Former NCB head says lower FINSAC interest rates could have saved local firms

KINGSTON — Former Managing Director of the National Commercial Bank (NCB), Jeffrey Cobham, told the FINSAC Commission of Enquiry Tuesday (April 19), that some local businesses which wilted under the 1990s financial meltdown, could have had a greater chance of recovery with reduced interest rates.

However, he said that while the situation was constantly discussed with then Minister of Finance and Planning, Dr. Omar Davies, and Bank of Jamaica (BoJ) Governor, JacquesBussières, the pleas of the indigenous institutions “fell on deaf ears."

Mr. Cobham is the latest of a number of executives from local financial institutions and life insurance companies who have appeared at the Commission, which is looking into the effect of meltdown, and the role of the Government owned Financial Sector Adjustment Company (FINSAC) in the recovery, at the Jamaica Pegasus Hotel New Kingston.

NCB was one of the few indigenous financial institutions to survive the meltdown, but did so with $19.1 billion worth of support from FINSAC, which has led to charges by other institutions that it was treated more favourably because of its connections with the government.

Dr. Davies told the Commission last November that NCB was “too big” to be allowed to collapse. The bank was then the second largest to foreign-owned Bank of Nova Scotia and, according to Mr. Cobham, was catching up in several sectors.

The former NCB head, empathized with the indigenous institutions which went under, and their customers, as he answered questions at the enquiry, Tuesday. He said that, even at the NCB, he felt there could have been greater adjustments in the levels of interest charged, after FINSAC took over the bank.

He noted that the interest paid by customers moved from 25/30 percent to 90 percent and, although institutions asked to be allowed some discretion in working out new payment arrangements with affected customers to assist them in meeting their obligations, it was not given the level of cooperation asked for.

“The indigenous banks met with them, and made pleas which fell on deaf ears,” Mr. Cobham said.

He denied, however, that NCB was treated favourably although it was: recapitalized by FINSAC, through acquisition of its ordinary and preference shares; provided with liquidity support, through FINSAC’s purchase of its non-performing loans; and, FINSAC actually acquired 40 percent of the NCB’s outstanding ordinary shares plus 43.8 percent of NCB Group for a total holding of 68 percent.

“I think the circumstances differed in the case of each bank,” Mr. Cobham explained, in response to the chairman, Mr. Bogle. He suggested that the problem with some banks could have been dishonest dealing revealed in their records, as NCB discovered in an institution it was asked to oversee, that the files could not be found.

“Every rock was turned over and every book read five times and nothing was found,” he said in the case of NCB.

Mr. Cobham said that there was no alternative to FINSAC, as the NCB needed the breathing space offered by the recapitalization, as its non-performing loans had risen considerably and needed to be taken off the books.

“We really saw FINSAC as the vehicle by which this would have been done,” he told Commissioner Charles Ross.

He said that many indigenous banks were inadequately capitalized for the conditions prevailing at the time, which were influenced by the prolonged high interest rate policy. When they went to the market to seek funding, the public showed a preference for the security of the foreign owned institutions instead, even though their interest rates were lower.

 He said that the foreign owned banks had adopted more rigorous security standards, which became the norm after the meltdown.

He said that the banks agreed that the regulatory environment had to be changed to match those of developed countries, but wanted it to be done more gradually.

The enquiry resumes next week Wednesday.

By BALFORD HENRY, JIS Reporter