Banks Still Don’t Get It

There is a famous saying that states that the more things change the more they remain the same.  I have been compelled once again to talk about the banks and how they operate.

The Fair Trading Commission has just released a report that suggests that the banks are charging fees for services that significantly exceed the cost of providing those services.  This conclusion was arrived at after an examination of the bank’s financial statements by the commission.  Well I do not need the commission to tell me what I already know and what I have been complaining about for the last year.

The Bankers association has responded by stating that the commission’s report is rubbish and that the commission did not use all of the relevant costs in computing the cost of the services.  Unfortunately we cannot expect any better from the banking system and this is because fees are not based on costs but on profit motives.

I will say that again, the charges that banks impose on customers are not based on the cost of providing those services but are driven solely by the need to increase profits.  After the implementation of the Jamaica Debt Exchange (JDX) programme last year, one would have expected the profits of the bank to decrease for two reasons.  Firstly the interest income would have fallen sharply as a result of the significantly lower rates on the new papers issued.  It was anticipated that the banks would not have been able to maintain the same margins as before given lower interest rates.

Secondly, if interest rates fall, and given that exchange rates are stable, then the return on equity that the bank needs to make would also be expected to fall.  For example, if a bank has equity of 30 billion dollars and interest rates were at 20% and the bank needs an extra 10% then prior to JDX the bank needed to make a profit of  $9 billion ($30 billion x 30%).  If rates fall to 13% and using the same additional margin of 10% then the bank will now only need to make $6.9 billion ($30 billion x 23%).

Yet, the profits of most banks increased during the period which means that they are making a return far in excess of what they need to be profitable.  I state again that it is unfair for individuals to have given up their income while banks have suffered no losses as a result of the JDX programme.  No the motivation of the banks is not about being fair it is about who can make the most profit.  The banks in Jamaica are amongst the most profitable in the world and the truth is that the overseas owners don’t want to give up their cash cows.