I wish to react to your publication on Thursday, 29th March, 2018 on the headline “Banking Crisis Reflects Challenges in Economy” attributed to me, which is not entirely accurate.
I was out on a business trip when I received urgent calls from several people asking whether the publication on the front page of the Business and Financial Times on 29th March, 2018 was indeed what I said. When I checked, I was surprised at the twist the story gave to an interview I granted after the Bank of Ghana’s recent action on UniBank. I was alarmed by the headline and the shift in focus of the write-up. First of all, I did not say that there was a Banking crisis in order to suggest that it was as a result of “challenges in the economy”.
I received a phone call some days after the UniBank incident by Business and Financial Times, asking me to speak briefly on the action the Central Bank had just taken on UniBank and related issues. I agreed to speak on the subject especially because I thought there were some misunderstanding about the whole exercise. Some of the media reportage on the issue, I thought could potentially cause panic in the system. I recalled B&FT’s own online publication on the day of the event and thought the interview would offer me opportunity to correct the erroneous impression created that the Bank of Ghana had “taken over the bank”. I sought to explain that the Bank of Ghana had instead “taken over the management” of the bank. This distinction I thought was necessary to give the public a better perspective of the actual situation on the ground. I granted the interview and took the opportunity to underscore that the Central Bank’s action is a normal regulatory practice, although used mostly in the past for the Rural and Community banks, citing my personal experiences of such actions in my prior career life as a Bank Examiner as examples.
During the interview, I was asked to talk about factors that could get a bank to the point where UniBank got and why the local banks are the ones that are stressed. I mentioned that these factors are both internal and external. I explained that banks are more susceptible to adverse impacts of operational shocks as well as those from external factors when they have: a) weak corporate governance standards, Risk management and internal control mechanisms, b) limited amounts of capital resources, which leaves little cushion against risk-taking; and c) lower growth rates due to a combination of a) and b) above. I explained that transaction ticket sizes and hence profitability are linked to the size of capital employed in the banking business and also, if due to weak controls, a bank accumulates or piles up non-performing loans, it will have to make provisions for them, thereby reducing their profits and ultimately the bank’s rate of organic capital accumulation. I explained further that banks that have weak systems as mentioned in a) and b) above are even more susceptible to adverse occurrences in the external environment (industry) and from the larger economy. Banking institutions are the key channels of financial interrelation, hence, they filter policy impulses to the real sector and at the same time, receive feedback in the form of results from the real sector on the impacts of changes in key economic variables. When something significant impacts the larger economy, either from external or domestic sources, it tends to have lagged effects on banks’ performance through some pass-through mechanisms. External economic factors are normally translated through exchange rates. I explained further that fortunately in Ghana, we do not have sophisticated tradable cross-boarder, asset-backed financial instruments, so banks are insulated from direct impact of external shocks such as the sub-prime bubble bust in 2007/8, which caused financial melt-down in the USA and other European countries. In Ghana, its impact was managed through policy at the macroeconomic level. Further, I said domestically, the performance of the larger economy also has a lagged causal effect on financial institutions. For instance, if a sector is hit by a problem such as the past energy problems, which mostly affected industry; or say the last fall armyworm infestation (if it affected food production), then a bank that is significantly exposed to the affected sectors may experience huge non-performing loans over a period. If these are not managed well by the banks and the capital cushion is also little, then the bank will have a problem. Another issue that affects the pricing of assets and liabilities and potentially affects credit administration and the ease of asset recovery is the general liquidity condition of the market. I added that these factors are also linked to the robustness of the risk management function of a bank and its ability to assess/forecast and effectively manage the inherent risk.
Asked about whether the external factors affecting banks’ performance would be easing soon, I responded that some of the factors are cyclical and others seasonal, which means they have the tendency of recurring and as such must be dynamically assessed and managed. If the Central Bank is successful in increasing the capitalisation requirement for banks, the higher capital would serve as bigger cushion for banks against adverse impacts. Additionally, the recent liquidations and active interventions of Bank of Ghana in recent times may serve as a deterrent to other banks against unwarranted risk-taking and push them to act more responsibly in the market.
I reiterated however that, as indicated by the Central Bank, what has happened at uniBank, is not a liquidation. I can take this opportunity to explain more. Technically, liquidation of a bank, according to Bank of Ghana’s prudential norms, is the official withdrawal of a bank’s operating license with all its operational privileges due to it being technically insolvent and illiquid. Mostly, the situation in such a bank would have been assessed by the Bank of Ghana as endemic/entrenched, posing potential systemic risk to the industry. The Bank of Ghana’s action on UniBank, however, is different. It involves the removal of the bank’s management and the institution of a system of management, usually temporary, in an attempt to fully assess inherent risks and implement corrective measures where necessary after the supervisory authority has identified significant weaknesses and deteriorating conditions in its assessment of the bank. Again as example, I mentioned that I have witnessed three bank liquidations in my past life as a bank examiner and participated in one of them.
I often say that the Central Bank has come a long way in its practice of building confidence in the banking system, which is the bedrock of its stability. This is so dear to me because I have in the past played key roles in aspects of the achievement of this enviable success, especially in charting the path of Financial Stability analysis in Ghana. So I indicated further, that “wearing my financial stability cap”, I consider inappropriate reportage that potentially causes panic in the financial system as unfortunate.