rate-setters wanted to benefit themselves and their employers. Last week, as well, Britain’s four largest banks—Barclays, HSBC, Lloyds and the Royal Bank of Scotland—agreed to a settlement in a case involving misrepresentation in the sale of 28,000 interest-rate protection products to small and medium-sized businesses since 2001. In this case, the UK regulator said it found cases of poor disclosure of exit costs, failure to be sure that customers understood the risks they were undertaking and over-hedging in which the protection or duration didn’t match the underlying loan. Bank employees looking to benefit themselves and their employers. Banks are also partly to blame for the severe economic and financial hardships being experienced in Ireland and Spain, both of which experienced property booms between 1994 and 2008 as a result of cheap credit.
Both Ireland and Spain have had to borrow billions in order to safeguard the savings of depositors in the affected banks as well as the bondholders who were holding the paper issued by the financial institutions. As a result of the boom and bust of the banks, ordinary taxpayers in Ireland and Spain have had to ensure much higher rates of unemployment, significant increases in taxes as well as sharp cuts in government expenditure. In other words, the greed and recklessness of bankers—as well as in many cases the imprudence of the borrowers, it must be said—has led countries to the edge of ruin and has caused a severe deterioration in the standard of living of people around the world. It must also be recalled that the reason the US is struggling to turn its economy around is because some banks there chose to make mortgages available to sub-prime borrowers (who, one imagines, would have been ethnic minorities in many cases) and then to bundle those loans inappropriately. So what is the scenario in T&T? Have our bankers been as reckless, greedy and stupid as some of their international colleagues? To a large extent, local bankers have not.
T&T has not suffered the debilitating fallout of real estate speculation that has had such a detrimental impact on the economies such as the US, Ireland and Spain. With the exception, of course, of Clico Investment Bank, which exhibited many of the malpractices now being exposed all over the world, the T&T Government has not had to bailout out any local bank. While the local financial system has for years been affected by excess liquidity, T&T’s commercial banks have resisted the temptation to lower their prudential standards by taking on riskier loans that pay higher rates of interest. In fact, speaking from recent personal experience, local banks have made it harder to qualify for loans. They charge many of their longstanding customers, who have never missed a loan payment, and who are prepared to fully collateralise their loans, rates substantially above the prime lending rate. A case can be made that local bankers are manifesting the same wickedness as their international colleagues by charging customers 10 per cent or higher to borrow $100,000, while paying that same customer less than one per cent to keep their savings in a fixed deposit. The argument would be that that margin between lending and savings rates is so high because the bankers want to drive the profits of their institutions, which would lead to increased salaries and much larger bonuses. That is one point of view.
Another point of view is that the relatively high rates that banks still charge on most retail loans—with the notable exception of mortgages—serve as a disincentive for borrowers to undertake loan commitments in which the payback cannot justify the amortised payments. The wide margin between loans and savings may in fact be protecting us from our own worst inclinations. In its June 2012 Financial Stability Report, the Central Bank said: “The commercial banking system remained stable and well capitalized. The prudential indicators confirm that the banking system’s profits were strong and capital adequacy ratios were well in excess of the minimum 8 per cent threshold. “Although, there was an increase in the ratio of non-performing loans to gross loans, this was not indicative of any broad based increase in non-performing loans in the banking system.” Despite the conservatism of local bankers, there has been a sharp increase in non-performing loans between December 2007, when the rate was 0.8 per cent to March 2012, when it jumped to 6.8 per cent. The Central Bank noted that the rate had increased marginally from 6.3 per cent in December 2011 to 6.8 per cent in March 2012. “The increase in non-performing loans is largely because of two large projects in the luxury segment of the real estate market.
A closer interrogation of the data suggests that the modest deterioration in credit quality is not indicative of any broad-based increase in non-performing loans in the banking system. Indeed, when the two largest loans are excluded from the loan portfolio of commercial banks, the ratio declined to 4.7 per cent in March 2012.” The report suggests that the banks have adequate provisions to deal with their non-performing loan portfolios. One of the lessons that can be learnt from recent international developments is that cheap credit sometimes ends up being very costly as Governments have been required to step in and save the day, thereby increasing their sovereign indebtedness. Is it better for the cost of borrowing to be higher or do high borrowing rates stop good investment projects? The other lesson that must be learnt here is that the regulators must be prepared to punish wrongdoing when it is discovered as the UK and US regulators have done.