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Charging that the banking system is predicated on what amounts to legalized fraud, the author of "Honest Money" made a case for legislation that would protect all bank deposits and put the brakes on excessive inflation.
John Tomlinson, a former stock broker and merchant banker, addressed participants at an event of free market advocate the Nassau Institute, held at the British Colonial Hilton last week.
He argues that since early 19th Century, UK court decisions gave ownership of customer deposits to banks. They have been producing money, he said, essentially out of thin air when they lend those deposits out - an unethical practice that balloons the money supply and triggers inflation as a result.
"If you think you have money in the bank, you are wrong. You have been reduced to no more than an unsecured creditor and secured creditors (mostly other banks) have a first claim on the money you think is yours."
Tomlinson referred to two judicial decisions in the UK, the first by Sir William Grant in Carr vs. Carr (1811) and the second by Lord Cottenham in Foley vs. Hill (1848), saying they "legitimized the banks' practice of issuing fraudulent receipts". Under those pieces of legislation, as soon as a depositor puts money into a cheque account, title to that money transfers from him to the bank, Tomlinson said.
To illustrate how lending of deposits increase the money supply and adds risk to deposits, imagine a customer deposits a dollar in a bank, which the bank turns around and lends to another customer. The bank credits the lent dollar to the second client's account.
On its books, it owes $2 dollars, but if both clients show up and demand their $1, the bank will only have the first customer's dollar available for payment.
Tomlinson presented the real world statistics that show how that principal plays out in The Bahamas.
"At the end of last year, December 31 2010, the banks had deposits of B$1,205,033,000 in cheque accounts," Tomlinson said. "They held cash of B$113,117,000 plus deposits with the Central Bank of B$518,706,00. This left them short by B$631,833,000."
While the Bahamian and Canadian banks survived 2007/2008's economic downturn 'reasonably well', according to Tomlinson, they are by no means immune to future failure operating as they currently do. He warned that another "Lehman moment" - referring to the collapse of what was the fourth largest investment bank in the US in 2008 - was certainly in the world's future.
"If we wish to protect the Bahamian banking system from the coming turbulence, we must change the Bahamian banking system ourselves. We must free it from risk ... We must free it from moral hazard," he said.
Tomlinson charged that bank deposits will never be truly safe until the legal ownership of deposits is returned to the client, and banks are transformed from money-lenders into safe-keepers, offering investment opportunities to clients who wish to risk their deposits for some returns.
If legislation were to be introduced giving clients ownership of their deposits, each bank would have to rectify its shortfall of cash compared to the deposits on its books. To accomplish this, he says the government could buy-back $631.8 million of government debt from the banks.
According to Tomlinson, the measure would not have an inflationary effect, as it merely replaces 'digital money' with cash - all the money it would 'create' is already represented in the monetary system.
"Bahamian banks would then be 100 percent free from risk and 100 percent free from all moral hazard," he said. "[They] would then be fully safe, whatever happened to the banking system in the rest of the world."
Under Tomlinson's redesigned banking system, banks would charge customers for the important service of keeping deposits safe, and for disbursement services such as facilitating withdrawals and honoring cheques. Banks could set up investment companies which depositors could buy shares in if they were interested in returns.
"Instead of the banks investing their money, you will be investing yours. You will be entitled to your share of the investment profits that banks have been making and keeping for themselves," he said.
Tomlinson estimated the banking sector would see about $33 million in additional profits under such a safe-keeping/investment company model for the industry, much of it through savings from less loan-write offs and reduced provisioning. Government would save about $30 million in interest expense too, he said.
Tomlinson said the approach would also end inflation as we know it. Under it, only additional printing of money by the government would have that effect.
The results of such a system would be the strongest banking system in the world, even resulting in Bahamian Dollar becoming an international reserve currency. The Bahamian Dollar would float, but free of heavy inflation to whittle away its value would strengthen against world currencies, he argues. Imports would become cheaper, and exports would become more costly to buyers.
