A banking consultant, Dr. Richmond Atuahene, warns that banks operating in the country could face insolvency if the International Financial Reporting Standard (IFRS) 9 is applied strictly, following their participation in the Domestic Debt Exchange Programme (DDEP).
Already, indications point to the fact that foreign-owned banks, including South Africa-based Standard Bank and First Rand Bank, are looking to recapitalise their Ghanaian branches. Standard Bank is reported to have set aside 1.5 billion South African Rand (ZAR) – approximately US$81million – to cover potential losses emanating from the DDEP.
Dr. Atuahene, in the paper co-authored with a financial consultant, K.B. Frimpong, titled ‘Assessing the Domestic Debt Exchange Programme and Fair Value Accounting Impact on Local Banks’ Solvency’, argued that more than 30 percent – nine banks out of 23 – could go bust if the IFRS 9 is not temporarily suspended.
The losses could be due to a combination of coupon or interest rate reduction and maturity extension with below-market coupon rates, Atuahene explained.
He added that the capacity of the banking sector to absorb losses is low and that without resorting to recapitalisation from the government or shareholders, local banks will not be able to absorb losses.
The Bank of Ghana (BoG) has issued regulatory forbearance on liquidity and solvency, and standardised the accounting treatment regarding DDEP.
BoG is also spearheading the establishment of a GH¢15billion Financial Stability Fund, which is intended to serve as an additional layer of support for affected institutions, chief among them being banks.
In spite of these measures, Dr. Atuahene warns that they may not be sufficient to prevent Ghana’s banking system from becoming insolvent.
Government and shareholders need to act fast to recapitalise banks and protect the stability of the entire banking system and the economy as a whole. “We cannot afford to take any chances”, Atuahene cautions.
Dr. Atuahene highlights the potential impact of domestic debt exchange on 23 banks’ balance sheets as domestic banks hold around 37 percent of government securities.
Any loss in value as a result of government debt exposures would lead to regulatory capital impairment in banking institutions at the time of the restructuring, unless these losses have already been absorbed by loan-loss provisioning and mark-to-market accounting, which were never applied before the restructuring.
His warning comes as discomfort persists in the industry over the DDEP as vestiges of the financial sector clean-up remain.
