BoG spent over ¢5bn to support 'distressed' banks in 2 years

Source: Ghana| Myjoyonline | Joy Business
Date: 19th-august-2017 Time:  11:27:03 am

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The Bank of Ghana (BoG) may have spent over ¢5 billion in supporting “distress” banks, JOYBUSINESS gathered after going through the Central Bank’s financial reports over the past three years.

This was contained in the Statistical Bulletins of by the Central Bank which highlights movements in the Assets and Liabilities of the Banking System.

These Statistical Bulletins are reported monthly and they provide full aggregated information on the Assets of the Commercial Banks and that of the Central Bank.

Although the aggregated information always presents difficulties in distilling key information, a close examination of the movement in the numbers presents an interesting development.

Using an average exchange rate for the two year period 2015-2016, over which the increase in liquidity support to the banks was observed, the amount injected by the Central Bank in supporting these banks was in excess of $1.3 billion.

Concerns about this arrangement

Analysts are beginning to ask why the Central Bank extended such huge money to these banks instead of using it to develop critical financial infrastructure for the entire financial system.

It is not clear for now whether these funds went to all the banks or only to those commercial banks said to be in financial distress. 

The picture could be clear soon clear soon on this issue, after further engagement with these banks and a careful look at their balance sheets.

How did it start?

By definition the lender of last resort function always rests with an institution, usually a country's central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse.

The Central Bank under its lender of last resort function always carries out “overnight” lending to commercial banks.

These overnight lending are just for a day and in some cases, the maximum number of days could be for a period of two weeks.

While some analysts say this is not a big deal, others are of the view that for these lending to remain in perpetuity on the balance sheet of the commercial signals a big deal and should have raised red flags in the industry.

However, a key observation here is that the spike in the support to the banks which started in August 2014 lingered on for a two-year period before metamorphosing into a long-term loan facility from these banks.

The BoG’s line item of claims by Deposit Money Banks (DMBs) showed a sharp increase from ¢487 million to over ¢1 billion in June 2015 and increased to ¢5.2 billion as at January 2017.

However, the May 2017 numbers showed that the amount has reduced to about ¢4.6 billion.

Challenges in recovering the funds

It is not yet clear also at this stage what informed the Central Bank to begin re-classifying these facilities as long term loans.

Attempts by the Central Bank to recover these facilities on many occasions have proved difficult and some analysts within the industry are saying these are already bad loans and monies gone down the drain.

'Distressed' banks benefited from support 

JOYBUSINESS can confirm that UT and Capital Bank got a significant amount of these funds to help them in their daily operations.

Sources say another bank said to be in distress (name withheld), is also said to be on lifesupport.

JOYBUSINESS can also confirm that out of the initial nine banks mentioned in the Asset Quality Report of the Bank of Ghana as being undercapitalized, two of them were foreign owned financial institutions.

Categorization of the distressed banks

Banks in distress have been grouped under various levels of capitalization. Those that are insolvent and having negative capital adequacy ratios (UT and Capital Bank), those that are ‘Significantly Under Capitalized” and those that are Undercapitalized Banks (names being withheld for now).

Issues with how the support was disbursed

There are also questions about these loans were even extended to the banks by the Central Bank, as there are even speculations that some officials of the BoG might have been compromised in the review processes leading to the determination whether a particular bank qualified for Liquidity support.

As the stories unfold and officials of the affected banks begin to talk and provide critical evidence, more light will be thrown on what actually happened.

Initial responds from Bank of Ghana

According to officials of the Bank of Ghana, its operations of liquidity support is mandated under its lender of last resort function.

The practice where funds are given to banks as loans should not be seen as ‘free cash’ and that these would ultimately be repaid back to the Central Bank.

On whether the loans extended to banks whose licenses were revoked this week, this is what a senior official at the Central Bank intimated: “we would get the money that was extended to them, even if their assets may have to be sold ”.

The official also adds that the reduction in the numbers as at May 2017 showed that the bank is making progress in recovering these funds.

Reponse from some commercial banks

For some of the commercial banks in question, they were forced to borrow from the Central Bank because of its own regulatory requirements, which requires them to keep a fraction of deposits at the Central bank.

They have argued this practice should be seen as normal. Some of the distressed banks have told JOYBUSINESS that they are working hard to get off this liquidity support from the Bank of Ghana.

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