Banks bailout: gov’t receives backing amidst criticisms

Adnan Adams Mohammed

Some financial journalists has shared their varied opinion on the assertion of Prof. John Gatsi supporting the government new intervention to bailout some six indigenous banks with about GHC2 billion Special Purpose Vehicle.

 Although, Prof Gatsi questioned the timing of government’s intervention to bailout the six local banks, aimed at supporting these banks meet the Bank of Ghana (BoG) GH₵400m minimum capital requirement, he supported the new intervention of government as against the previous interventions the government used to takeover or nationalize some seven indigenous banks.

“This approach to protect local banks was the prudent approach proposed to government and Bank of Ghana since 2017 but both government and BoG refused” he said in an interview on accra based radio.

However, his position has been met with varied argument by some financial journalists in the country.

Mr Llyod Evans of IFEJ has totally disagreed with the assertion of Prof Gatsi. Mr Evans do not understand why should the taxpayers money be used to support institutions with poor corporate governance. He added, “I just don’t want to go into details.”

Also, Mr Isaac Aidoo, a senior financial journalist with the Finder Newspaper, concerted to the argument of Mr Llyod Evans, saying that, “they are private businesses albeit indigenous…. and their Heads’ must be held liable for any regulatory infractions….not the taxpayer

However, Beatrice Torshie Torto, the programs coordinator of IFEJ disagreed with the two financial journalist making reference to the US government bailout of some financial institutions for the financial crunch some ten years ago, she said, it is a recurring phenomenon which can be managed not curbed. The lessons by the banks consolidated are enough.

“Those bailed will learn from this lesson and reduce the risk of bad corporate governance in their dealings”, she expressed.

Many financial analyst and economists have affirmed that, the financial sector is on it’s knees with the happenings there not being good to the economy. The robustness of business growth and development is grinding to a hold, the private sector is ceasing to exist because of this. Yes, there is a huge challenge with corporate governance and the regulator must work to sanitize the sector, however there must be circumspection and where necessary a helping hand which will inure to the stabilization of the economy.

Mrs Torto, who partially agrees with Prof Gatsi intimated that, bailout does not mean those responsible to the collapsed of the banks will not be held accountable.

“I believe the government is looking more at the bigger picture whilst dealing with these corporate governance failure that seems to be eating up not only banks but other institutions as well.”

“I will like to see a regulator that does not sleep on the job and wait till things get out of hand before acting”, she indicated.

Yet, Mr Isaac Aidoo, who is still not convinced with the government bailout to about six indigenous bank explains that, “a lot of rot has gone on in the banking system…as we have been made aware of which were perpetuated in defiance of the laws regulating the industry, of course not without the complicity of elements within the regu

latory space. It may not have been wrong for the bailout, but shouldn’t we hold those responsible for the mess accountable and possibly retrieve from them whatever was used for the bailout?”

But to his surprise, those who supervised or created the rot, we hear have been transferred away from where they used to be. “Can we trust that, those who directly were responsible for the mess will be investigated?” he quizzed.

Meanwhile, the government has justified its decision to back financial support arrangements that would raise the minimum capital requirement levels of seven local banks.

Last year, the Bank of Ghana raised the minimum capital requirement of commercial banks from GH¢120 million to GH¢400 million and set a December 31, 2018 deadline.

According to the central bank, some 22 banks have so far met the new minimum capital requirement, but some local banks have been struggling to meet it.

The government says, it was forced to support the planned bailout arrangement – which is private-sector led – because should the banks fold up, it will have a devastating effect on the economy.

The struggling local banks, according to the government, are making a significant contribution to the economy in terms of payment of taxes and providing employment.

For instance, the source noted that “we were worried about the direct and indirect job losses coming just after the collapse of the seven commercial banks.”

It also considered the fact that, if these banks are made to operate as savings and loans companies because of their inability to meet the new capital requirement, it will restrict a lot of business activities which would in turn impact negatively on their earnings and jobs.

But, according to Prof Gatsi, the refusal of BoG and government to bailout the local banks long ago deepened the difficulties of these banks over the period. The greatest challenge created by the previous approach used by the BoG and government is low confidence leading to unending panic withdrawals.

“Most of these banks are now in liquidity and confidence trap. It is unfortunate these banks and their workers have to suffer the worse form of psychological trauma before this bailout which was suggested long ago as a solid alternative.

