Economist Avinash Persaud is warning commercial banks that it is no longer business as usual and that they need to change the way they operate in order to better withstand external shocks.
Addressing the ninth annual Domestic Financial Institutions Conference at the Lloyd Erskine Sandiford Centre on Thursday, he pointed to a range of new rules affecting the industry which he said could easily result in higher operating costs for banks, which currently raise as much as 80 per cent of their capital through obligations such as mortgages, credit cards and loans.
“So we need to think about how we graduate our business model to something that will give you more breathing room and more comfort, because in a world of the new capital requirements, the reserve requirements and the new accounting rules, institutions with short-term liabilities are going to find it increasingly unprofitable to be lending long-term. So we need to think about diversifying that model,” Persaud said.
Speaking on the topic What Does Resiliency Mean and How Do You Build it?, he suggested that strategic partnerships were the way to go, including with insurance companies, “where maybe the long term liability part is taken on [by] the insurance company and the bank is focused on the creditors”.
“We can think of new types of mortgages where there is an actual built-in insurance mechanism where when unemployment rises the premiums and interests are cancelled for two years and it is because the bank is triggering its insurance policy . . . . So we need to think seriously about this as well,” he added.
While risk is hard to predict, the economist said the risk in the financial system should be “organized” in such a way that it could still be absorbed.
He said this meant that banks had to “move away from that one dimensional capital only solution approach” to their operations.
“Capital is not a solution to those risks because the way you would hedge them is different . . . So we need to think what is the risk we have in the financial system and, are they where they should be?” Persaud said, adding that “resilience is about being able to stand”.
“We think of risk sensitivity, [but] we need risk absorptive capacity. The financial system that uses its risk absorptive capacity is a safer system, is a stronger system, is a system that allows growth. Today we do not do that and we need to change,” he stressed.
In his address, Persaud, who played a major role in the economic and development plan for Dominica following last year’s devastating hurricane impact and is currently serving as an economic advisor to the Mia Mottley-led Government, said the region as a whole was in need of “resilient cities” that could survive up to four weeks if cut off from the rest of the world.
He explained that in addition to building a climate resilient distribution network and linking various sectors, it was important to create robust network teams within the population.
“It is about teams that will coordinate when the disaster happens; teams that will make sure there is law and order and that society is still knitted together. The soft part of resilience is even more important than the hard part,” he said, adding that enforcing building codes was simply not good enough.
While expressing fear that “resilience” might just become another buzzword, Persaud reported that Dominica was already on its way to becoming a resilient nation, with Barbados following closely behind given the Rapid Roof Replacement programme announced in the June 11 Budget.