Urgent action required to address early distress signs in banks – BoG

The Governor of the Bank of Ghana (BoG), Dr. Ernest Addison, has enjoined boards and shareholders of banks and other deposit-taking institutions to act quickly to address early signs of distress to mitigate the risk of failure, which has ramifications not only for depositors, but also for the stability of the entire financial system and the economy.

He made this call at the second induction ceremony of insolvency practitioners organised by the Ghana Association of Restructuring and Insolvency Advisors (GARIA), and noted that prevailing macroeconomic conditions have heightened the need for vigilance and swift action on the part of all corporate institutions, including banks and special deposit-taking institutions (SDIs).

“The bank’s macro-prudential risk assessment of the banking sector indicated the emergence of signs of spillovers from the current macroeconomic conditions characterised by high inflation and rising interest rates on the banking sector. In particular, pressure on the solvency and liquidity of banks have increased, and the bank is closely monitoring these,” Dr. Addison said in a speech read on his behalf by the Head of BoG’s Resolution Office, Elliot Adu Amoako.

Dr. Addison pointed out that the Basel Core Principles require supervisory authorities to have adequate legal powers to impose prompt corrective action on weak institutions to give them a chance of recovery within a reasonable timeframe. Failure to recover within this timeframe, he said, will require adequate action to restore these institutions under the special resolution regime.

The BoG, earlier this year, noted that the banking industry had begun to show signs of strain as a result of the current conditions. The industry’s capital adequacy ratio (CAR) had decreased to 16.6 percent in December 2022 from 19.6 percent the previous year, albeit remaining above the prudential floor of 13 percent.

The central bank attributed the losses to mark-to-market investments, an increase in risk-weighted assets and the depreciation of the cedi on foreign currency-denominated loans.

Profitability also declined as higher impairments on loans and rising operating costs weighed heavily. The industry’s post-tax profit contracted by 18.9 percent year-on-year, amounting to GH¢3.9billion in December 2022 while operating expenses rose by 32.2 percent during the same period under consideration, even as inflation remained at more than five times the central bank’s upper target limit.

Dr. Addison further stated that while the BoG has put in a number of reliefs, including the establishment of the GH¢15billion Ghana Financial Stability Fund, it will not hesitate to rely on the expertise of licensed insolvency practitioners if the need arises.

“I would like to emphasise that the resolution of banks and SDIs falls under the Special Resolution Regime provided by Banks and SDIs Act 930. The Bank of Ghana would, without hesitation, rely on licensed professionals under GARIA in the event of any future episodes,” he said.

The central bank’s chief welcomed the addition of new insolvency practitioners coupled with the Corporate Restructuring and Insolvency Act, 2020, (Act 1015), which he described as an “important addition to the framework for the establishment of a well-designed insolvency regime”.