TWO experts in banking, Mr Eric Nipah and Nana Otuo Acheampong, have underscored the need for banks to remain solvent and liquid to be able to support national development.
They said in separate interviews that banks that were considered solvent and liquid were able to operate on their own without external support such as the Bank of Ghana (BoG’s) emergency liquidity support (ELS).
The two were speaking with the paper ahead of the GRAPHIC BUSINESS/Stanbic Bank Breakfast Meeting on May 15.
On the theme: “Liquidity and solvency management – boosting the health of banking in Ghana,” the meeting will be the second of its kind organised by the two institutions for experts to deliberate on key issues affecting the economy.
The discussion will be led by the Governor of the BoG, Dr Ernest Addison.
Other panellists at the forum include the Senior Country Partner of Pricewaterhouse Coopers (PwC), Mr Vish Ashiagbor, and the President of the Ghana Association of Bankers, Mr Alhassan Andani.
Nana Acheampong expressed the hope that the BoG would give a proper update on liquidity and solvency in the banking sector at the meeting.
“It is the Banking Supervision Department of BoG that has update on the sector and that is what the governor will do on May 15,” he said.
Impact on collapsed banks
Asked if liquidity and solvency played a major role in the collapse of UT and Capital banks, Mr Nipah, who is a Senior Partner at PwC, said: “The licences of these banks were revoked because of severe impairment of their capital as a result of liquidity and solvency challenges.”
He noted that although the collapse of the two banks could be attributed to several factors, it was worth mentioning that solvency and liquidity played a pivotal role.
He said both banks at certain points required liquidity support from the BoG which was aimed at shoring up their operations, including their obligations to depositors.
Touching on how critical solvency and liquidity are to the banking sector, Mr Nipah said banking activities to a very large extent, revolved around liquidity and solvency.
“Liquidity refers to the ease with which assets can be converted to cash to settle obligations. Solvency on the other hand is the ability to meet short and long-term obligations as and when they are due,” he stated.
“The duty of a bank to honour its obligations to depositors at all times requires the bank to be liquid to enable it to carry out its day-to-day business. Once a bank becomes illiquid or insolvent, it cannot operate without intervention,” he explained.
Gaps in banking sector
When quizzed on the gaps in the country’s banking sector, the senior manager said there was no perfect institution and hence the bottlenecks in every institution must be addressed in order to improve upon the effectiveness of the institution.
He stated that the bottlenecks in the banking sector had created gaps between the management of banks, the regulator of the industry and customers.
“Each has a part to play to ensure that the industry thrives. The banking sector currently faces challenges which stem from both internal and external factors,” he pointed out.
He said the internal challenges included inadequate governance structures, as well as ineffective and in some cases, poor risk management policies and procedures which bedevilled good banking business and practices.
He noted that the external issues included regulatory challenges encountered by the central bank in its administration and supervision of institutions in the banking sector.
“A key function of the Bank of Ghana is to ensure that at all times, banks operate within the prudential requirements placed on them in order to safeguard the interests of their customers and to ensure that the banking industry is stable and resilient,” he explained.
Basel II and III
Commenting on the implementation of Basel II and III, Mr Nipah said its implementation would lead to enhanced risk management and financial stability in the banking sector and make it possible for the regulator to better understand and evaluate the risk profile of each bank.
The BoG’s Capital Requirement Directive (CRD) was implemented on January 1, 2018 and banks and deposit-taking institutions are required to report under the CRD from July 1, 2018. — GB