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Zimbabwe banks rue breach of Basel rules
Dumisani Muleya, Business Day (SA)
May 17, 2006

http://www.businessday.co.za/articles/topstories.aspx?ID=BD4A201243

THE latest media reports that Zimbabwe’s top banks have lurched into a new roller-coaster performance — coming soon after the 2003-04 crisis which resulted in 10 banks closing shop — could send powerful shock waves through the country’s already derelict economy.

Press reports say the five biggest commercial banks in Zimbabwe are facing a new crisis due to costly treasury bill portfolios that could wipe out their accumulated capital, with dreadful ripple effects across the economy.

While the looming crisis threatens the entire banking sector, the top five commercial banks — Standard Chartered, Commercial Bank of Zimbabwe, Barclays Bank, Stanbic Bank and Zimbabwe Banking Corporation — were said to be haemorrhaging most from a raft of central bank policies which could precipitate bank failures. The five banks control about 90% of all deposits in the financial services sector.

The holding of huge treasury bill portfolios — most of which have yields of about 350% at a time when banks are financing their positions at 800% through the central bank’s overnight accommodation facility — poses a major threat to the banks. The five banks are borrowing more than Z$1-trillion daily and incurring daily interest expenses of more than Z$20,5bn — a position that is clearly unsustainable.

The overnight accommodation rate is 800%, the interbank rate 94,2%, and treasury bill yields 350%.

This situation has created a distortion in the market because the treasury bill yield is so much lower than the rate of the overnight accommodation. This structural aberration is made worse by the statutory reserves being higher than what banks are allowed to retain from deposits — which creates a mismatch in the balance sheets.

Zimbabwe was hit by a spate of bank closures in 2003-04, largely triggered by liquidity problems. The bank failures left companies and individuals in dire straits and aggravated Zimbabwe’s economic problems. But major banks recovered and recorded good profits last year before the emergence of the current crisis.

When the earlier banking crisis first broke out, the central bank moved in to arrest the situation through financial bale-outs, but soon found itself entangled in legal and political wrangles with some of the closed banks.

Shareholders of most of the failed banks complained about "political regulation" and "unfair practices" by the authorities. They accused the Reserve Bank of not following established Basel committee on banking supervision rules. The Basel committee II rules deal with minimum capital requirements, supervisory review, and market discipline to promote greater stability in the financial system.

Marking the 10th anniversary of the Basel regulations in 1998, former US Federal Reserve chairman Alan Greenspan said bank governors should adhere to established banking regulations to ensure they were not judged harshly by history for driving banks and economies into the ground.

"If we follow these basic prescriptions (Basel II), I suspect that history will look favourably on our attempts at crafting regulatory policy," he said.

But Zimbabwe’s local monetary authorities argued their measures were designed to save the banking sector from collapse by minimising liquidity and operational risks, mismanagement, corruption and incompetence — all of which were rampant in the system. They say their moves succeeded in preventing a run on banks that could have set off a chain of bankruptcies and deepened economic recession.

Banks are highly susceptible to different forms of risk that usually trigger occasional systemic crises. Risks include liquidity risk (the risk that many depositors will request withdrawals beyond available funds), credit risk (the risk that those that owe money to banks may not repay it), and interest-rate risk (the risk that the bank will become unprofitable if rising interest rates force it to pay relatively more on its deposits than it receives on its loans), among others.

Banking crises have happened throughout history when one or more risks rock a banking sector. Prominent examples include the US savings and loan crisis in the 1980s and early 1990s, the Japanese banking crisis during the 1990s, bank runs during the Great Depression of the late 1920s and 1930s in the US and Europe, and, in Africa, the recent liquidation of 25 banks by the Central Bank of Nigeria.

The Bankers Association of Zimbabwe recently warned of imminent bank collapses unless urgent preventive steps were taken. It said its macro-economic analysis revealed a looming danger. Against this background, Zimbabwe should guard against possible bank failures that could drive the final nail into its economic coffin.

*Muleya is Harare correspondent and Zimbabwe Independent news editor.

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