No Free Lunch

Heads I win…

/ 05:04 AM September 10, 2019

The public outcry against a looming hike in banks’ service charges on ATM transactions calls to mind how banking could well be the most enviable industry in the economy, whether here or elsewhere in the world. That’s because it’s an industry that appears to do well in good and bad times alike.

Pawnshops are known to enjoy brisk business when the economy is down, and not as well when the economy is booming — which stands to reason because what motivates people to run to pawnshops is lack of money, especially when times are hard. But banks do better than that, at least as suggested by the GDP data: Their business grows consistently even through economic ups and downs. Moreover, growth in the industry consistently outpaces overall economic growth.


In the 15-year period 2004-2018, overall GDP growth averaged an annual rate of 5.8 percent, but financial intermediation (primarily banking and insurance) grew at an average annual rate of 8.7 percent. In the first half of this year, the overall economy grew by a disappointing 5.5 percent, after maintaining 6-7 percent growth over the last eight years. But guess what: The financial sector grew nearly twice as fast, by 9.7 percent. Recently, the country’s top banks have also announced growth in profits ranging from 17-46.8 percent. Interestingly, when our economy nearly ground to a halt at 0.9 percent GDP growth in 2009, financial intermediation actually grew a hefty 7.1 percent.

It is often said that the banks provide the lifeblood of the economy, and that the financial markets are the barometer of the performance of the real economy (that is, of the
behavior of prices, jobs and incomes), though I’m not too convinced about the latter. The reality is that whether the markets go up or down, there is little in it of direct consequence for the common folk. Bullish stock markets and an appreciating peso are good news to and benefit the financial players who can cash in on market capital gains. But a booming stock market makes little, if any, direct impact on the lives of the common poor rural or city-dweller. True, a sustained stock market rise could eventually boost jobs and incomes, but the effect is indirect, takes time or may not happen at all, especially when market reversals occur before these indirect effects could even begin to take hold.


Who gets hurt the most with financial market reversals? We only need to look back to what happened in the past international financial crises to see the answer. The Asian financial crisis of 1997-98 was sparked by failed unsound investments by big banks in Thailand and Korea. The 2008 world financial
crisis, sparked by the collapse of financial giant Lehman Brothers, was traced to irresponsible investments by big US banks in high-risk (“sub-prime”) housing loans. But these big US banks were considered “too big to fail,” prompting the US government to bail them out with taxpayer money, while the common people reeled under the economic fallout that ensued.

When the dust had settled, who were the worst hit? It was not the financial sector players or the losing investors, who mostly had deep pockets to start with. Rolls Royce actually saw sales of its luxury cars surge 20 percent in 2009, after five consecutive years of growth — and the single biggest market for the company’s products then was still the United States. In the Philippines, the consumer product with fastest-growing sales then (25-percent annual growth) was table wines, along with other products consumed primarily by the wealthy.

It was the common folk who were hit with skyrocketing prices, job layoffs and falling incomes, as firms and farms found bank loans extremely costly or difficult to obtain amid rising interest rates. And it was the common folk who suffered reduced social services from cash-strapped governments facing dramatic drops in revenues.

I once heard someone say that you can’t get any luckier than a banker: They are the guys who make a lot of money “playing with” other people’s money. From where we stand, they are in the enviable situation aptly described as: Heads I win, tails you lose.

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TAGS: ATM transactions, bank service charges, Banking, Cielito F. Habito, No Free Lunch
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