HAVING the same entity controlling more than one commercial bank could be risky for the stability of these institutions.
University of Nottingham economics professor Spiros Bougheas expressed this opinion at a lecture at the University of the West Indies St Augustine campus on Wednesday. Bougheas made the comment when asked about the potential for systemic risk should the State have controlling interests in different banks which are "branded separately."
Bougheas said such a scenario could be "very, very risky" if not handled properly. He explained that if one of the banks experiences difficulty, it was not impossible for the single owner "to use one bank to save the other bank." In the case of an independent bank which sees such institutions at risk of failing, Bougheas said it was important for this entity to ensure it is insulated from the at-risk entities.
Bougheas also said corporate governance issues, such as who controls the appointment of the board of directors, play a role in determining the institution's stability. He highlighted interbank models where a failure of one bank causes others to fail. Bougheas showed other models where some banks are unaffected when others collapse around them, and said these models could not accurately predict the potential failure of financial institutions, such as CL Financial.
Bougheas' research interests include systemic risk in financial markets, financial contracting and international financial architecture. He said to understand the global financial crisis in 2008, people need to "look at how institutions, contracts and policy instruments are designed." There must be an examination, he said, of "how they're applied to financial, labour and international exchange markets."