That could have a huge impact on the tourism industry - already considered pricey versus our competitors. It may also force the question of whether safeguarding deposits is worth jeopardizing the nation's number one industry.
Tomlinson's answer to that was to focus more on offering a tourism product of such quality that the price of a Bahamian vacation was still a good value.
Perhaps an even greater challenge to Tomlinson's ideas ever taking route may be the scope of the change it suggests, and broad reticence to tampering with the status quo. Tomlinson says The Bahamas can lead the pack in safeguarding banks and reigning in their inflationary impact.
"You can get used to a bad habit as well as a good one," he told Guardian Business in a subsequent interview. "But the question is, if you have a bad habit should you address it? My argument is that you certainly should."
MINISTRY OF FINANCE FEES PAYABLE BY RETAIL BANKS for 2009/2010 and 2010/2011.
Progressive Liberal Party (PLP) Chairman Bradley Roberts said yesterday the government relied on "market intelligence" from commercial banks when it developed its mortgage relief plan.
Roberts' statement came a day after former Bahamas Mortgage Corporation (BMC) Chairman Dr. Duane Sands said the government's "failed" plan helped who it was designed to assist -- PLP election campaigners.
"This Mortgage Relief Plan (MRP) was no election gimmick as critics have suggested, but a plan designed in consultation with and endorsed by the stakeholders -- commercial banks -- to offer relief to distressed mortgagees," Roberts said in a statement.
"Participating banks had intimate knowledge of the financial circumstances of their customers and agreed to the terms of the MRP based on their industry knowledge and workability of the proposed plan.
"The PLP government clearly relied on the market intelligence of the commercial banks in crafting this plan."
The plan introduced over seven months ago, has yet to help a single struggling homeowner, Minister of State for Finance Michael Halkitis confirmed to The Nassau Guardian on Friday.
Roberts said if the leaders of the banking industry knew at the time that homeowners could not qualify for relief under the proposed plan, "that sentiment was certainly not expressed during the negotiation and launch phases of the plan".
In his statement, Roberts quoted Chairman of the Clearing Banks Association (CBA) Nathaniel Beneby, who said last September, "All member banks are pleased to provide support and are fully participating in partnering with the government in the MRP."
He also said the PLP has been the only government to propose a tangible plan to assist struggling homeowners with their mortgages.
However, Free National Movement (FNM) Chairman Darron Cash said it is "pitiful" that Roberts would seek to blame the commercial banks for the government's ill-conceived plan.
He said the PLP chairman is still in denial that the government fostered an "unworkable, unrealistic plan" on the Bahamian people.
"It is now proven that it had little or no chance of success," Cash told The Nassau Guardian. "The prime minister has already publically admitted that the plan has failed and Mr. Roberts ought to get with the program."
But Roberts said because homeowners have private mortage contracts with private entities, the government should instead be applauded for making $10 million in public funds available to assist ordinary working Bahamian families in keeping their homes.
"Surely with this olive branch extended by the government in good faith, there has to be more the commercial banks can do to assist their distressed customers," Roberts said.
Roberts put Sands' comments down to political posturing.
Prime Minister Perry Christie told reporters yesterday he plans to take a more active role in retooling the scheme.
Financial institutions in the country are defending their role in the controversial Mortgage Relief Plan.
As government admits the key election promise has gone unfulfilled, top banks are insisting that those who qualified for restructured loans have already been serviced. In other words, banks have done all that they can to help Bahamian homeowners.
Bradley Roberts, the chairman of the Progressive Liberal Party (PLP), suggested earlier this week that the plan was based on "market intelligence" from commercial banks.
"This Mortgage Relief Plan was no election gimmick as critics have suggested, but a plan designed in consultation with and endorsed by the stakeholders - commercial banks - to offer relief to distressed mortgagees," he said in a statement. "Participating banks had intimate knowledge of the financial circumstances of their customers and agreed to the terms of the MRP based on their industry knowledge and workability of the proposed plan."
