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Thank God For Our Bankers

By Francisco Javier Cimadevilla

November 27, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

There are many things to give thanks for this Thanksgiving Day. Not the least of which is having emerged from the economic slowdown of the past four years relatively unscathed.

And make no mistake about it. Puerto Rico’s financial institutions–not the government, not manufacturing, not construction, not tourism–are what have kept the engine of Puerto Rico’s economic development running these past four years.

During this period, local financial institutions have pumped a whopping $54 billion into Puerto Rico’s economy, most of it coming from outside of Puerto Rico and distributed in the form of loans. In the process, they have grown by leaps and bounds, with total assets and net income jumping 65% and 62%, respectively.

Since late 1999-early 2000, Puerto Rico, like the U.S. mainland, has struggled with an economic slowdown–at times turned recession –that has affected virtually every business sector, including thousands of consumers and businesses that would have gone under without the financial help of our financial institutions.

On the mainland, business confidence has been in shambles since the tech stock market bubble burst, the Enron-Andersen corporate scandals, 9/11, the war on terror, and the intervention in Iraq. Sales stalled, corporate profits plummeted, and businesses had to let people go and otherwise cut costs to avoid going under. Most businesses decided to postpone major investments, purchases, or expansions until the economy looked better.

Here on the island, a do-nothing government administration that stopped all infrastructure construction projects, raised taxes for consumers, and failed to promote any economic development initiatives added to the grim picture we got of the stateside economy.

In the midst of it all, the local banking sector, including commercial banks, mortgage banks, and savings-and-loans, has taken advantage of Federal Reserve policies that have kept interest rates at their lowest levels in half a century to exhibit spectacular growth, and thus has played a key role in keeping the local economy afloat.

Since January 2000, local commercial banks have originated $15 billion in new loans to the commercial and industrial sector, including construction, plus $5 billion in loans to consumers, including personal and auto loans. A lot of this money came from very favorable Federal Reserve loans to the banks.

During this period, mortgage lending by commercial banks has totaled 100,000 new loans worth $16 billion, while nondepositary mortgage institutions have originated another 178,000 loans for an additional $18 billion.

Mortgage lending is of special significance because it serves as a vehicle for new outside money to be pumped into our economy. Very little, if any, mortgage lending is financed locally. Most mortgage lenders package the mortgages they originate on the island and sell them in the so-called secondary market. That means big, cash-rich institutional investors such as national insurance companies or big pension funds buy those real-estate-secured mortgages as investments. In so doing, they pour into the island billions of dollars–funneled through new mortgage loans–which in turn move through our economy.

Also significant has been the continued expansion of the deposits base of local financial institutions. In order to keep lending money, banks and other financial institutions need to continue to capture more and more deposits.

In the past four years, for example, the amount of brokered deposits–deposits in local banks by individuals anywhere on the U.S. mainland–has grown by a whopping $7.4 billion, from $2.8 billion at the end of 1999 to $10.2 billion as of Sept. 2003. Again, this is outside money that is being funneled into our economy through the activities of local financial institutions.

All told, Puerto Rico’s businesses and consumers can sleep tight knowing that in good times and in bad, a solid, world-class local banking and financial institutions sector will continue to sustain the island’s economic development.

This Caribbean Business article appears courtesy of Casiano Communications.
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