Banks’ excess cash means lower interest rates for Belizeans
Central Bank's Governer, Glenford Ysaguirre, says surplus cash will bring down interests rates
Commercial banks may very well be impelled to further reduce their lending and deposit rates, as the banks’ cash reserves, which are held at the Central Bank, are well above the prescribed limit, Central Bank Governor, Glenford Ysaguirre, told the Reporter on Tuesday, December 20.
Ysaguirre explained that the Central Bank of Belize (CBB) mandates that the commercial banks keep 8.5% of their average deposit liabilities at the Central Bank as cash reserves. However, current figures show that the banks have an excess liquidity of $108.9 million.
“The amount that they are holding at the bank right now is $283.5 million, under the regulations they are supposed to hold $174.6 million,” CBB’s Deputy Governor, Mrs. Christine Vellos, explained.
Looking at it from a merchant’s perspective, the situation does create difficulties for banks because this means there is less demand for their “product”—loans; while there has been a simultaneous increase in their “inventories”—increased deposits.
But, like any prudent business owner, the price of their “product” (interest rates) is expected to come down, as they hope to attract more borrowers.
“High levels of excess liquidity are an indication that savings levels within the system are high. This is good to the extent that it will put pressure on lending rates...Some advertised lending rates are already in single digits which was previously unheard of in Belize,” Ysaguirre noted.
As they apply to loans to the business sector, the rates have also started to come down, although not as fast as some in the private sector would like.
Ysaguirre said the measured reduction is largely due to the high levels of non-performing loans, which is due to poor decisions made by some banks in past years and complicated by global economic pressures. The banks are now left to carry these high levels of defaulted loans, so there is a resistance to lowering the price of their goods, because they are trying to recover some of their losses.
However, while any reduction may be good news to the borrower, it does mean the banks would be “buying” less from their “suppliers”—the depositors, and they would be inclined to lower the interest rates offered, because they are already “overstocked”.
“Given the current international situation, it is not unusual, in the U.S. for example, for deposit interest rates to approximate 0% or even become negative, [that is to say] banks charge depositors a fee for safe keeping of deposits since they already have more than sufficient funds to meet their lending needs,” Ysaguirre explained.
He pointed out that the surplus is different for each domestic bank, because the liquidity isn’t evenly distributed. This means that the interest rates for deposits, or the conditions under which they are accepted, may vary. Even so, Ysaguirre says, there has been a marked decrease in deposit rates, especially as it pertains to large time deposits.
“Some banks may not accept large time deposits, but as far as we know no restrictions are being placed on savings deposits,” he said.
The CBB has gradually reduced the flooring on savings deposits from 4.5% in 2010 to 2.5% in 2011, in order to give the commercial banks more incentives to lower their lending rates, although such a reduction doesn’t automatically result in huge decreases.
“It is necessary to bear in mind that there are other factors that influence the lending rates such as the level of non-performing loans... [And] the domestic demand for loans is also influenced by the level of economic activity in countries that are our major trading partners,” Ysaguirre said.
He reiterated that, in the end, the matter is ultimately determined by the individual bank’s operating costs; and the economic realities across the region and in the United States, where he says, “excess liquidity is so high, interest rates on regular deposits are well below 0.5%.”
But, as it pertains to the overall health of the economy, Ysaguirre pointed out that Belize has recorded a 2.7% growth up to September, which exceeds the 1.8% increase of the same period last year.
He explained that the excess liquidity in the system can in no way be the sole indicator of the economy’s health. There are several other factors to consider such as GDP growth, the level of inflation and growth in the country’s foreign reserves, he said.