Paul McWeeney, the managing director at Bank of The Bahamas (BOB), said a great deal of restructuring has been ongoing at the institution since the onset of the financial crisis.
BOB has worked hard to keep as many Bahamians as possible in their homes. And what's left, he said, are those that simply don't have cash flow.
"The major problem we're facing is unemployment. If you don't have a job, the ability to give assistance is limited. Those are the people who need help," he said. "They have no source of income."
McWeeney told Guardian Business yesterday that clients with equity built up in their homes have the ability for some restructuring, but even that won't last forever. If there is no employment, it will ultimately return to non-performance.
When the relief plan was first formulated, there was an idea for government to service some of these loans, regardless of whether Bahamians have employment or not.
"It would bridge the gap and allow people to stay in their homes," he added.
However, that approach is considered very risky and impractical.
"From our point of view, we are working on solutions constantly, regardless of government, to help people out," he said. "We have so much internally, and short of government servicing the debt, I'm not sure what else can be done. And that's probably not a viable solution. What we need is jobs."
Last Monday, State Minister of Finance Michael Halkitis admitted that the government was "very disappointed" with how the plan turned out.
According to the government's figures, at the time of the plan there were around 4,000 homeowners in arrears. The government allocated $10 million to the modified plan and said around 1,100 Bahamian homeowners would benefit.
That plan differed considerably from the original Mortgage Relief Plan suggested prior to the election, which offered sweeping assistance to all mortgagees and was openly condemned by international rating agencies.
"We haven't gotten to the point where we have actually paid anybody, so we continue to try to refine the system. We have to go back to the drawing board," Halkitis said.
Another leading banking executive, who wished to remain anonymous, said the general feedback on the plan is the Bahamians still in need of assistance are unable to make any payments on a regular basis, even with a restructured loan. What's left, he said, are homeowners that want "something for nothing".
Back in December, Scotiabank (Bahamas) Limited said the cash flow problem was "across all banks".
"The program is well place and well developed, but what we are finding practically is we are working through opportunities with all of our customers, and I know it's the same across all banks, and income and cash flow is proving very difficult to facilitate any further restructuring," according to Kevin Teslyk, the managing director at Scotiabank (Bahamas).
A top banking executive believes unregulated lending facilities are worsening public debt and creditworthiness, making it even more difficult for institutions to approve or restructure loans.
Ian Jennings, the president of Commonwealth Bank Limited, is lobbying for these informal loans to come under regulation and greater scrutiny.
Furniture loans, loans extended by used car companies and other credit facilities are not beholden to the same rules and restrictions as banks. As a result, when Bahamians fail to qualify with formal institutions, they tend to reach out to the unregulated facilities.
Jennings told Guardian Business that it often makes it even more difficult to later restructure bank loans or extend any new credit.
"We try and lobby for them to all come under regulation, but we haven't had any success. If we help a client and perform debt consolidation and bring him or her within a level the Central Bank allows, it's not long before they run up additional credit from unregulated companies," the banking executive explained. "That is an ongoing challenge for banks."
The comments from Jennings come at a time when some banks have been criticized for imposing criteria that remains out of reach for consumers. Some business leaders believe that this tightening only makes a bad economy even worse due to the vacuum in capital. Meanwhile, most financial institutions argue that high employment means there simply aren't many Bahamians who qualify for new forms of credit.
For his part, Jennings told Guardian Business that new loans are very few and far between these days, and the number only seems to be getting worse year-on-year.
In terms of the overall economy, he said The Bahamas finds itself in a "vicious cycle" whereby taxes are dependent on consumer credit and activity. One of the reasons for the decline in government revenue is the decline in lending activity, he said, which reduces customs duty collection.
In other words, people aren't spending money. And if they do, it is often through unregulated credit facilities.
