Only increase in capital levels can save banks

THE world of finance is now replete with all kinds of frameworks predicated on the desire to present financial information in a simpler, transparent and objective manner acceptable even to the not so financially aware.

Auditors and accountants now have standards of practice that have brought a level of uniformity and consistency in the presentation and review of financial statements.

Bankers on the other hand, have evolved different versions of their framework from Basel I to today’s Basel III. The underpinning objective of all these guidelines in all their forms is to try and ensure that organisations are governed properly. It all looks tidy and beautiful yet banks and listed companies have continued to collapse resulting in severe losses to the investing public. Such is life, the beautiful ones also die.

In Zimbabwe, the financial graveyard continues to fill. This is despite the spirited efforts of the Reserve Bank, itself an institution kept together by a life support system running on empty.

In recent days the financial undertakers appeared to be questioning Interfin and Genesis banks’ financial health. The questions are now fact; Genesis Bank is no more as Interfin Bank limps on. Expectedly, when these kinds of stories crop up they often will be followed by emotional contributions around financial sector indigenisation reforms.

It muddles up what should be a sober discussion on bank ownership. My personal view on this is that yes the foreign banks should make available between 30-40 percent of their shareholding to local investors such as their workers and those institutional investors of a sound financial disposition.

But, that is to digress. The Bankers’ Basel III framework is aimed at strengthening bank capital adequacy and introducing regulatory requirements on bank liquidity and leverage. Bank capital consists primarily of shareholders’ equity, retained earnings and in certain instances, not necessarily common in this part of the world, long term debt.

It is clear that Basel III seeks to remedy the problems which caused the financial crisis that hit the first world in the closing stages of the last decade. Tellingly, most of the players in our financial sector are still trying to meet the requirements of Basel II and a few have found the mere US$12,5 million capital requirement to be an unyielding albatross. Let me attempt to reduce all this funny lingua to English.

The Basel III framework recognises that bank owners must inject into their businesses sufficient capital to meet all the quantifiable and possible risks that come with running a banking concern before looking for deposits from the public.

This is not to mean that this will stop some banks from collapsing, no. A bank might still collapse if the necessary bank control systems and regulatory imperatives are not properly enforced.

Greed and a profound sense of impunity have often been the underlying reasons for some of the recent bank failures. It should have been clear by now, particularly where Zimbabwe is concerned, that the era of individuals holding a controlling interest in a banking concern may be long gone.

The problem though is that, most of our citizens who have invested heavily in banking companies lack the wisdom, nay humility, to relinquish control to investors who may not be very accommodating of their weakness for sweets.

The myth that good bankers are found in foreign owned banks has been peddled so much it almost always is taken as gospel truth yet some of the distinguished career bankers you see today were trained in the very institutions that now seek to distance themselves from the products of their wombs.

Now, because this is a myth that sells, no foreign bank will willingly erode that perception advantage by correcting it. This partially explains why the indigenisation process can never interest them as it is their major selling point. But that is not the point.

The point is that the public have laid trust in foreign banks not only because of the myth that they are better managed but also because foreign banks are thought to have accumulated sufficient reserves to meet all possible claims against them in the event of a banking crisis such as severe trading losses in their local operations.

This brings to the fore the often mentioned loan-deposit ratio which has been used or perhaps misused, by design or by sheer inadvertence, to cause alarm in the financial sector. Put simply, the ratio is used to calculate a bank’s ability to cover withdrawals made by its clients. It is arrived at by dividing a bank’s total loans by its deposits and is thus in many respects, similar to the accounting liquidity ratio.

The adequacy of a ratio so derived will always be a matter of context, line of business and the general trading conditions. If the ratio is too high this may mean that the bank could struggle to fund unforeseen client demands on it. Conversely, if the ratio is too low it also implies that that bank is not earning as much as it possibly could from the deposits it has at its disposal.

Within context, a loan-deposit ratio of above 100 percent is not indicative of an impending disaster. Barclays Capital last year reported that Texas Capital in America’s loan deposit ratio was just under 140 percent. Contrast this with the Bank Of New York’s 20 percent.