THE LAW SPECIFICALLY REQUIRES THE CENTRAL BANK TO APPOINT A RECEIVER AND TAKE REMEDIAL ACTIONS AGAINST BANKS THAT HAVE NEGATIVE CAPITAL ADEQUACY RATIOS.
Bank of Ghana has revoked the license of two commercial banks - UT Bank and Capital Bank.
The action has been triggered by the inability of the two banks to turn around their negative capital adequacy position which has lingered on for some time now.
In simple language terms, the action has been taken against these affected banks due to their “terrible” financial situation and their inability to perform within the banking industry.
THE BANK OF GHANA WAS FORCED TO TAKE THIS ACTION BASED ON PROVISIONS OF THE CURRENT BANKING AND SPECIALIZED DEPOSIT TAKING INSTITUTIONS ACT.
It is believed that the continued encouragement of the operations of these institutions could endanger the banking industry as a whole and hence the action that was taken against them over the weekend.
The Bank of Ghana was forced to take this action based on provisions of the current Banking and Specialized Deposit Taking Institutions Act.
In the law, Sections 104-107 discusses prompt corrective actions for banks with various degrees of capitalization requiring the regulator to step in after 90 days or 100 days, if the bank in question fails to recapitalise or submit to the Bank of Ghana, a capital restoration plan.
Also, in Section 123, the law empowers the Central Bank to REVOKE THE LICENSE OF ANY BANK THAT IS INSOLVENT OR LIKELY TO BECOME INSOLVENT WITHIN THE NEXT 60 DAYS.
The law specifically requires the Central Bank to appoint a receiver and take remedial actions against banks that have negative capital adequacy ratios.
Other analysts also say that the Bank of Ghana went ahead with this action because they were not satisfied with the capital restoration plans brought forward by these two banks, and the law grants them the powers to go along this path if it is not satisfied with proposed plans from the ‘sick’ banks.
The same banking law requires the election of an official administrator, either appointed by the Central Bank or a bank elected by the Central bank, to handle resolution proceedings by taking stock of loans that remain in good standing and deposits and take hold of the accounting books of the bank that has had its license withdrawn.
Observes in the Industry are e also attributing this quick action from Central Bank to some form of a subtle pressure coming from IMF to quickly deal with the situation of the affected banks before the IMF’s board meeting in Ghana which is slated to come on at the end of August 2017, or the first week in September 2017.
This action is likely to be tested by the Board for its overall consistency and long term impact on the economy.
Implications of the Action
This could mean that legally the two banks cease to exist as a bank, from today, Monday, August 14, 2017, that is why GCB has been appointed to take over the assets and liabilities of these two banks. This could possibly mean that all the workers, good loans and even the bad debts would be taken by GCB.
Government and SSNIT, the two major shareholders of the Bank have given their blessing to the move.
This would see the government take on the bad loans, a move that will worsen the overall fiscal situation. If the government, on the other hand, decide to issue bonds to cover the bad loan position of Capital Bank and UT Bank, so that, it does not affect the financial position of GCB, there would be implications for the country’s overall unfavorable debt position.
Since the two banks would legally cease to exist, GCB would also take up any contractual arraignment with its clients including good and bad loans. However, in the case of UT which is a listed entity, this development could possibly result in the institutions de-listing from Stock Exchange.