"Really it comes under credit regulation, as opposed to bank regulation," he told Guardian Business. "A lot of jurisdictions have credit regulation. If you are faced with the challenges we have, there needs to be control in every area."
Jennings said that Bahamians are excellent at finding loopholes. If they exist, people will find them to fuel purchases. Most of these consumers already have heavy debt burdens, which makes them turn away from banks in the first place.
Regulations across the board would mean that Bahamians coming into banks would be in a better position for service. He argued that it also means greater consumer protection, allowing people to better manage and understand their finances.
Three banks moved into their new homes on the rerouted West Bay Street yesterday, part of a $15 million relocation to a new Commercial Village that one top bank executive says holds significant potential.
President of Commonwealth Bank, Ian Jennings, told Guardian Business yesterday that while the bank incurred no real cost for the construction of the new premises, it was pleased to be a part of such a 'breathtaking' project with strong future potential.
"The full benefit for the banks will be perceived once the project is completed in 2013/14," Jennings said.
He expects that even before that, however, banks in the area should start reaping the benefits of the beautiful new location and roadway, once the former route is closed off and traffic must use the new road on the new apron.
Now relocated and open in the Commercial Village are Commonwealth Bank, Fidelity Bank, Scotia Bank and the new police and fire station. All of the costs of the relocation were born by Baha Mar, Jennings saying there was essentially a property swap and an agreement to move out of its old premises on the Friday the deal closed, and into its new location the following Monday.
Baha Mar's Vice President of External Affairs, Robert Sands, confirmed that the cost burden for Baha Mar was a part of the deal.
"We certainly incurred the cost for rebuilding all of these buildings. A part of our agreement was to acquire the land and the space for the foot-print we have, and to provide alternative locations and to rebuild as per the structures before."
According to Jennings, all that needs to be done now is the finalization of legal work, which was contingent on the rerouting.
Bruno Styles, manager of Scotiabank's branch in the new Commercial Village, said his staff was "super excited" about the move, describing the atmosphere and the ambiance as "overwhelmingly fantastic". Customers were already enjoying the benefit of 'better flow' in the area, which takes the thoroughfare further away from the hotels and their guest's pedestrian traffic as well.
"It allows customer to interface with our services representatives more effectively," he said.
Guardian Business reached out to Fidelity for comment, but was not able to secure comment up to press time.
The entire construction of the four new buildings was completed by Bahamians, Sands confirming that it resulted in the creation of about 300 direct jobs and 150 indirect jobs. The work was done in under a year, as Baha Mar broke ground for the site on February 21st this year.
The local firms working on the project included John F Dunn and Associates for the Fidelity Bank facility, Osprey Developers Co. Ltd for the Commonwealth Bank facility, Cavalier Construction Co. Ltd for the Scotiabank facility, and CGT Construction for the police and fire station.
Sands said the build-out cost for the buildings alone was nearly $15 million. He also said the West Bay Street traffic should fully divert to the new route around the middle of January 2012.
With the relocation now completed, it clears the path for the demolition of the old buildings to prepare the area that Baha Mar's new properties will rise from.
"These banks opened for business today, and certainly the police and fire station and it now means we are in position to implode or demolish the buildings on West Bay Street to make way completely for the coming out of the ground of the Baha Mar superstructure," Sands said.
CIBC has been named as the strongest bank in North America and the third strongest in the world by Bloomberg Markets magazine.
This is the second year the bank has been recognized among the world's strongest banks. Bloomberg's global study is based on banks with more than $100 billion (U.S.) worth of assets.
"This award recognizes CIBC's success in delivering on our strategic imperative of value creation for stakeholders by delivering consistent and sustainable earnings over the long-term, while achieving strategic growth," said Gerry McCaughey, CIBC president and chief executive officer.
