In Parts 1 and 2, the article discussed the policy thrust of BOG’s recapitalization and restructuring of Ghana’s Universal or Tier 1 banks.
They noted that the measures often appeared to be ad hoc and spontaneous. Consequently, most of the unplanned bailouts are at a high cost to the overall economy, taxpayers and stakeholders such as domestic investors, depositors, pension fund contributors, employees and families.
In final Part 3, with benefit of hindsight, we draw lessons from (a) domestic (e.g., bailout loans/spending, bad banks, ESLA, NPART/GAT); and (b) global (i.e., global financial crisis) experiences; to advocate a bank crisis and resolution blueprint that will be more orderly and less stressful in future. The package should have early warning signals, derived from BOG’s bank supervision and special audits programs that form the basis for the measures in the current exercise.
Lessons and alternative proposals
Bank of Ghana (BOG) has issued three (3) “big bang” edicts within a decade on bank recapitalization-cum-restructuring. While it may be norm, our fiscal perspective is for a comprehensive and incremental approach in future, taking account of the impact on the economy and stakeholders.
- Tiered-banking: This notion lets banks move seamlessly within “bands” for the 3-tier banking structure—universal, savings and loans (S&L), and microfinance/rural banks. Domestic investors can opt for downgrades and, probably, prefer this to compulsory windup and loss of ownership. It is flexible for banks to re-strategize and revert to lost status—during national crisis and austerity. It is an incentive to graduate but also promote efficient “niches” around lower tier bands.
- Annualized recapitalization targets: If we retain the policy recapitalization by banks, we could combine it with annual targets over a given period (e.g., 3 or 5 years). This will allow for (compulsory) profit-plough backs, at the expense of dividends, during good times and raise equity and bonds efficiently in smaller amounts from a domestic capital market that is also growing. It will minimize cost to stakeholders and overall economy through lesser disruptions to the services sector (including financial services).
- “Too-big-to-fail” dilemma: A dilemma from the global financial crisis is the risk posed by large Tier 1 failing banks. Failure is ideal but the contagion effect includes drying credit that concurrently pulls down smaller banks and businesses. As depositors S&Ls, rural, and microfinance banks had “trapped” funds in troubled and failed “Tier 1” banks, for which MOF and BOG had to provide bailouts. These banks were “too-big-to-fail”, not because of size per se but due to the inevitable systemic risk to the economy. The cardinal lesson from the EU and US, origin of the expression after the failure of Lehman Bros, is to set up efficient bank resolution and restructuring mechanisms with “early warning signals”.
- Bad Banks: Ghana had an ERP/SAP era Non-Performing Assets Recovery Trust (NPART)—a “bad bank” that pooled, managed and recovered NPLs from the 1970s depression. We can set up a similar structure to pool the actual and contingent liabilities from the bailouts and takeovers (e.g., GAT and GCB). Its refined processes should ensure orderly bank resolutions that safeguard investments and minimize excessive costs and disruptions. These flows from ESLA can be used to support the bank.
- Deposit insurance: A lot of work has gone into passing a Deposit Insurance law, with lessons that include the US Federal Deposit Insurance Scheme (FDIC). The next stage is to fund it to start operations, augmented with fees from financial sector institutions. This is necessary to protect depositors up to a limit, especially small savers who tend to bear the full brunt of the social cost of bank failures.
- PAMSCAD-type social intervention: The Program of Action to Mitigate the Social Cost of Adjustment (PAMSCAD)—lampooned for its catchy acronym—was a useful ERP/SAP era social intervention plan in those crisis-period. We can refine and sustain the concept for special crisis, including austerity and banking crisis, to augment others in the health and education sectors. This will also complement the deposit insurance scheme.
- Non-core banking activities: The restructuring exercise shows that BOG support and depositors’ funds may be diverted excessively to related entities in holding company structure. While some experts have questioned the extreme case of separating these non-core banking activities under the US’s Glass-Steagill Act emanating from the 1930s financial crisis, BOG must issue guidelines that prevent the risk that holding-subsidiary company structures pose to the banking sector and the economy.
These proposals consider that MOF is struggling to recapitalize some state-owned banks (i.e., ADB and NIB)—after GCB’s imposed takeovers, it has created the Ghana Amalgamated Trust (GAT) to raise funds. GAT will use pension funds to underwrite loans and contingent liabilities for “well-managed” (yet troubled) public and private banks. The GAT loans, using the book-building method in a relatively shallow market, will inevitably crowd-out funds for alternative private and public sector investments, including the budget.
Ethics, conflicts, politics, and sanctions
Some reforms have highlighted judicial, ethical and political issues that should be analyzed to enrich the processes for supervision and structural change.
- Ethical issues: BOG is streamlining its ethics procedures to protect the integrity of its authorization and bank supervision activities. The monetary authority has stated that this could involve sanctions. This useful organizational step should complement the outcomes of ongoing judicial and administrative actions affecting public servants who must be impartial in performing their professional duties under the Constitution.
- Local investors: Given local content laws and policies in various sectors, there are concerns that almost all the investors affected by BOG’s consolidation, liquidation, bad bank, downgrade, and trust decisions are domestic and sovereign. They include ADB, Beige, Capital, Heritage, NIB, Premium, Prudential, Sovereign. UMB (undergoing its second restructuring and cash infusion), Unibank, and UT. GCB appears to stand tall but weighed by its absorption of Capital and UT Banks. The local banks that cleared the Ghc400 million bar had infusions of external funds.
