Banks are an essential source of income for most businesses, and provide other important financial services which contribute towards the development of any economy. However, weak banks can lead to a number of negative externalities in society if they collapse.
A distressed bank can be defined simply as a bank whose liquidity or solvency is impaired unless there is a major improvement in its financial resources, risk profile, management systems and in a timely manner. Issues of inadequate financial resources and weak asset quality can be predicted through various calculations, the easiest being their liquidity and risk positions.
Liquidity refers to a bank’s ability to convert assets to cash or the amount of cash on the balance sheet. Banks must meet funding needs for their operations, they must be able to repay their own debts. They must have enough cash on hand to meet withdrawals requests and be able to fund new loans for customers. A high working capital, as well as a high current ratio represents a stronger position of liquidity, which would determine how solvent and profitable the bank is.
When dealing with distressed banks, early intervention is by regulatory bodies is critical to prevent an escalation of the problem. To prevent a liquidity crisis like the financial crisis from happening again, BoG regulations should require banks to meet certain stringent liquidity requirements for operations. This is an important protection for the financial system, and it also makes calculating a bank’s liquidity position much easier for investors.
Bank of Ghana (BoG) has indicated that there are seven other banks classified as being in varying stages of distress, the cases of UT Bank and Capital Bank were most severe. In respect of the other banks that are distressed to varying extent, we expect BoG to monitor them closely and step in as soon as it appears that the interest of depositors and other participants are threatened.
Re-capitalization has become necessary because of weak economic growth and weak credit management systems are affecting performance in the financial sector. The new requirement is expected to clean up the banking industry. We expect more mergers and acquisitions in the banking sector as not all the over 30 banks would be able to meet the new capital levels.
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