The Bloomberg Markets assessment studied the risk factors and capital levels of the world's largest banks. It examined the quality of the banks' holdings and ranked them based on five key criteria: Tier 1 capital to risk-weighted assets; non-performing assets to total assets; loan-loss reserves to non-performing assets; stability, measured in terms of the ratio of deposits to funding; and efficiency (costs to revenue).
"In 2011, CIBC reported net income of $3.1 billion, an increase of more than 25 percent year over year," added Mr. McCaughey. "Our return on equity was 21.3 percent, the highest among the Canadian banks and, our capital position remains among the best of any bank globally with a Tier 1 capital ratio of 14.7 per cent."
Bloomberg is a global business and financial information service that provides data, news and analytics to organizations globally.
In addition to the Bloomberg recognition, CIBC has been recognized as:
o Best in Mobile Banking globally by Global Finance magazine
o Deal of the Year Award for its equity investment in American Century at the recent Mutual Fund Industry Awards held in New York
o One of Canada's Best Workplaces by the Great Place to Work Institute
o One of Canada's 10 Most Admired Corporate Cultures by Waterstone Human Capital
o One of Canada's Best Diversity Employers and a Best Employer for New Canadians as ranked by Mediacorp Canada Inc.
Please allow me the opportunity to express my concerns in your valuable newspaper about the current exploitive charges being implemented by the banking sector.
A few months ago I visited my bank to make a deposit to my savings account. Upon the return of my passbook, I inspected the account to ensure that the funds were properly entered. I then observed that a small amount of interest was added to the account, but there was also a debit amount of $1 to the account.
I queried the debit and was informed that the bank had implemented a charge beginning that month of $1 per month on all savings accounts.
I was outraged by the implementation of this charge as in all my years of banking, which encompassed some 40 years, I was always of the view that banks encouraged persons to deposit funds with them where the customer would earn interest on those funds.
The bank would then on-lend those funds and earn a higher interest rate. They would earn their spread of your money, and earn documentation and administrative fees along with this process.
Of course I wrote to the financial institution, while carbon copying the prime minister in his capacity as minister of finance, outlining this exploitive process which was implemented by this particular institution.
The fees being charged would have amounted to $3.00 per quarter while I would have only been earning 40 cents per quarter.
Obviously, since the amount charged to my account was larger than the interest earned during the period, at some point my savings would eventually have been depleted and wiped out.
I was able to succeed in having them return my funds, but now I am concern that other depositors may be unsuspecting of this new policy with these institutions, with the implementation of these and other exploitive charges and they may not query the charges as they appear insignificant.
In the meantime, the purpose of the letter being carbon copied to the prime minister was to ensure that the government was aware of this exploitation of the Bahamian public. And I do commend him for responding to my letter, notifying me that the issue was submitted to the Central Bank for review.
I refer to the introduction of these fees as "corporate piracy", and they were implemented to replace lost revenue due to their problematic loan portfolio.
Another avenue implemented by these institutions as a part of their "corporate piracy" procedure is that they will now process a charge against your savings account if it did not have any activity for over six months. If your savings account has no activity over a six-month period, the banks will process a "lack of activity" charge to your account.
These new charging mechanisms are implemented to exploit the disadvantaged and unknowing consumers who make every effort to keep their heads above water in these challenging times, as the banks know that the majority of their customers will not even question their motives.
While I am on the topic of banking, I will also highlight the fact that these institutions have decided to cease providing their customers with their cancelled checks on their checking account.
Again, this is implemented to take advantage of the consumer, as we would now need to pay a fee to the bank for any cancelled checks required.
As an example, if you had a problem with regards to payments to a creditor over a period of time, you would have to pay a fee to get copies of your cancelled checks, no matter how many checks may be involved.
I do hope that our elected representatives would make an effort to evaluate these issues involving these exploitive habits of these financial institutions to alleviate the undue burden on the Bahamian public, wherein their funds are taken unscrupulously by these institutions under the disguise of operation fees.
Geoffrey B. Stuart