The amount of excess cash some commercial banks in the Caribbean have is “troubling”.
As a result, one of the region’s leading economists is suggesting that these financial institutions will have to examine various options to remedy the challenge.
Caribbean Centre for Money and Finance (CCMF) executive director Professor Compton Bourne examine the issue in CCMF’s final newsletter for 2014.
Bourne, who is a former Caribbean Development Bank president, said “Excess liquidity has reached troubling levels from the perspective of being an inordinate amount of unutilised lending capacity in the banks”. He mentioned The Bahamas and Jamaica as two Caribbean countries affected
by the problem.
He attributed the excess liquidity
to several factors including “weak demand for credit by potential customers deemed to be creditworthy by the banks”, “an increase in loan delinquencies, mainly as a result of the initial impact of the global economic crisis and its lingering effects on Caribbean tourism and other service exports, real estate markets, and household capacity to service personal debt”.
Bourne also pointed out that “faced with substantial increases in the proportion of delinquent loans, commercial banks have raised their credit assessment standards and have become more risk averse”, resulting
in either a decline or slow growth
in loans.
The economist said that “at existing spreads between loan rates of interest and deposit rates of interest, excess liquidity depresses commercial bank profitability, and . . . increases in loan rates might further dampen loan demand. The idea of reducing deposit rates of interest has been floated, not to discourage savings but to reduce interest costs on deposit accounts”.
On the other hand, reduced deposit interest rates could prove disincentive for saving, “possibly even causing shifts to competitors within the national economy and overseas”.
To fix the excess cash problem, commercial banks could also “become more venturesome in their search for banking opportunities within the domestic economy, expanding beyond their traditional comfort zones to finance new customers in new industries as well as in familiar industries”, he said.
Bourne pointed out that “commercial banks hold cash and other short term assets, termed liquid assets, in order to ensure that they can meet the normal demands of depositors and credit customers for funds entrusted to their safekeeping and that they have sufficient funds to be employed by credit customers for consumption, production and investment purposes”.
“Commercial banks also hold liquid assets to satisfy the regulatory minimum stipulated by the central banks for prudential reasons. Typically, total liquid assets held by Caribbean commercial banks exceed the stipulated minimum. The higher is the proportion of liquid assets in the total as-sets portfolio, the smaller is the proportion deployed in credit and longer term investments,” he said.
