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New capital requirement by BoG: Panacea for bank failures?

Bank failures are the most dreaded phenomena within the Banking Industry across the world as they not only affect the Bank but its Clients, Depositors, Industry and even Families. The fear of Bank failures is not only because of its impact on Depositors but for the likely spillover effect of one Bank’s failure on other Banks as Depositors rush to withdraw their Monies for fear of similar failure of their Banks. Such failures can ripple throughout a Country’s Economy and subsequently cause the failure of other Banks. The recent failures of Capital and UT Banks are a case in point, except that the Regulator, Bank of Ghana (BoG), stepped in to forestall a run on Banks.

In the USA for instance, between 2009 and 2017, 491 Banks failed (FDIC, Dec 15, 2017) with huge cost to Deposit Insurance Fund (DIF), something in the region of $38.73billion (2009) to $9.6million (2016). In a similar vein, Tanzania recently announced the closure of 5 Failed Banks (2018).

The Bank of Ghana (BOG’s) New Capital requirement of GHC 400Million for Banks (an increase of 233.33%) is welcome news. What we should be asking, however, is whether that is the Panacea for Bank Failures in Ghana.

Various research reports (www.businesspundit.com/25-biggest-bank-failures-in-history; Resolution of Banking Crises: The Good, the Bad and the Ugly by Luc Laven and Fabian Valencia, (August 2102); OCC ’88 among others) have shown that though Bank Failures have occurred on different Continents and in different Environments, causes are virtually the same with the two Principal Ones being ILLIQUIDITY and BAD ASSETS.

 

After studying the failures with particular reference to happenings in our Country (Ghana), I am of the considered opinion that apart from the Principal Causes above mentioned, particular attention should be paid to the following;

•Poor Risk Management

• Poor Internal Control Systems

• Non Adherence to Corporate Governance Policies

 

• Imbalance of Risk versus Return

• Offering of Products and Services that are not fully understood, all in the name of matching Competition

• Failure to Diversify

• Board of Directors shirking their Fiduciary Responsibilities and themselves engaging in practices detrimental to the wellbeing of the Banks

 

• Insider Abuse and Fraud

•Shareholders/Managements Excessive Focus on Profitability at the Expense of Prudence

•Regulator Inertia

The Failures studied also showed that Policies and Procedures of Management and Board have a greater influence on whether a Bank will succeed or fail although Economic Conditions also play a part albeit insignificant. (OCC8)

 

Since Bank Failures have a tendency of Ultimately bringing a permanent damage to Families that form the foundation of Societies and for that matter Countries, it is IMPERATIVE that all Stakeholders do their part to avert or minimize them (if conditions are so extreme to make it inevitable).

Thomas Jefferson, Third President of USA once wrote: “I sincerely believe that Banking Establishments are more dangerous than standing Armies”.

Board of Directors: Must put in place a Corporate Governance Policy that should guide actions, be Strong and Actively involved in Bank’s affairs because they are ultimately responsible for the Long-term health of the Bank; have formal written Policies in place and Keep Lending Limits Low from CEO to Credit Officers and Monitor strict Compliance of Policies. They must also ensure the CEO has Capacity, Experience and INTEGRITY to make the Bank succeed; should have a Whistle Blower Policy that has the necessary protection for Staff who report Non-conformists. They should above all be abreast with Trends in the Global Financial Services Industry in order to have the right Strategic Direction.

Management: Should adhere to the Governance Structure of the Bank; Ensure Strong Operational Risk Procedures are in place and Compliance enforced; Avoid Frequent Credit Exceptions (e.g., poor Collateral Documentation or income information about borrowers); Adhere to Single Obligor directives, and avoid Concentration Risk. Early Alert Systems to handle problem loans before they get bad; Strictly Supervise Officers by putting in place Internal Control Systems and Sanction deviant behaviour; Maintain Strict Rotational and Leave Policies to avoid situations where staff stay extremely long on Schedules and in some cases suppress wrongdoing or fraud; Adequately train staff at all levels. Audit and Assurance department and Monitoring Units should proactively review Operations and flag infractions for further investigations.

Staff: Should follow Operational Policies and Procedures; resist Superior pressure to cut corners and strictly adhere to Approved Processes and Procedures; Report “Rogue Officers” to Management; Put the interest of the Bank and achieving the Strategic Objective above all else; Should make Risk one of their Cardinal principles in all dealings.

Customers: Must understand that they have an obligation to pay any Loans and Advances taken from Banks and so should apply the money for the intended purposes; Be interested in the performance of Banks and ask questions to enable them to make informed decisions.

Media: May report Failures and untoward behaviours of Bank officials by putting out facts devoid of any sensationalism as that has a potential of causing a rippling effect on Performing Banks that may suffer a Run; Should educate themselves on Banking Laws and Financial Reporting in order to avoid situations where lack of understanding cause more harm; Should recognise that Banking is not restricted to Local Transactions so putting out wrong information may have a negative effect on the Bank concerned to the extent that their International Credit Lines may be cut with its attendant effect on Trade and related Business; Foreign Banks may in extreme cases Sever relations with the Bank concerned; Media MUST, therefore, be well Informed and Responsible in their reportage because of the Global implications.

Judiciary: Having set up Financial Courts, should always expedite Cases brought by Banks to avoid situations where recalcitrant Customers hide behind long Court processes to unduly delay repayment of defaulted facilities.

Parliament: Should seek explanations for Failures from Regulators and also apprise themselves with Modern Banking trends

Government (Executive): Should ensure Sound Economic Management, promptly pay Contractors as they mostly depend on Bank facilities to execute Contracts and any delayed payments adversely affect them because of penal rates not to mention the effect on the Banks that may be involved.

Regulators (BOG): Should among others:

• Strengthen the Banking Supervision Department with very Experienced Staff and Modern Tools to proactively deal with the challenges in the Industry

•Ensure that Banks Implement Strict Risk Management Policies and Supervise Compliance

• Constantly Monitor Asset Quality of Banks

•Expedite the Full Implementation of Basel II/III

•Tighten Criteria for allowing Banks to Expand

•Avoid Single Obligor Waivers

•Introduce Deposit Insurance/Guarantee Scheme to Protect Depositors

•Possibly Publish periodically, the CAMELS Ratings of Banks to serve as a guide to the Public and also to make Board and Management of Banks sit up

•Make it Obligatory (if not already the case) for Banks to Implement Cyber Security Systems and Policies to help protect the Industry from Cyber Fraud which is on the increase Worldwide

•Ensure that People with requisite Experience and Integrity are cleared to serve on Boards of Banks

•Clear all Key Management Personnel of Banks before they take their Position

•Name and Shame “Rogue CEOs” who bring the name of the Industry into disrepute noting that the character of the CEO is often synonymous with the Brand of the Institution

• Push for Mergers of Weak Banks and Restructure their Management Team

•Not to allow themselves to be Coerced by a section of the Public to engage in “ Financial Socialism” to give the impression that Board and Management can run down a Bank and expect a bailout from BOG after they have taken Private Profits.

There is no gainsaying the fact the current Governor of BOG, Dr Addison and his Team are doing their best but it is important that a Multi-pronged approach, where all Stakeholders are on board, is used to curb, if not eliminate, the menace of Bank failures in Ghana. Public Confidence in the Financial Industry should be regained in order to bring into the Banking System, a greater part of the Money in circulation currently outside.

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