Butterfield defends rate-cut decisions
Butterfield Bank has defended its decision to make larger interest rate cuts in Cayman than in Bermuda after criticism from the Premier and the finance minister.
The bank said the decisions reflected the “different demand, supply and lending-risk realities in the two jurisdictions” as well as the stronger economic growth in Cayman.
Butterfield added that its moves to cut lending rates and automatically defer loan and mortgage repayments for three months had put $55 million into the Bermuda economy.
Speaking at a government press conference on Monday evening, referring to potential pay cuts for civil servants, David Burt, the Premier, said: “It's difficult to ask people to take a pay cut when a bank's interest rates in this country were reduced by 0.5 per cent and the same bank in the Cayman Islands reduced their interest rates by 1.5 per cent.
“I don't think that is right and proper.
“If the private sector doesn't act in these particular instances, then the Government may be forced to do so.”
The Premier overstated the size of Butterfield's mid-March rate cut in Cayman, which was one percentage point. The move left the bank's Cayman dollar and US dollar base rates at 3.25 per cent.
In March, Butterfield reduced its Bermuda dollar base rate by half a percentage point, reducing its Bermuda dollar base rate to 4.75 per cent.
A Butterfield spokesman said: “Lending risks for the bank are influenced by economic growth and prospects in each location, as well as our ability to make recoveries on delinquent or defaulted loans and mortgages.
“The population and economic activity in the Cayman Islands is expanding faster than in Bermuda at the moment, and there is greater opportunity there for home ownership by foreigners, meaning there is greater demand for real property.
“In contrast, the Government of Bermuda is forecasting significant contraction in the local economy, levels of government debt are high, and the island's credit ratings are lower, which serve to increase lending risks for the banks here. These factors inform our lending policies, adjudication and rates.”
Cayman's economy has grown at an annual 3 per cent rate over the past five years in real terms, compared with Bermuda's 0.1 per cent growth. Bermuda's government debt burden is more than five times greater than that of Cayman.
A property and development boom in Cayman has been spurred by the lack of barriers to foreign property buyers.
However, Cayman's tourism industry has been hit hard by Covid-19. Thousands of expatriate workers left the territory in March, just before its airport closed, when the Government estimated the population fell by about 6,000.
The Government is working to arrange more flights for laid-off guest workers. Cayman's pre-crisis population of close to 70,000 included more than 30,000 work-permit holders.
Butterfield said its priority was to work with borrowers to structure lending in such a way that they are able to comfortably service their debts. “Where customers run into difficulty, we work with them to develop mutually agreeable solutions,” the spokesman said. “Recognising the additional financial pressure that the Covid-19 crisis has put on many of our customers, we introduced automatic payment deferrals on mortgages, loans and credit cards, and have made interest-only arrangements for payments by many business clients.”
The spokesman added that in Cayman, rates move in lock step with the US Prime Rate. “That means when US rates decrease, deposit and lending rates automatically drop, and conversely, when rates increase, borrowing and savings rates also increase,” he said.
“In Bermuda, the banks set their base rates based on a number of factors, of which movement in US rates is only one.
“We also look at economic activity, unemployment, real estate market activity and the risk profile of the market at that point in time when establishing our base rate. “Historically, we have not increased our lending rates in step with every US Prime Rate increase, as has been the case in Cayman. Similarly, we have not dropped deposit rates with every US rate decrease. Lastly, there is no central bank or lender of last resort in Bermuda, and Butterfield does not utilise interbank borrowing or securitise our mortgage book, meaning we need to be more conservative in our approach to lending and capital management than is the case for banks in other jurisdictions.”
Curtis Dickinson, the finance minister, a former Butterfield employee who worked as a banker for 25 years, said at the weekend that he had spoken about rates with the Bermuda Bankers' Association.
“We look at some way to bring harmonisation to our rate structures,” Mr Dickinson said. “There is a different Bermuda dollar base rate at all three banks.
“My own sense is that if we can find a way to encourage the banks to use the same base rate, that may help to make pricing more transparent.”
Banks, he added, would be an important partner in helping the economy recover, and they needed to be mindful of their role.
Butterfield said it and the BBA had discussed with the finance ministry and the Bermuda Monetary Authority how banks can support the community during the crisis and beyond. The talks included “everything from the need for the banks to continue to operate branches to facilitate cheque cashing so government relief funding can flow into the economy, to lending policies during this time,” Butterfield said.
The spokesman added that Butterfield had also helped the community in other ways in the crisis, by helping to set up and fund a programme that was now feeding 1,000 needy people a day and helping cover the costs of a charter flight from Atlanta to bring stranded Bermudians home.
“We are supporting all of our employees through this crisis by maintaining full salaries and benefits for all staff, regardless of whether they are able to work,” he added.