Stir of bank failure: Bankruptcy affects both individuals and companies - Bernard Otabil
The Purchase and Assumption transaction that involved GCB Bank taking over some assets of Capital Bank and UT Bank has dominated discussions in the media for a while.
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This, however, is not surprising because the stock –in- trade here is cash, a “commodity” we all seem to understand very well, and also the fact that depositors have interest in the health of the institutions.
Apart from that, when the men in suits get themselves in a spot of bother and it is most likely going to have effects on households, there would be a reaction of some sort.
And that is exactly what we have experienced since the Bank of Ghana (BoG) announced the transaction on August 14, which also included a statement on the revocation of the Licenses of the two banks.
Indeed, in various columns of newspapers, and on TV and radio, many analysts, economists, academics and market watchers have expressed their views on the issue, with some looking critically at the impact of the collapse of the two banks on the banking sector.
But the question that seems to dominate the headlines is this: How did the two banks get to this point of insolvency in the first place?
Well, simply put, it is not difficult to get to a point of insolvency because if you are not able to have the right asset cover at any given point in time as a business entity, you will become bankrupt along the line, no matter how long you have been in business.
And the evidence on this is very clear. Many businesses of global repute, like the Lehman Brothers, Enron and Worldcom, have all hit the rocks and in the process have denounced the long held view that some businesses are, perhaps, “too big to fail” or possibly “too old to fail”!
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By the time Lehman Brothers filed for bankruptcy on September 15, 2008, it had been in busness for more than 160 years! This was a company started in the 1800s and had an asset base of more than US$600 billion by the time it filed for bankruptcy in 2008.
Today, the scale of that spectacular collapse has made the Lehman Brothers story a must-read in Business Schools across the world as Case Study!
Yes, there are lessons in every situation - good or bad - and heeding to the signals from the lessons is always the best way.
So let us now turn our attention back home, by first looking at what it means when an institution is declared insolvent and what the situation involving Capital Bank and UT Bank means to the banking sector generally.
First off, insolvency is when an organisation or individual gets to the point where it can no longer meet its financial commitments. Same as bankruptcy, it is not only companies that suffer this fate as individuals as well as big and small firms can all become bankrupt.
At the individual level, as l have repeatedly stated in this column, whenever you find yourself in the position that requires that you have to borrow or find “other” means to meet your obligations consistently, the end result will be bankruptcy.
This may be due to your unbridled desire for loans and credit advances as soon as you find them available from a lender.
When you take loans for consumption and you have no other means (assets with enough income streams) to “cover” the amount borrowed, it means that you will not be able to pay back the principal and the applied interest as required of you by the terms of the credit agreement when they become due. Over time, you could become bankrupt.
Applying the context of the individual to the firm, in the case of the two banks, as explained by the regulator, “their liabilities exceeded their assets, putting them in a position not to be able to meet their obligations as and when they fall due”.
So, you see, it wasn’t any different from what individuals go through in the conduct of their financial affairs.
Liabilities can indeed make you miserable in the end if you don’t put in place the right structures that ensure that there is enough income streams to cover obligations when they fall due.
Further, whereas you can always renegotiate loan and credit agreements whenever you find yourself in trouble, ensure that you honour your obligations under the terms of the contract (as renegotiated) because failing that could give you even more problems.
“Despite repeated agreements between the Bank of Ghana and UT Bank and Capital Bank to implement an action plan to address these significant shortfalls, the owners and managers of UT Bank and Capital Bank were unable to increase the capital of the banks to address the insolvency”, the central bank stressed in reference to the situation of the two banks.
Consequently, said the Bank, to protect customers, it “has decided to revoke the licenses of UT Bank and Capital Bank under a Purchase and Assumption transaction”.
The two banks, indeed, were important institutions in the financial sector. However, their collapse does not cast a slur on the resilience of the sector.
Even though headlines in various newspapers had screamed about it as some form of “disaster”, on the whole, it only proves the resilience of the financial sector because it only takes a resilient sector to be able to withstand the “shock” as expressed by analysts and commentators.
“The outlook of the industry remains broadly positive and banks have been directed to adopt better credit risk management practices which would help deal with the high non-performing loans facing the industry”, the Bank of Ghana said in its latest Banking Sector Report published this week.
“ The passage of the Bank of Ghana and SDI Act 2016 (Act 930) and the Ghana Deposit Protection Act, 2016 (Act 931) will pave way for the issuance of various directives and guidelines in line with proper application of the Act to improve overall stability and soundness of the financial sector”, the central bank concluded.