The Courage to Act

When you want to know what to do in a banking crisis and want to learn it from the very best, the first place to start would be at the feet of Ben Bernanke. His book, the Courage to Act: A Memoir of a Crisis and Its Aftermath, is a detailed first hand account on the developments in the financial crisis taking you to the heart of the crisis and giving you a behind-the-scenes view of many of the decisions that had to be made in those very difficult circumstances. For the uninitiated,

Ben Bernanke was the US Federal Reserve Bank Chairman during the financial crisis of 2007-9 and was the one in charge of making several radical and sometimes unpopular decisions that in the end helped the US pull through very difficult financial times. At the center of the crisis were banks and as such this book is recommended reading for anyone in the banking sector in Kenya right now. I would hope that the Kenyan Central Bank governor has a copy of it.

In a crisis, the first thing that evaporates is trust and confidence in the financial system. As a result, panic spreads, withdrawals increase as people literally put their money under their beds deeming it more secure there than in a bank and liquidity dries up and. No wonder then that when rumours of Chase bank problems began to circulate, about Ksh 8 billion ($79million) in a single day. To put that in perspective, the bank´s cash as at 31st December 2014, from the audited 2014 financial statements, was Kshs. 11 billion ($108 million). As Bernanke notes:

In a panic, depositors and other providers of short-term funding withdraw out of fear that the institution will fail and they will lose their money. Even a bank that is solvent under normal conditions can rarely survive a sustained run. Its cash reserves are quickly exhausted, and its remaining assets, including its loans, cannot be sold quickly, except at depressed prices. Thus, a run that begins because depositors and other providers of funds fear a bank may fail risks becoming a self-fulfilling prophecy.

A key observation from the book is that when Wall Street (a collective name for the players in the financial markets) makes mistakes, Main Street (the ordinary person) is the one that is most affected. The impact of Chase bank being put under receivership given the problems it faced as a result of mismanagement and fraud by a few has been significant to  the rest to say the least. Businesses and individuals have been hugely affected and many have had to close shop. Among those affected is one Shamil Patel () who tweeted: “My employees have been off since Thursday. Can’t work without financial float. Office remains closed. Chase bank remains in limbo.”

The worry though is if the other financial institutions are really safe. Speculations are rife on who´s next. Several Kenyans are indeed worried if the deposits in their banks are safe. One even penned this hilarious yet important letter to the CEO of his bank asking him to safeguard his meagre earnings. Mere reassurances like those from the Treasury secretary and The Kenyan Bankers Association won´t do and real action needs to be taken. Prosecutions and punishment of those responsible for the problems of such a significant institution would help because the general mood is one of the guilty walking away scott free even after brazenly guiding institutions to their death beds as they milk the cow dry.

There is need for the Central Bank to be clearer on its policies and way forward on the matters at hand. “Transparency about the Fed and our policies also was proving essential for the greater battle of winning the public’s trust. ” It´s been a week since the collapse and there have been very sketchy updates on the happenings at Chase Bank. This heightens worry (Will it open or close or be sold? Is my money safe?) and cements distrust. Clearer communication from the Central Bank would help a lot. To its credit, the Central Bank has established a facility available to ´any commercial or microfinance bank that comes under liquidity pressures arising from no fault of its own´ to help easy liquidity concerns. This is a solid tool in dealing with a financial panic for as Bernanke writes, “We were fighting a financial panic by providing essentially unlimited short-term credit to fundamentally solvent financial institutions and markets”.

In sum, problems such as those faced by the financial system in Kenya presently present an opportunity to re-examine the system and to make changes in necessary areas such as corporate governance. The process of sweeping may be painful but the results of courageous actions will lead to a cleaner financial system based on strong fundamentals that will help underpin economic development.

In other significant developments in Africa this week:

  • Set up in 2011, One of Africa´s youngest stock exchanges, the Rwanda Stock Exchange(RSE), plans to switch from the current manual platform to a digital platform soon.
  • African nations that are oil dependent are beginning to feel the pain of the low oil prices.  Angola and Nigeria have specifically reached out to the IMF for loans to help deal with the projected budget deficits. The latter has agreed a currency swap deal with China in addition to an infrastructure loan.
  • The IMF in its latest World Economic Outlook projects that Africa´s economic growth will slow down this year with projected GDP growths of 3% in 2016 and 3.4% in 2017 down from 3.4% in 2015.
  • Barclays Africa continues to prepare for the exit of its parent company from Africa in the next few years. Last month, Barclays announced its plans to reduce it´s ownership interest in Africa from the current 62% to 20% in the next to three 3 years.
  • Google is investing in Africa in conjunction with Livity Africa via Digify, a digital skills training programs that aims to equip 1 million Africans with digital skills ´in preparation for jobs and entrepreneurial opportunities across the continent´. The aim is to train 300K South Africans, 400K Nigerians, 200K Kenyans, and 100K from other sub-Saharan countries.

 

 

Author: Mokaya Erick

I am a learning investor who writes to make my thoughts clearer. I am interested in investment research and analysis, financial modelling and portfolio management.

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