Downgrading Is Not Liquidity, Focus On Restoring Liquidity – Prof. Gatsi Tells BoG

Downgrading Is Not Liquidity, Focus On Restoring Liquidity – Prof. Gatsi Tells BoG

The head of the Finance Department of the University of Cape Coast is advising the central bank to rather focus on restoring liquidity in the banking

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The head of the Finance Department of the University of Cape Coast is advising the central bank to rather focus on restoring liquidity in the banking sector.

His comment is as a result of the Bank of Ghana’s announcement that, it has downgraded GN Bank to saving and loan company.

According to him,  “Downgrading from universal banking to savings and loan only prevents the bank from certain transactions”.

“The transition from universal banking to savings and loan company to a large extent does not negatively affect the spread of branches in the country. However, the company can restructure to reduce the number of branches” – he explains

Using the football team analogy, Prof. Gatsi said: “downgrading or transition means removal from maybe division one football club to division two but they all remain football teams”.

He added that: “It is a less harmful punishment”

The financial sector in Ghana has seen some challenges since 2017 with seven banks collapsing and another merging.

Read his full post on Facebook:

Telling customers and stakeholders what a particular decision actually means is always difficult for regulators and firms affected. Downgrading from universal banking to savings and loan only prevents the bank from certain transactions. The transition from universal banking to savings and loan company, to a large extent does not negatively affect the spread of branches in the country. However, the company can restructure to reduce the number of branches.
Therefore downgrading or transition means removal from maybe division one football club to division two but they all remain football teams. It is a less harmful punishment.
But it is not the solution to the most important challenge of suffering from illiquidity. This implies that all those indebted to any downgraded bank including government must still pay to improve liquidity situation and indicate confidence to depositors. Management should continue to appeal to depositors who do not need their money now to disengage the demand for deposits trigger.
In brief, downgrading is not liquidity. Restoring liquidity is the greatest tool to sustain even savings and loan businesses.
@informativejgatsi