Barbadians could be the likely victims of Government’s recently announced amended monetary policy which will require commercial banks to increase risk by holding more Government bonds and other promissory papers, according to a leading economist.
University of the West Indies lecturer Jeremy Stephen said the banks could drop interest rates even lower due to the added risk.
Interest rates on savings currently range from 0.05 per cent to 0.25 per cent.
“The commercial banks are expected to take on that risk to themselves and as a result you can expect that savings rate will not grow [or] in the very least might stay the same, but more than likely fall further as the banks would try their best to reduce the likelihood of loss and try to maintain profit in light of them having to take on riskier Government debt,” Stephen warned.
“And a lot of this is . . . dependent very heavily on whether Government would continue to pay higher rates on their T-Bills [Treasury Bills] and on their bonds to satisfy banks taking on more direct risks.”
Acting Governor of the Central Bank of Barbados Cleviston Haynes last week announced that come June 15, 2017 banks would be required to hold 15 per cent of their domestic deposits “in stipulated securities”, up from ten per cent, as the Freundel Stuart administration seeks to control and finance the fiscal deficit.
Haynes explained at the time that the securities requirement was among the policy options available to the bank, and now was a good time to exercise its prerogative.
Despite admitting that commercial bank customers stood to lose as a result of the policy tightening, Stephen told Barbados TODAY it was a good move that could help the bank to reduce its funding of Government.
“We all know the effects of money printing with respect to the strength of the Barbadian dollar. However, it [the monetary policy] is a short-term solution which forces banks in some form or fashion to redirect any excess liquidity, all the money we have been saving in the bank somewhat, into the Central Bank,” the economist explained.
Under the new policy the cash reserves requirement for commercial banks remain unchanged at five per cent. The reserve requirements for deposit-taking trust and finance companies and merchant banks also remain unchanged.
In recent years commercial banks have been moving away from funding Government through purchasing promissory papers despite the high levels of liquidity in the banking system.
The 2016 Financial Stability Report released by the Central Bank in March showed that total assets in the financial system grew by 4.5 per cent or $805 million to $24 billion as at September 2016, when compared to the same period in the previous year.
Of that amount, 55 per cent of assets were held by commercial banks, 13 per cent by insurance companies, nine per cent in mutual funds, eight per cent in credit unions and the same amount in pension funds. The remainder was held in finance and trust.
At that time the excess liquidity in the banking system was 14.6 per cent, up from the 10.6 per cent it was at the end of March 2016. Excess liquidity as at March 31 this year, jumped to 17 per cent.