{"id":352296,"date":"2017-09-10T18:00:21","date_gmt":"2017-09-10T18:00:21","guid":{"rendered":"http:\/\/citifmonline.com\/?p=352296"},"modified":"2017-11-10T09:45:52","modified_gmt":"2017-11-10T09:45:52","slug":"impact-of-new-minimum-capital-requirement-on-banks-article","status":"publish","type":"post","link":"https:\/\/citifmonline.com\/2017\/09\/impact-of-new-minimum-capital-requirement-on-banks-article\/","title":{"rendered":"Impact of new minimum capital requirement on banks (Article)"},"content":{"rendered":"
Capital requirement is the minimum amount of capital a bank or other financial institution has to hold as required by its financial regulator.<\/p>\n
A bank\u2019s capital adequacy ratio on the other hand is expressed as a ratio of equity as a percentage of risk-weighted assets.<\/p>\n
These requirements are put into place to ensure that these institutions do not take on excess leverage and become insolvent.<\/p>\n
There is a strong consensus among policymakers in favor of higher bank capital requirements especially Tier I capital. The benefit of increased requirements is clear:<\/p>\n
The importance of adequate capital in banking in the Ghanaian economy cannot be over-emphasized.\u00a0 Banks play an important intermediation role in the economy. In fundamental terms, banks take on deposits (incur liabilities) and provide loans and advances (create assets). From undertaking these activities, banks would make a profit and retain some of its profits to boost its capital strength, distribute (some) to providers of capital, or make a loss.<\/p>\n
For the conduct of both activities, banks require adequate capital to provide comfort and satisfaction to both customers and the regulator of the industry and also to achieve confidence in the financial services system.<\/p>\n
Absence Ghana Depository Protection Act, 2016 (Act 931) becoming operational, the importance of the adequacy of bank capital cannot be over-emphasised.<\/p>\n
Various media networks in Ghana reported on September 8, 2017 that Bank of Ghana (BoG) will\u00a0 (earliest as September 11, 2017) formally direct banks in the country to recapitalise to GH\u00a2400 million, equivalent to about US$100 million.<\/p>\n
This would represent an increase of 233 percent over the old capital level and would be the biggest capital increase witnessed over the banking landscape.<\/p>\n
The first time in the last decade where banks in Ghana were required to raise their minimum regulatory capital was in 2008. The regulator increased the minimum regulatory capital from GHS7 million to GHS60 million.<\/p>\n
The industry was put on a two-track race to compliance: banks with majority foreign ownership had two years, and banks with majority local ownership were given a more lax time frame of five years.<\/p>\n
Banks in Ghana were last recapitalised in 2012, when the BoG asked them to raise their stated capital from GH\u00a260 million at the time to the current GH\u00a2120 million.<\/p>\n
According to the media sources, banks would be given up to December 2018 to meet the new capital requirements of GH\u00a2400 million.<\/p>\n
Based on my estimate, the industry would potentially need to raise GH\u00a28.6 billion (in absence of financial statements available for National Investment Bank Ltd, OmniBank Ghana Limited,the Beige Bank Limited, the Construction Bank (Gh.) Limited, GHL Bank Limited and ARB Apex Bank Ltd, I assumed each of them will need GHS 400 million) by 31 December 2018 (ignoring IFRS 9 impacts, any expected worsening of credit and economic impacts, profits for 2017, and potential consolidations).<\/p>\n
This is estimated to be about 78% of June 2017 total shareholder\u2019s funds of GH\u00a211 billion per the July 2017 Banking sector report (see question 13).<\/p>\n
As the end of 2015 the statutory credit risk as a percentage of the IFRS reserve was 42%. Let\u2019s assume this ratios was the same as end of 2016 and June 2017 and we apply ratio on the 2016 and 2017 statutory credit risk, we can derive both the IFRS reserve and BoG reserve.<\/p>\n
If we further assume that IFRS 9 will lead to an increase of loan reserves by 50%, the impact is that the industry will need additional capital of GHS 238 million to remain at the same level, or capital reduces by 1%.<\/p>\n
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In view of the above analysis, I recommend the following actions to be adopted by BoG and the Banking industry from now until December 2018 and thereafter:<\/p>\n
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Conservative application of accounting standards should be supplemented by micro- and macro prudential measures, such as time-bound targets for resolving delinquent assets and raising risk weights on impaired assets of a certain vintage (above the current 150 percent, under the \u201cstandardized approach\u201d adopted by all Banks in Ghana).<\/p>\n
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–<\/p>\n
Author: Emmanuel Akrong<\/p>\n
Email: emmanuel.akrong@gmail.com<\/p>\n
Credit Consultant<\/p>\n