Usually a distressed bank ends up being taken over in mergers and acquisitions. When that fails a central bank may take over the defunct bank’s troubled assets and allow a liquid bank with a strong balance sheet to take over to keep customers’ accounts running. However, when a buyer can’t be found, things can get more complicated for account holders. Liquidation and dissolution of a bank may also be done voluntarily by a vote of the stockholders but even this requires the endorsement of the central bank.

What is Bank Liquidation?

Bank liquidation is the process of permanently closing down a bank and its branches, selling off any assets and using the proceeds to settle as many of the bank’s remaining liabilities as possible. Typically, customer accounts are closed and checks are mailed to account holders for the amount of their insured deposits.

Bank liquidation process

Usually the Central Bank takes over directly or indirectly to relieve the existing management of authority and takes everything over. Normally Fridays are the preferred take over day, and usually by the following Monday morning they would have reopened under the banner of the acquiring bank.

In the event that the Central Bank is unable to find a buyer, it tries to sweeten the deal by offering just the deposit accounts for sale. If that fails, the only option left is usually liquidating the bank, cutting account holders a check for their insured deposits, and trying to help account holders move on as best as they can. The Central Bank is most likely to pursue this option if the bank is very small or if most of the deposits are from institutional investors or large businesses.

For example, on Sept. 13, 2013, when The Community Bank of Bridgeport, Connecticut, was closed down It was not able to find another financial institution to take over the banking operations of The Community Bank. To this end, the Federal Deposit Insurance Corp. (FDIC), just mailed checks directly to depositors of The Community’s Bank for the amount of their insured money according to a press release.

A hassle for account holders

Bank failures that are sudden and unexpected can cause a lot of pain. To this end, Central Banks try to prevent a mass run on the bank before it’s taken over, for this reason Central Banks keep its troubled-bank list a closely guarded secret.

In view of the secrecy kept by the Central Banks, you may deposit your paycheck on a Friday afternoon and return Monday to make a withdrawal, only to find the bank out of business for good.

Bridge banks can help

At times, Central Banks may allow a bank with a better liquidity and balance sheet to take over based on certain terms and conditions. This is to help ensure continuity of service to the depositors and minimize the problems associated with a bank-run. In the US, the Federal Deposit Insurance Corp. (FDIC) may reopen defunct banks as FDIC-controlled entities for a limited time. For example, when New Frontier Bank of Greeley, Colorado, failed on Friday, April 10, 2009, it reopened the next Monday as Deposit Insurance National Bank of Greeley and continued checking services, including direct deposit, until May 8, when it was shut down for good. If a bank is big and important enough to the local economy, the FDIC may keep it going for a much longer time. For example, after the California-based IndyMac Bank failed, it stayed opened from July 14, 2008, until March 2009, when the deposits were picked up by OneWest Bank.

(B) DISSOLUTION OF UT AND CAPITAL BANKS – BANK OF GHANA DESERVES

COMMENDATION!

Revocation of Operating Licences of UT Bank and Capital Bank

Since the Bank of Ghana revoked the operating licences of UT Bank and Capital Bank there has been many commentaries but I think the Bank of Ghana deserves commendation at least for protecting depositors’ funds. Without the intervention of the Bank of Ghana, the repercussions of the extreme insolvency of the two banks which are not able to meet their obligations to customers would have been disastrous and injurious to the whole financial system. What Bank of Ghana has done conforms to international best practice and will to a large extent restore financial stability. In the case of DKM microfinance, it was not properly handled causing a lot of pain to depositors. I am at a loss with most Ghanaians who are questioning the intervention of the Bank of Ghana. It appears when the Bank of Ghana exerts its authority or implements its regulatory policies we complain and if they do not act we still complain. Learning from international best practice one can infer that the Bank of Ghana has acted in the supreme interest of the entire financial system which is bigger than any single creditor or shareholder.

Causes and Benefits

According to the Bank of Ghana, both UT Bank and Capital Bank were deeply insolvent, meaning that their liabilities far exceeded their assets, putting them in a position not to be able to meet their obligations as and when they fell due.

After BoG allowing for repeated agreements entered into with the two banks (UT Bank and Capital Bank) to implement an action plan to address these significant inadequacies and shortfalls, Directors and managers of these banks were not able to increase their capital outlay to address the insolvency. The most rational thing that BoG has done is the protection of customers’ funds by revoking the licences of UT Bank and Capital Bank under a Purchase and Assumption transaction by allowing the GCB Bank to take over all deposit liabilities and selected assets of both UT Bank and Capital Bank. The action by BoG was in line with provisions of the Banks and Specialized Deposit Taking Institutions (SDIs) Act, 2016 (Act 930).

GCB acting as a care-taker bank will not only take over all the depositors' funds but will continue to provide normal banking services to customers. Again, BoG is urging borrowers to comply with all the terms of their legally enforceable loan agreements including all conditions associated therewith, especially with regard to repayment terms.

WAY FORWARD

Creditors and Shareholders of UT and Capital Bank

What happens to creditors and shareholders of the two banks? Once GCB has taken over all the deposit liabilities and selected assets and PWC has been appointed as the Receiver, it is important that they work with the Ghana Stock Exchange (GSE) and the Securities and Exchange Commission (SEC) to establish how to pay creditors and possibly shareholders of the two banks. There must be transparency with the figures involved from all quarters. The Receiver must manage the assets of the two banks not taken over by GCB Bank and in addition distribute proceeds to creditors according to the priority of claims in accordance with the Banks and SDIs Act, 2016 (Act 930).

Granting of Licences to Smaller Banks May be Challenging in the Face of Anticipated New Capital Requirement by BoG

Notwithstanding the good action taken by BoG on UT and Capital Bank, it is important that BoG keeps an eye on the new small banks especially when the granting of licences is based on the existing lower capital base. It becomes very challenging for smaller new banks when immediately after receiving their licences, then in no time BoG shoots up the capital requirements very significantly. There are examples on the African continent where new banks suffer or crush in no time immediately they receive their operating licences.

This stems from the significant increases in capital requirement from their Central Banks immediately after the granting new licences. For example, in 2016 the shareholders of Banque International Pour I’Afrique au Congo (BIAC) in the Democratic Republic of Congo, voted for a dissolution of the bank but the Central Bank of Congo (BCC) voiced its opposition to the dissolution. In Ethiopia, two Banks under formation, Noah International Bank and Tsehay International Bank, submitted letters to their National Bank requesting for the dissolution and release of their equity raised by shareholders and placed in blocked accounts with the central bank.

Promoters of both banks cited significant increases in capital requirements by their central banks. Both banks had adequate capital base at the time of the licence but this fell short far from the new capital requirements. BoG should not release licences to smaller banks and then turnaround in no time to ask for very significant increments in new capital requirements because it becomes very challenging for them.