Financial institutions remain key agents in promoting and maintaining national, regional and global economic stability. As such the failure of banks and other players in financial intermediation should be averted as much as possible to limit contagion i.e. systemic risk in the financial space. When do financial institutions fail? This happens when such institutions are unable to meet their obligation to both creditors and depositors which in itself stems from insufficient liquidity or solvency.
Financial institution failures are not new as it is with other corporate failures. History provides us with a tall list of such an undistinguished order. The memories ofBear Stearns and Lehman Brothersstill linger on.
More Bank Bail Outs?
The collapse of two[1] Ghanaian banks in August 2017 coupled with the revocation of the licenses of five[2] more others in July 2018 by the Bank of Ghana(BoG) adds to this ugly order. The cause(s) of the failure of these banks is not the central theme of this piece. However, interventions that could be drawn on from other jurisdictions to improve our lot is central to this piece.Although the central bank has been widely praised for the handling of the resolution of the failed banks, it has had to dole out a total of about eight billion Ghana Cedis to bailout these seven banks. Considering that the banking sector“cleansing” as stated in the 83rd Monetary Policy Committee (MPC) press release[3] is far from finality,more tax-payer moneycould be spent in the guise of protecting depositors’ fundscome December 31st 2018.This opinion draws support from comments made by the Governor of the Central Bank, Dr Ernest Addison at the 84th MPC press briefing. The man at the top sees the likelihood of about nineteen banks recapitalizing with about ninety-days to the given deadline.
The media landscape is awash with tales of indigenous banks needing some assistance from the Central Bank and or Government to meet capital shortfalls. More so, there are talks of mergers and acquisitions for which the regulator has issued a draft directive for guidance. However, liabilities (depositors’ funds) of undercapitalized banks which do not find suitable suitorswill have to be catered for in the foreseeable future. Presumably, more bonds will be raised to support either an acquirer (as seen in the Purchase and Assumption Agreement of GCB Bank) or a newly incorporated entity like Consolidated Bank Ghana. However, irrespective of the vehicle deployed to clean up the mess, the financial cost of that vehicle is borne by the ordinary citizen knowingly or otherwise whilst the perpetrators (banks and FIs) sublime into oblivion.
Waiting for Things to Happen
The aftershocks of the credit crisis of 2007/9 to our part of the world was an eye opener tothe explosive nature of systemic risk which has heightened due to increased globalization – a network of intricate interwoven systems which has become much complex and integrated than ever before. It is a firm belief that more should have been done by those entrusted with responsibility and duty by the state to ensure the robustness of our financial institutionsdrawing lessons from the devastating prowl of the crisis in North America and Europe a decade ago.The failureof the American and European banks came at a huge cost to national and regional economies creating the “zombie” bank phenomenon.
The Second Deputy Governor, Mrs. Elsie Awadze speaking at the recent 2018/19 Annual General Conference of the Ghana Bar Association in Koforidua referenced the crisis stating that “zombie” banks are not good to anyone. They are a silent canker which can bring the entire financial system on its knees[1]. Interestingly, the precursor to the “credit crunch” and the current challenges in the Ghanaian banking sector are alike – excessive risk taking and illiquidity. Considering the similarity of both events, it suffices to say we have let ourselves down when there are blueprints all over the global terrain to help put in place measures to limit and or absorb the shocks. Those who wait for things to happen have no right to hope.We cannot afford to continue in our latent status quo if the socio-economic policies of our social and political establishments are to become anything relevant in the lives of the Ghanaian people.
An European Framework
Not surprisingly most of the regulations and guidelines aimed at strengthening national and global financial stability were birthed after the 2007/9 crisis. The Dodd-Frank Wall Street Reform Act[2], Financial Stability Board’s Key Attributes of Effective Resolution[3]and the Bank Recovery and Resolution Directive (BRRD)[4]of the European Union are examples of such regulationsor guidelines. The latter proposed and adopted by the European parliament in May 2014 provide adequate tools to deal with failing financial institutions with minimal systemic risk to financial stability. Most importantly, the guideline lays out a framework where the cost associated with the failure of an institution is borne by shareholders and creditors and not taxpayers.
The BRRDis a three pronged fork. There are parts to be played by the regulator and regulated respectively. Firstly, it requires the nomination of a public administrative body to be a Resolution Authority which is responsible for exerting resolution powers imposed by the directive. The Resolution Authority is also required to prepare a resolution plan for financial institutions using information solicited from these institutions.Such plans must provide for the resolution actions which the authorities may take in the event that an institution meets the conditions for resolution. Secondly, it is required of each financial institution to prepare a detailed Recovery Plan (with various scenarios) to set out the measures it will undertake in the event of financial distress and must be submitted to the Recovery Authority for review. Such a plan should be updated at least annually or after changes to the legal or organisational structure of the institution.
A change in business or financial position of the institution also necessitates an update of the recovery plan. Finally, the framework also includes the creation of national resolution funds – a buffer to be used in distress times. All financial institutions are required to contribute to national resolution funds. The contribution per financial institution is dependent on the size and risk profile of the financial institution. The BRRD ensures that shareholders and creditors of failing banks pay their share of the associated cost and supplements same with the funds accrued in the national resolution fund.In effect it creates a system where a distressed bank gets bailed out with the banks’ own funds. Perhaps, we can take a leaf from the Europeans’book and make our financial institutions clean up their own mess.
Source: Samuel Koranteng Adjei
Banker with Energy Commercial Bank.
e-mail: ollennuadjei@gmail.com
