A Comparative Analysis of the Gh¢60 Billion Loss Incurred by the Bank of Ghana, the Financial Sector Clean Up and the Bond Holders’ Haircut

Introduction

The financial sector in Ghana has undergone a significant transformation in recent years, marked by the collapse of several financial institutions and the subsequent cleanup efforts by the government. Among the most pressing questions in the wake of these developments is whether the losses incurred by the Bank of Ghana (BoG), totaling Gh¢60 billion, could have been prevented and whether the government’s decision to implement haircuts for bondholders is justifiable. In this article, we will provide a comparative analysis of these crucial issues.

The Banking Sector Cleanup

The Bank of Ghana (BoG) which is the resolution authority for banks and specialized deposit-taking institutions (SDIs) carried out a banking sector cleanup exercise between 2017 and 2019, which costed GHȻ26.05 billion. According to the Ministry of Finance, the Banking Sector Clean-up was aimed at ensuring the orderly exit of insolvent institutions to protect depositors’ funds and also ensure the safety and soundness of the banking sector, which was in a state of distress. Several banks had engaged in risky lending practices, poor corporate governance, and unsustainable operations, leading to insolvency. The cleanup aimed to restore stability, protect depositors, and ensure a healthier financial sector.

Could the Collapsed Banks Have Been Saved?

One of the critical questions raised during and after the cleanup was whether the collapsed banks could have been saved. The answer is multifaceted:

  • Regulatory Oversight: While some argue that stronger regulatory oversight and early intervention could have saved some institutions, others contend that the problems were so deeply rooted that rescue efforts would have been insufficient.
  • Moral Hazard: Saving insolvent banks without imposing consequences could create moral hazard, encouraging risky behavior by banks in the future. To some, the collapse of the institutions was a means to put some level of order in the sector so that institutions would know that their license could be revoked at any point if they were found not complying with the laid down rules and regulations.
  • Resource Constraints: Some argue that the government’s ability to provide sufficient capital to rescue multiple banks simultaneously was limited, further complicating rescue efforts. As good as this may sound, it is not the case. This is because the amount spent to clean up the sector could have been injected into these institutions. The majority argues that an amount lower than the GHȻ26.05 billion that was spent on the cleanup exercise could have saved these financial institutions while safeguarding the work and investments of the citizens.

The Bond Holder Haircuts

In response to the banking sector cleanup, the government issued bonds to raise funds to support the affected banks. However, these bonds came with a haircut for bondholders, effectively reducing the value of their investments. The question of whether this was a justifiable measure is contentious:

  • Government Liability: Bondholders argue that they invested in government-backed bonds, expecting a certain return. The haircuts imposed reduced their returns and affected their trust in government securities. It is important to note that government securities are one of the risk-free investment avenues that citizens consider when looking for investment avenues. People losing trust in government securities will not only affect investors but also the fundraising capacity of the government. This is because the government uses these securities to generate funds to finance its expenses and if people decide not to invest in government securities for fear of losing their investments, government will suffer.
  • Necessary Funding: The government required funds to stabilize the banking sector and protect depositors. The bonds provided a source of capital, and haircuts were a means to share the burden of the crisis. Although this may sound good, the issue on the mind of the citizens is the security of their investments. The government should have thought through it well before taking the decision to revoke the license of the financial institutions in the first place. The decisions taken by the BoG have resulted in a loss of jobs, and investments and brought severe hardship into the country.

Comparative Analysis

In comparing the Gh¢60 billion loss incurred by the BoG with the banking sector cleanup and bondholder haircuts, it is essential to recognize the complexity of the situation:

  • The banking sector cleanup was a necessary step to address systemic weaknesses and protect the financial stability of Ghana. But we must admit that the government could have done better. The justification given by BoG for the 60 billion loss is not pleasing. If BoG claims that they have incurred this loss because of the financial sector clean-up exercise, then, it implies that BoG has not taken the best decision. You cannot make a decision that will result in a Gh¢60 billion loss and expect people to be happy with you. The decisions of BoG were reckless and without proper consultation. Early intervention strategies could have.
  • While there may have been alternative strategies, such as early intervention, the depth of the issues made a comprehensive cleanup inevitable. 
  • Bondholder haircuts, while contentious, were a means to share the financial burden and prevent taxpayers from bearing the entire crisis cost. This became inevitable because of the cleanup exercise, a reckless decision taken by the Bank of Ghana.

Conclusion

The Gh¢60 billion loss incurred by the Bank of Ghana is a stark reminder of the challenges facing the banking sector. The cleanup and bond holder haircuts were difficult but necessary steps to restore stability and protect Ghana’s financial future. Although they were necessary steps, they could have been prevented but for the decisions of BoG. A careful balance between safeguarding the interests of investors, depositors, and taxpayers must continue to guide policy decisions in Ghana’s financial sector.

Article by

Precious Mondial

He is a policy scholar and senior researcher assistant at YAFO Institute with a strong background as a dedicated mathematics educator and statistician. He holds MSc in Applied Statistics at Kwame Nkrumah University of Science and Technology (KNUST)

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