Graphic Business News

Deposit insurance thrives on strong prudential norms – Legal practitioner

By: Daniel Ofosu Dwamena
Mr Alhasan Andani (left), President of Ghana Bankers Assosciation in a discussion with Dr Ernest Addison, Governor of BoG
Mr Alhasan Andani (left), President of Ghana Bankers Assosciation in a discussion with Dr Ernest Addison, Governor of BoG

A Partner at Bentsi-Enchill, Letsa & Ankomah (BELA) law firm, Mr Seth Asante, has called for proper prudential regulations and banking supervision to complement the deposit insurance (DI)scheme due to be implemented later this year.

The measures are needed to augment the safety net that DI is envisaged to give customers and the financial services sector in general.

He explained that DI alone was limited in protecting everybody who deposited funds with the various deposit taking institutions (DTIs).

“DI is also unable to play any role in prudential risk minimisation and bank resolution functions,” Mr Asante said at the Graphic Business/Stanbic Bank Breakfast Meeting on February 6.

On the theme ‘Deposit insurance: A catalyst for a stronger banking sector,’ the programme brought together stakeholders in the financial services sector to deliberate on how to make DI, a protection scheme for small deposits, successful.

The scheme became compulsory in the latter part of 2016 after the Ghana Deposit Protection Act, 2016, Act 931, was passed.

Commenting on how to make DI a success, Mr Asante said, the BoG needed to augment the scheme with improved prudential norms and a tighter supervision role.

“We need to look at the financial standing of banking institutions in a variable tool of measures in light of the four models of banking supervision because DI cannot protect everybody since the limit is very small.”

“Without a proper and effective banking supervision, the DI will fail,” he explained.

He said an effective DI system was dependent on macroeconomic stability, resilient banking sector, strong prudential supervision and an effective banking resolution framework.

Additional mechanisms
Mr Asante, who is also the Head of Finance Institution and Capital Markets Practice Group at the law firm, added that the increase in the minimum capital requirements and proper corporate governance were some of the additional tools needed to augment DI to protect the financial system.

He added that there was real danger in DI leading to moral hazard, as it increased risk taking which could make depositors think they were not protected.

He, however, explained that a properly designed DI scheme would remove the incentive of panic runs on banks and lack of confidence.

“A DI scheme should strike the right balance. It should not provide an incentive for depositors and regulators to ignore excessive risk taking by banks,” he added.

Another supervisory body
When asked whether the country needed a separate authority that is independent of the BoG such as the Financial Services Authority in the United Kingdom, to oversee the operations of DI, Mr Asante said, “ we don’t need that. All that needs to be done is for the Bank of Ghana to strengthen their supervisory role.”

He said there was no need to restructure or take away the already existing regulatory authority from the BoG, and described it as immature.

He, however, explained that there was the need for the BoG to give a little more attention to its supervisory function.

“We should be careful not to make certain conclusions based on what other countries implement. I think our structure is efficient, however, much more work needs to be done on the supervisory angle,” he added. –GB