Submitted by Dr. Justin Robinson, Department of Management Studies, UWI Cave Hill
The Prime Minister of Barbados has stated that his government has an interest in working with private players in Barbados to take a controlling interest in the Barbados National Bank (BNB). The Prime Minister’s statement has generated comments from highly trained and respected experts in Economics, Finance and Business, among others. The consensus among a number of commentators seems to be that the acquisition of a controlling interest in Barbados National Bank might not be best use of public funds at this time.
I certainly have found nothing in the Prime Minister’s comments to suggest that his government was interested in dipping into the public purse to acquire a majority stake in BNB. I have interpreted the Prime Minister’s comments to mean, that his government sees net advantages to the existence of a financial institution whose ownership structure would make it more likely to act in the national interest if called upon to do so. For example, to expedite the bailout of a troubled financial institution, such as the role played by First Citizens Bank in Trinidad and Tobago. If my interpretation of his position is correct, in my view it is an interesting position and one worthy of further debate.
Significant government ownership and influence over the operations of financial institutions is certainly not the prescription that the economic doctors have been serving up over the last two decades. We have become used to the mantra of free markets and the benefits that flow from private ownership and management of economic resources. However, over the last two years obscene amounts of tax payers funds have been called upon to support failing, privately owned financial institutions. There has been private incompetence, private profits but publicly shared losses. Governments around the world have in effect been forced to reverse economic policy and take significant ownership stakes in financial institutions. This development has led to a re-opening of the debate on the appropriate role for governments, in terms of the ownership and operation of entities in the financial services sector at least. I think it is a debate well worth having.
In the Trinidad example, as part of its policy response to the troubles of the CL Financial Group, the government has used the state owned First Citizens Bank to take over the operation of Caribbean Money Market Brokers, as well as to service the depositors of Clico Investment Bank. “National Banks” in the OECS were able to quickly form a consortium to take over the Bank Antigua which was suffering the fall out of the Standford Financial Group scandal. I think it is certainly legitimate to raise the question as to whether or not the existence of such “national” institutions, enhance the efficacy of the policy response to a financial crisis in small states, with a limited number of institutions capable of effecting a takeover of a struggling financial institution. How valuable is the flexibility such “national” institutions provide to policy makers in a crisis? Are there far more effective alternatives in a small developing country, or do the costs of having such institutions outweigh the costs?
If we have learnt two things over the last two years they should be, that swift and effective policy responses to crises in the financial services sector are critical to a nation’s economic well being, and your national government is the only source of a bailout if a financial institution fails. As an aside, the latter lesson poses real challenges for the future of offshore financial services. If in fact, “national financial institutions,” enhance the capacity of a national government to respond to crises in the financial services sector, the question may well be, not whether a country can afford a “national financial institution,” but whether it can afford not to have one. Such a perspective goes against my many years of training, but economic orthodoxy has been found so sorely lacking in this crisis that I am open to new ideas. New answers often require new questions and a willingness to engage in fresh open minded debate. In academic circles, many of the searching new questions are often raised by those not so steeped in the prevailing orthodoxy.
The blogmaster invites you to join the discussion.