The Financial Sector Cleanup of 2017: Seven Years On — A Reflection

The events of August 14th, 2017 have become a watershed moment for Ghana’s financial services industry. What began as a seemingly isolated intervention has since been etched into the collective memory of the sector as the beginning of the “cleanup.” Seven years after the dust settled, it’s crucial to reflect on the implications of those events.

In the immediate aftermath, we published “Fate of System Thinking” on the first anniversary of the collapse of UT Bank and Capital Bank, right at the heart of the formation of Consolidated Bank Ghana (CBG) and the subsequent collapse of five other banks. This book sought to provide a case study on the failures of UT Bank and Capital Bank, aiming to dissect the systemic issues that led to their demise.

Looking back now, it is evident that what started as an isolated failure of two banks evolved into a widespread collapse affecting 420 financial institutions regulated by the Bank of Ghana, with an estimated cost of GH¢26.05 billion—around 7.45% of GDP. This figure excludes the closure of 50 Fund Management Companies regulated by the Securities and Exchange Commission, which accounted for an additional claim value of GH¢10.83 billion. Any way you slice it, this was an extraordinarily expensive decision.

The Bank of Ghana justified this sweeping action by arguing that the financial sector was on the brink of collapse and that intervention was necessary to protect depositors from losing their savings. Moreover, the central bank posited that the Receiver would work to prevent an unfair asset transfer from depositors and shareholders to borrowers by recovering the impaired assets that had led to the insolvency in the first place.

Today, as we reflect on these events, I pose 12 critical questions—each a probing inquiry into the true cost and effectiveness of the cleanup:

1. Debt Recovery: How much has the Receiver recovered from the total debt? We were informed that as of 2019, the debts owed by the nine banks stood at GH¢10.1 billion, with the Receivers’ success rate at a mere 10%.
2. Receivership Costs: How much has the entire Receivership process cost? What is the total expenditure classified as resolution costs?
3. Resolution Cost vs. Assets: How did the resolution costs exceed the total assets of the institutions? What additional factors, beyond Receivership costs, contributed to the economic burden?
4. Statute-Barred Assets: From the total outstanding assets of all the institutions, how much is now statute-barred and irrecoverable?
5. Transparency: What is the most recent publicly available report from the Receiver?
6. Information Capital: What happened to the valuable information capital held by the collapsed institutions?
7. Currency Depreciation: How is the Bank of Ghana accounting for the depletion of capital due to cedi depreciation?
8. Risk Management: How has the Bank of Ghana addressed the fundamental issue of risk selection in the Ghanaian economy in a way that fosters sustainable economic growth?
9. Capital Redistribution: Has the capital redistribution resulting from the collapse benefited the overall financial system?
10. Regulatory Approach: Was the regulatory response to the crisis fragmented or holistic? What measures have been implemented to prevent the creation of future problems under the guise of solving past ones?
11. Ownership of Assets: Who now owns the assets of the collapsed institutions?
12. Future Crises: Are we looking at the next crisis in a decade or a century?

The harsh reality of financial markets is that the cost of bankruptcy is often grossly overestimated. Upon closer examination, it becomes clear that the assets of failed institutions do not vanish—they simply change hands. Governments often act as insurers during bank failures, restoring balance through the redistribution of assets. The ultimate question remains: Who acquired the assets of these failed institutions?

As Nobel laureate Joseph E. Stiglitz aptly notes, “If the regulatory structure is designed and enforced appropriately, insolvencies should be relatively rare. In practice, macroeconomic downturns are a major cause of insolvencies, and avoiding such downturns is the responsibility of the government. Making the government bear the costs of a failure to live up to its responsibilities provides a natural incentive for it to do its job well.”

In conclusion, it has become imperative to critically assess the long-term impact of the Financial Sector Crisis. We must learn from this chapter in our financial history to ensure that future crises are managed with greater foresight, efficiency, and transparency.