- Political bias: Some BOG decisions are under scrutiny, as harsh, victimizing and biased against majority of domestic investors, from a similar political orientation. The offences relate to alleged misapplication of BOG bailout funds and diversion of depositors’ funds for related but non-core banking businesses. BOG’s explanation that the measures are from audit and supervision exercises has not assuaged strong sentiments from officials of the past administration.
- Conflict of interest: Some commenters and victims of the restructuring have leveled incompetence and conflict of interest charges against the Big Four Accounting Firms and some bank officials. The accusations stem from their positive (but often qualified) audit reports that did not help in identifying the faults they now preside over in various capacities in the restructuring process. We note that BOG is streamlining its ethical processes while some of these cases are in the courts.
Central banks are deemed to be non-partisan entities in any country, even if in practice, leaderships tend to alternate with political persuasions—through resignations and non-renewal of tenure. Hence, citizens expect BOG to guard against political bias in the discharge of its extensive monetary and financial mandates.
Regulator for financial sector
The Government has set up a Financial Stability Council (FSC) with majority of members being the regulators with oversight of the financial sector. Besides BOG that is implementing the restructuring, some of them head agencies that have pledged public funds for the bailout (e.g., NPRA). A second factor in assessing this policy move is the extensive monetary and financial responsibilities of BOG.
Despite BOG’s statement about bringing closure to the restructuring program, perhaps for the Universal Banks, we draw attention to similar policy for the Savings and Loans (S&L), Microfinance, and other financial sector institutions. Secondly, we not the recent announcements by Ministry of Finance and National Insurance Commission on recapitalization moves for the insurance sector.
We join the view on initiating a debate on the establishment of a Financial Services Authority (FSA) with direct accountability to Parliament. However, we hold the view that this should not affect BOG’s autonomy on monetary policy, except to ensure that it is also accountable to Parliament (as argued later). Hence, the FSA will oversee sectors such as insurance, equity markets, and stock exchange. This step, in consonance with increasing complexity of our development, is to promote more accountability, oversight, and responsibility for core functions.
Role of Parliament
As noted, many of the restructuring measures are fiscal or quasi-fiscal and involve the use of public funds that should form part of the budgetary process. Hence, Parliament must exercise its constitutional mandate and approve the policies with significant impact on the economy and, where necessary, approve and appropriate loans for bailouts.
- Approval of policies: The authorities scatter some policy measures in the 2018 and 2019 Budgets but exclude others that are ad hoc and incremental. For example, the release of MOF’s January 2019 GAT statement came within days of Parliament approving the 2019 Budget. In contrast, the House debated, approved, and enacted the ESLA policy and law in December 2015 after the 2016 Budget.
- Approval of loans: Under Article 181, the Constitution gives powers to Parliament to impose taxes and approve public loans and financial transactions. Besides the ESLA Bond, some loan agreements have been through Parliament but without specificity on their use for bailouts. It seems that others have not been sent to the House, including the use of pension funds to underwrite the restructuring.
- Appropriation of public funds: We have just heard about the use of Pension funds to support the restructuring without recourse to the House as part of the FY2019 Budget. In other instances, ESLA and PRMA funds may have been applied to alternate uses, including bailouts, without approval and appropriation.
- Oversight role: In several countries, including US and Britain, the central bank is accountable to Parliament—with their Governors or Chairmen appearing before House Select Committees periodically, usually quarterly, to account for their stewardship of monetary policy and implementation.
- Power over other regulatory authorities: Another important issue is the presumed BOG authority to override the authority of other regulatory and supervisory institutions (e.g., Registrar General). Even if such authority exists, it is important for the agencies to coordinate their activities under a clearer statutory and regulatory framework.
We cite the ESLA Bill to illustrate our point. A comprehensive Bill was prepared and approved by Cabinet and Parliament in FY2015—after consultations among MOF, Ministry of Power (MOPw), Ministry of Petroleum (MOP), Ministry of Roads and Highways (MRH) and their regulatory agencies (e.g., Petroleum Commission and Road Fund). Besides the energy sector and enhanced road levies, the reorganizations, debt restructuring, as well as the spending and revenue accounts mechanisms were submitted to Parliament and approved as part of the Bill.
We have consolidated information from different sources to propose a comprehensive view of recent recapitalization and restructuring policies. After three (3) major episodes in less than a decade, we must assess and formulate an improved policy framework that takes account of buffers to minimize the economic and social impact.
A uniform one-size-fits-all policy for over thirty (30) banks minimizes the varying capital bases, capacities, and focus. Even at qualification, the “newly-minted” twenty-three (23) Tier 1 banks will have a set with the Ghc400 million bare maximum while others exceed it by substantive amounts. Given the difficulty of increasing capital, in excess of 500 percent in a decade, we propose alternatives to the current policy.
The past mandatory increases likely bear the seeds for some ethical and financial engineering that BOG is keen to cite to justify its current actions. If future edicts do not consider domestic and external factors affecting the economy, another set of chickens may come home to roost. Given the social and fiscal cost of correcting complementary but disruptive monetary policies from audits and bank inspections, we must separate them from routine recapitalization to avoid collateral damage to stakeholder.
Given the high stakeholder costs, Parliament must review BOG’s “independent” monetary policy mandate and, possibly, set up a more authoritative Financial Services Authority (FSA) to replace the Financial Stability Council (FSC). The majority of FSC members are the sector’s regulators and seems self-regulatory. An FSA is a pragmatic step in the evolution and maturing of a relatively complex financial sector and consistent with setting institutions to consolidate our Middle-Income Country (MIC) status.