The Bank of Ghana (BoG) is struggling to align its regulatory and supervisory  framework with international standards, as the bank faces enormous challenges to satisfy 14 out of the 25 core principles of the Basel II accounting standard.

Basel II is a framework adopted internationally to secure international convergence on revisions to supervisory regulations governing the capital adequacy of internationally active banks.

According to an IMF team that conducted a comprehensive study on the stability of Ghana’s financial system, there are major achievements on the legislative front, but with efforts to strengthen the supervisory process, “14 of the 25 Basel Core Principles supervisory practices were found to be either non-compliant or materially non-compliant.”

But in reaction to some of the findings of the IMF, the central bank Governor, Mr Kwesi Amissah-Arthur, downplayed the impact of the IMF team report, which goes to suggest that Ghana was not fully implementing the Basel II framework.

He said Ghana was not in a rush to implement the core principles of the Basel II framework, which aligned Ghana’s regulatory and supervisory framework with international standards.

He said an IMF technical team is currently in the country to train banking personnel on details of the Basel II regulator requirement.

Some of the non-compliant issues the IMF identified included the inability of the central bank to be always forceful and proactive in utilising its legal powers.

“There are instances where banks that did not meet the minimum solvency and other prudential requirements were permitted to continue undertaking normal banking business in contravention of the banking laws”, the team observed.

Such shortcomings, the report noted, had important implications for the soundness of the banking system, most notably; consolidated supervision, lack of supervisory guidelines on risk management, and supervisory forbearance.

Another revelation, rather startlingly is when, according to the report; “the BoG used a temporary liquidity facility to keep afloat a bank that would otherwise have been insolvent.”

The team further observed that by holding stake in some banks, the BoG complicated supervisory governance and could taint its reputation and credibility where enforcement actions were delayed.

On the other hand, banks in which either the Bank of Ghana or the government had beneficial ownership could become a source of systemic banking problems.

Meanwhile, the IMF noted without prejudice to the fact that the responsibilities and supervisory objectives of the central bank were clear and well entrenched in laws.

It said since the last FSAP of 2003, several legislative improvements had been made in establishing the BoG's primary objectives, operational autonomy, transparency and accountability.

Some of the high points, however, includes the start of informal discussions between the BoG, the National Insurance Commission (NIC) and the Securities and Exchange Commission (SEC) to enter into a joint memorandum of understanding (MoU) that would facilitate the sharing and exchange of information among all domestic regulatory bodies.

Such arrangements have already been executed between the BoG and some foreign supervisors, but the report noted “there is significant room for improvement in terms of practical implementation.” 

About Basel II
Basel II is an international business standard that requires financial institutions to maintain enough cash reserves to cover risks incurred by operations. The Basel accords are a series of recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision (BSBS). The name for the accords is derived from Basel, Switzerland, where the committee that maintains the accords meets.

Basel II improved on Basel I, first enacted in the 1980s, by offering more complex models for calculating regulatory capital.

Essentially, the accord mandates that banks holding riskier assets should be required to have more capital on hand than those maintaining safer portfolios. Basel II also requires companies to publish both the details of risky investments and risk management practices.

The full title of the accord is Basel II: The International Convergence of Capital Measurement and Capital Standards - A Revised Framework.

The three essential requirements of Basel II are: Mandating that capital allocations by institutional managers are more risk sensitive; Separating credit risks from operational risks and quantifying both and; Reducing the scope or possibility of regulatory arbitrage by attempting to align the real or economic risk precisely with regulatory assessment.

Basel II has resulted in the evolution of a number of strategies to allow banks to make risky investments, such as the subprime mortgage market.

Higher risks assets are moved to unregulated parts of holding companies. Alternatively, the risk can be transferred directly to investors by securitisation, the process of taking a non-liquid asset or groups of assets and transforming them into a security that can be traded on open markets.