Those who follow the developments in the financial sector will not question the principles of transparency, disclosures and skewed benefits about the bailout”.

He also indicated that government needs to review the approach to single treasury account policy which has moved funds of some state institutions from local banks.

The review to reverse a certain proportion of such funds back to the local banks will contribute to activating liquidity trust and restoration of confidence among local banks. Prompt payments of arrears especially to government contractors both past and current can revive liquidity and credit in the banking system.

Prof Gatsi however, clarified that, a government bailout to local banks is not free money, therefore should necessarily and indeed be accompanied by management and board restructuring. However, the government should also indicate to workers of the recipient local banks whether or not this bailout will be followed by retrenchment and other labor rationalization measures.

Moreover, Maxwell Akilare Adombila of Graphic Business has also added a commentary to the argument. He opined that, as a country, we have all agreed, unanimously that if there are challenges in the banking sector, which there are, (using the results of the 2015 Asset Quality Review commissioned by the IMF), then they must be addressed holistically through strategic interventions by the government and BoG.

“What we have not agreed on in unison is the mode of intervention, the method to be used to address those challenges and to what extend the government and BoG, who hold the sway in this matter, should be involved in the solution. This, I think is the basis of Prof. Gatsi’s take”, he said.

Among the many options available, the BoG decided to use Purchase and Acquisition (P&A) (call it nationalization) to address the challenges with UT and Capital. That cost the state in excess of GHC2.2 billion, an amount that impacted on our debt and debt to GDP ratio. It introduced toxic assets into GCB and that impacted on the bank’s liquidity position, profitability and general soundness (GCB Bank has often explained these off but it’s un/audited accounts show otherwise). However, the existing assets in GCB prior to the coming onboard of UT and Capital help to neutralize (to extend) the impact of the P&A on GCB’s liquidity position and the contagion on the banking and financial sector.

Somewhere August, last year, the government used an accelerated form of the initial solution to heal similar sicknesses of five other indigenous banks, nationalizing them into a bigger one, Consolidated Bank of Ghana (CBG), and spend in excess of GHC8 billion on that exercise. Same as in the case with the GHC2.2 billion expended in the initial intervention. These are public funds and added to our debt books to affect the debt to GDP ratio (although, the BoG had said otherwise).

The beneficiary of the P&A, CBG, was saddled with post-consolidation challenges, including liquidity and general soundness. But unlike GCB, CBG didn’t have existing assets that could suck out the impact that the liabilities from the five troubled banks, so had liquidity challenges (CBG unable to pay meet withdrawals, a downgrade in investments and a general numbness in business transactions with it) and these spread into other banks (banks that had contracts with one or more of the collapse), investment institutions (fund managers in particular) and NFIs that had contracts with one or more of the troubled banks.

In effect, we saw core liquidity from BoG data dropping, deposits and loans and a advances virtually stagnating (check BoG summary data for Nov 18). Jobs were lost, more than 3,000 direct jobs, and, possible, tripple as high indirect jobs.

In total, the option that BoG and by extension, the government used cost the state in about GHC12 billion as reported by the BoG, led to 3,000 direct job losses, reduced liquidity flow and created a confidence crisis using the Ghana Stock Exchange (GSE) performance as the gauge.

But, with Prof Gatsi’s assertion, saying that, at the time the government was using the option for Capital and UT bank and CBG, it was being told to use the option it now wants to use for the reported seven banks, which is the state taking equity in the troubled banks, clean them up with liquidity and good governance and later either merge them, sell to a stronger private investor or  list them on the GSE, using its power as a shareholder (possibly a majority shareholder). With this, it would have spent the same amount of public money it spent anyway but in a different way. (The Lloyds Bank of UK is the result of this option for/of state intervention in troubled banks)

Considerably, can it be said that, Prof Gatsi’s assertion would have also amount to using taxpayers’ money to pay for the private indiscipline? The answer is no. Because the state, through equity was going to get the ‘indiscipline shareholders’ to behave and clean up the ‘mess’ similar to what CBG is meant to do.

Again, would it have encouraged/entrenched the poor corporate governance that supposedly brought these banks to their knees? This a question that needs to be answered by asking how the nationalisation of the seven banks solved corporate governance in existing banks and the beneficiaries of the P&A.

It must be noted that, the current government bailout has an exit strategy that could lead to the merger of some or all the beneficiary banks in line with BoG and government resolve to create strong, big and properly capitalised indigenous banks.