BoG gives banks two weeks to increase cash reserve ratio from 12% to 14%
Steps up liquidity management operations
The Central Bank has announced significant policy changes aimed at ensuring financial stability in the banking sector.
In a move to address excess liquidity in the market, the Monetary Policy Committee of the Bank of Ghana has decided to reset the Cash Reserve Ratio on domestic currency deposits for banks from 12% to 14%, effective from April 13th, 2023. Additionally, the Bank will step up its liquidity management operations, further reinforcing the aim of maintaining financial stability.
Furthermore, the minimum Capital Adequacy Ratio (CAR) required to be maintained by banks was reduced from 13% to 10% as of December 31st, 2022. It was also announced that losses from the Deposit and Debt Exchange Program (DDEP) are to be reflected in the computation of CAR over a period of up to three years. These regulatory reliefs aim to provide some relief to the banking sector while ensuring that the overall financial system remains stable.
The adjustments made to the minimum CAR requirements have resulted in a significant decrease in the industry’s average CAR. The adjusted CAR, which reflects the regulatory reliefs, was 15.7% in December 2022, compared with the CAR of 16.6% in December 2022 without the DDEP.
The adjusted CAR includes valuation losses on GoG bonds, elevated credit risk, and revaluation losses on foreign currency-denominated loans.
While the adjustments to the CAR requirements may raise concerns about the potential risks to the banking sector, the central bank has taken a calculated approach to balance the need for regulatory relief with the aim of maintaining financial stability.
The adjustments will provide some breathing room for banks struggling to meet the previous minimum CAR requirements, while the reflection of DDEP losses over a period of time acknowledges the potential for losses to impact banks’ capital positions.
The Central Bank has also indicated that it will continue to monitor developments in the banking sector and deploy other macroprudential tools as necessary to maintain financial stability.
This suggests that the adjustments made to the minimum CAR requirements and the reflection of DDEP losses are part of a broader strategy to maintain financial stability in the banking sector.
Overall, the Central Bank’s recent policy changes signal a pragmatic approach to balancing the need for regulatory relief with the aim of maintaining financial stability.
While the adjustments made to the minimum CAR requirements may raise concerns, the Central Bank’s commitment to monitoring developments in the banking sector and deploying macroprudential tools as necessary should provide some reassurance to stakeholders.
