Competition review for banking sector
JAMAICA’S COMMERCIAL banking regulations that impact access to financing are to undergo a review, with recommended measures to be adopted by midyear.
The terms of reference for the study were developed by a team from the Bank of Jamaica led by Governor Brian Wynter, and the Fair Trading Commission (FTC), the latter in its capacity as the national competition authority, led by Executive Director David Miller.
The assessment should have started this month but FTC Competition Bureau Chief Dr Kevin Harriott said it is still expected to be completed in time to meet a June or July deadline for adoption of the recommended measures.
A consultant is now being recruited to undertake the study, Harriott said.
The terms of reference — which were developed last December — contemplate a supply-side review of regulations governing access to financing in Jamaica. It follows from an extensive study by the FTC of the commercial banking sector in 2010 as well as reviews carried out in other jurisdictions.
Among the key issues to be determined are the main factors for low competition outcomes in Jamaica’s banking arena. The review is expected to cover insurance and pension regulations that impact access to financing.
In a request for expressions of interest to conduct the study assessing competition in banking, the Ministry of Finance said the objective is to assess competition in the space/market in which commercial banks operate, identify bottlenecks and impediments, and propose policy recommendations for improved competition. In its 2010 study, the FTC, from its assessment of the structural characteristics, found that the commercial banking sector is persistently highly concentrated, with Scotiabank Jamaica and National Commercial Bank Jamaica accounting for more than 75 per cent of the sector’s income.
The two banks continue to dominate the market among seven players today, accounting for around two-thirds of the more than $1 trillion of sector assets.
The FTC study also found the banking sector was characterised by differentiated services; required entrants to have an expansive branch network for effective entry; and that the consumers served they served were inadequately informed.
The competition agency’s key finding was that although the market is highly concentrated, it is unlikely that any individual commercial bank, without coordinating with at least one other bank, could exercise market power as the two largest banks could each be a constraint against the other.
But it also found that, given the characteristics of the market, the two big banks could strategically coordinate their activities and allow them to exercise market power.
“There is no evidence, however, to suggest that commercial banks are colluding,” the FTC concluded.
The agency noted that the main obvious challenge to competition in the banking sector related to a lack of information on the part of consumers.
“The disparities in levels of fees provide room for improved competition to the extent that informed consumers (household and businesses) are willing and able to switch banks or reorganise their accounts to take advantage of lower priced services,” the FTC found, leading to its recommendation that the banks should develop mechanisms to better inform their clients.The current competition review is a deliverable under Jamaica’s economic reform programme and comes after criticisms from the IMF that the banking sector lacked competition.
The disparities in levels of fees provide room for improved competition to the extent that informed consumers are willing and able to switch banks or reorganise their accounts ... .