Debt exchange programme: BoG announces relief packages for banks

The Central Bank has taken action to alleviate any possible effects on banks of the government’s proposed debt swap programme.

According to the Bank of Ghana, this will help “preserve financial stability” for institutions that will participate in the initiative (BoG).

The Bank of Ghana urged all banks to take part completely in the Debt Exchange in a statement.

The Bank of Ghana stated in a statement that it had performed stress tests on banks based on their holdings of domestic public debt and had evaluated potential effects that could come from taking part in the debt exchange.

On December 23, 2022, these policy and regulatory reliefs will go into effect.

The reliefs are as follows: 

1. Reduction of Cash Reserve Requirement Ratio (CRR) to 12% on GHC deposits;

2. Maintain CRR of 12% on foreign currency-denominated deposits to be held in foreign currency;

3. Reduction of Capital Conservation Buffer from 3% to zero percent, effectively reducing the Capital Adequacy Ratio (CAR) from 13% to 10%;

4. New Bonds will be fully deductible in determining the financial exposure of banks to counterparties under section 62(8) of the Banks and Specialised Deposit-Taking Institutions Act 2016 (Act 930), while Old Bonds will not be deductible for that purpose;

5. Risk weights attached to New Bonds to be set at zero percent for CAR computation, and at 100% for Old Bonds;

6. Increase in Tier II component of regulatory capital from 2% to 3% of Total Risk-Weighted Assets.

7. Increase in allowable portion of property revaluation gains for Tier II capital computation, from 50% to 60 %;

8. Issuance of Guidance on standardised accounting treatment of the Debt Exchange impact, following engagement with external auditors.

The banks are also expected to:

1. Submit daily data to the Bank of Ghana on liquidity ratios and dynamics including access to interbank market and cost of financing, to enable Bank of Ghana to continuously monitor liquidity trends;

2. Pre-position assets for eligible collateral under Bank of Ghana’s Emergency Liquidity Assistance (ELA) framework;

3. Activate liquidity management plans promptly as needed (e.g. Interbank borrowings, use funding lines available, intra-group funding if, it exists, use up balances with correspondent banks);

4. Access Bank of Ghana’s repurchase (reverse repo) window excluSively with New Bonds, if no interbank or other market-related funding is accessible;

5. Access Bank of Ghana’s ELA as needed, using New Bonds and other eligible collaterals (excluding Old Bonds);

6. Suspend the declaration and payment of dividends and other distributions to shareholders forthwith;

7. Access the Ghana Financial Stability Fund;.as a last resort liquidity backstop.

Debt exchange 

For setting up a new system to give domestic debt bondholders variable maturity dates and annual interest, the government has come under heavy fire.

However, it has pledged that it will take all reasonable steps to prevent depositors from losing their money.

Dr. Ernest Addison, the governor of the Bank of Ghana, expressed confidence that the government’s proposed Debt Exchange Programme will boost economic confidence and the Central Bank’s efforts to reduce inflation.

He pointed out that the economic hardships that many banks have experienced have resulted in increased borrowing and operating costs.

Dr. Addison promised financial firms that the Central Bank would support them by giving them more liquidity during the exercise.

“In addition to the near-term adoption of the IMF programme, we will provide a balance of payment support to help with financing gaps, boost investor confidence and restore stability.”

Source: Ekow Coffie