Ghana’s banking sector has over the years witnessed many reforms aimed at addressing new, emerging challenges therein. The recent experiences from the revocation of seven banks’ licences within the period (August 2017- August 2018) have given the regulator pointers to some weaknesses which need new reforms to minimise the risks of re-occurrence.
So far, the Bank of Ghana has released several new directives. These include the Capital Requirement Directive, Corporate Governance Directive, the Fit and Proper Person’s Directive, the Cyber and Information Security Directive (CISD), and the Financial Holding Companies Directive. The Financial Holding Companies Directive, for instance, seeks to facilitate the consolidated supervision of financial institutions and address the nagging issue of related-party transactions.
Again, to augment the efforts aimed at improving supervision of financial institutions in the country, government saw the need to establish a Financial Stability Council that has the objective of bringing all the financial sector regulatory bodies – the Bank of Ghana (BoG), Securities and Exchange Commission (SEC), National Insurance Commission (NIC), National Pensions Regulatory Authority, (NPRA) and the Ministry of Finance – together to collaborate toward minimising regulatory arbitrage (loopholes in each of those sectors).
At the recent National Banking Conference organised by the Chartered Institute of Bankers (Ghana), Vice-President Dr. Mahamudu Bawumia used the occasion to reiterate government’s plan to establish the Council. His views were buttressed by the Bank of Ghana Governor, Dr. Ernest Addision, at the Institute’s Dinner Dance in Accra.
Laudable as this reform-initiative is, and re-echoed at the backdrop of the over-GH¢10billion banking sector bailouts, curious minds have begun to think aloud and across borders. The exercise is to help find out the models adopted by other countries from their experiences to mitigate such systemic vulnerabilities which result from financial crises.
The US Model
The Financial Stability Oversight Council (FSOC) was established by an Act (emphasis mine) in 2010 by the United States federal government with these three (3) mandates (as cited verbatim):
- Identify the risks to financial stability of the United States from both financial and non-financial organisations
- Promote market discipline, by eliminating expectations that government will shield them from losses in the event of failure
- Respond to emerging threats to stability of the US financial system
To enable it to perform its functions effectively, the Council is empowered to collect information from any state or federal financial regulatory agency. It relies on the Office of Financial Research, (which supports the Council’s work) to collect information from bank holding companies and non-bank financial companies. The Council monitors domestic and international regulatory proposals, including insurance and accounting issues, and advises Congress and the Federal Reserve on ways to enhance the integrity, efficiency and stability of the US financial markets.
The Swedish Model
In the case of Sweden, the Financial Stability Council is a forum (emphasis mine) with membership from the Government, FI (Sweden’s financial supervisory authority), the Swedish National Debt Office and the Riksbank (Sweden’s central bank). The Council meets regularly and discusses matters pertaining to financial stability, the need for measures to counteract the build-up of financial imbalances; and in the event of a financial crisis, the need for measures to address such a situation. Aside from being part of the Council, the FI is responsible for monitoring the banking, securities and insurance industries.
In Mongolia, the Financial Stability Council was established in 2007 by the central bank (BoM), Ministry of Finance (MoF) and the Financial Regulatory Committee (FRC). It was set up in line with international best practices in banking, financing, accounting and auditing. The primary objectives of the Council include safeguarding the financial stability of the country by determining any kind of financial risks that emerge and managing them within the current laws and regulations (emphasis mine). It operates with a Steering Committee consisting of the Governor of the central bank, the Minister of Finance and the Chairman of the Financial Regulatory Committee. The Steering Committee meets quarterly (intervals of 3 months each year) to assess internal and external factors underlying financial risks and formulate policies to address them.
The case of India is also very relevant to the cause of helping Ghana establish a Financial Stability Council. India’s Financial Stability and Development Council (FSDC) is an apex-level body constituted by government. Even though it is not a statutory body (emphasis mine), it has the cardinal responsibility of maintaining financial stability, financial sector development, and inter-regulatory coordination along with monitoring macro-prudential regulation of the economy
In the landlocked country of Hungary, the Financial Stability Council is a decision-making body of the MNB (the central bank) established by the new Central Bank Act of 2013. Its composition is made up of the Governor with Deputies, Executive Directors and the Director-General. By the legal framework, the Financial Stability Council operates within the existing structures of the central bank. Interestingly, there exists a Fiscal Council and the central bank provides it with Public Finance Review publications for its duties. The Financial Stability Council’s scope of responsibilities include (cited verbatim) but are not limited to:
- Continuously monitor stability of the system and financial intermediation as a whole, and of the financial markets, so as to maintain stability in the system of financial intermediation as a whole.
- Analyse the risks related to certain types of institutions or products or to the spread of these which may represent a threat to the system of financial intermediation as a whole,
- Discuss strategic, regulatory and risk-related issues affecting the system of financial intermediation as a whole and issues/opinions if necessary,
- In situations threatening stability in the system of financial intermediation as a whole, assess systemic risks and decide on the measures required to reduce or eliminate such risks.
In the Republic of Ukraine, the Financial Stability Council comprises the Governor of the central bank, the Minister of Finance, the Head of the National Securities and Stock Market Commission, the Head of National Commission for State Regulation of Financial Services Markets, and the Managing Director of the Deposit Guarantee Fund. The Council’s responsibility involves detecting and minimising risks to stability of the national financial and banking systems. Decisions made by the council are, however, recommendatory (with emphasis.)
In the island country of Iceland, the Financial Stability Council (FSC) is a formal forum (with emphasis) for cooperation between public authorities to maintain financial stability. The Council serves as the venue for consultation, exchange of information and policy formulation on financial stability, and coordinates preparedness of the public authorities for financial crises.
Indeed, there are many other countries, including Belarus and Japan, which have a Financial Stability Council. It is striking to note from the countries in reference that the mandates and compositions of their Financial Stability Councils (FSCs) to all intents and purposes revolve around financial stability. But while it is backed by an Act in the US, it is just a forum in Sweden and Iceland. Whereas Mongolia’s model operates within the current laws and regulations, India’s case has no statutory backing. The FSC in Hungary works within the existing administrative structures of the central bank. In the Ukraine, the Council’s decisions are not binding on the regulatory bodies which constitute it.
Based on these empirical observations, it should not be difficult for Ghana to craft the functions of the proposed Financial Stability Council. Nonetheless, how to define the Council’s authority without it interfering in the operational independence of existing financial regulatory bodies will require broad stakeholder consultations.
What is more, Bloomberg on December 11, 2018 reported that the First Deputy Managing Director of the IMF, David Lipton, gave a warning that indicated storm clouds are gathering for the next global financial crisis and there is need for urgent action to mitigate them. It is in this spirit that the plan to establish the Financial Stability Council is in order and better late than never. What do you say?
This script was written by a Chartered Banker with a flair for feature writing. Apart from his work schedules, he edits or proof-reads corporate material for his colleagues, executive managers – including distinguished professionals working in various fields outside Banking. Through this column, his articles feature on third-party online media platforms in Ghana and outside.