Banks need to have sufficient capital to absorb losses

Banks must have sufficient capital to absorb unexpected losses and enough liquidity to meet their obligations as and when they fall due, Mark Arthur, Executive Director of the London-based Ghana International Bank, has said.

“The liquidity must be sufficient in quantity and quality. They must be high quality - enough so that they can be converted to cash to meet obligations as and when they fall due,” he said at the opening of the bank’s second annual four-day Risk Management in Banks and Implications for Capital programme in Accra.

The four-day programme, which has participants from Ghana and the sub-region, focuses on identifying, measuring and mitigating risks in such a way that it does not have a negative impact on capital.

“Participants will identify some of the traditional risks associated with banking. The other thing will be how to measure those risks, and once you measure them you need to know how you mitigate them in order that they do not have negative impact on the capital.

“When you look at a bank’s balance sheet you are looking at assets and liabilities, and what really underpins that activity is your net worth or capital. It is important to have adequate capital to absorb losses, and also it is important to have liquidity. Liquidity is important. Having high quality assets to meet your obligations in stress-times is key,” he added.

He further said that to expand on the knowledge base of participants, they will be looking at experiences in other regions and lessons from recent developments, particularly the 2008 financial crisis and some of the measures being taken in the various economies.

First Deputy-Governor of the Bank of Ghana (BoG) Millison Narh touched on his excitement about the programme, which will enhance the capacity of bankers at this challenging time when risk in banking matters most.

“Capital is needed to start and operate a business, but risk management is key to the sustenance of a business; and therefore without an effective risk management framework, the capital of any business venture may be eroded in no time.

“Banking business is one of the most risky ventures, and it is for this reason that is one of the most regulated businesses around. So much will be learnt here. The environment we are in today is full of challenges, but a good understanding of what you are doing will make you stand against all odds,” he added.

He explained that the BoG’s new bills in Parliament - Specialised Deposit Institutions bill and Deposit Protection bill - will go a long way to mitigate risks associated with the banking sector.

“If you imagine what is happening in the microfinance sector, this is very timely. Very soon we will have a Deposit Protection bill. Enterprise Risk Management is crucial in ensuring that risk management is carefully and holistically planned and managed to ensure that risks are identified and controlled, to at least minimise their effects on capital and earnings.

Risk management is important, and as bankers risk is all over the place - from credit to operational - it is important that we develop systems like risk-registers which monitor risk and suggest solutions to deal with the risk identified,” the Deputy-Governor added.

Mr. Arthur also said the Ghana International Bank (GHIB) has for many years provided a platform where interesting matters like this can be discussed. “We run a number of training forums at which these matters can be discussed, and this is one of five we put together in the year.”

GHIB has over 50 years presence in the heart of the city of London, the world’s leading financial centre. GHIB focus on four key areas: international trade finance, correspondent and corporate banking, Treasury, and transactional banking services.

For organisations doing business in Africa, the bank provides a gateway to the global financial system; providing access and expertise, capital and extensive cross-border capabilities.

The bank’s exposure in the region has been growing rapidly and is currently in excess of US$350 million.The growth in GHIB’s African operation is reflected by the surge in both the bank’s balance sheet that has more than doubled in the past ten years, and its pre-tax profits which have increased five-fold during the same period.