Story: Today Analysis
The Federal Reserve (Bank of Ghana) in conjunction with the US Treasury Department (Ministry of Finance) moved over the last weekend to assure the banking public that their deposits are safe. The Treasury Secretary Janet Yellin (Ken Ofori-Atta) was on TV shows on Sunday telling Americans that the banking system is “safe and sound”. The President of the USA on Monday March 13th addressed the nation to boost confidence in the banking system. The focus has been and continues to be to guarantee depositor funds.
One of the factors that led to the collapse of the Silicon Valley Bank (SVB) and the others is the significant investment that bank made in US Government bonds. The bank’s executives invested the windfall in deposits they gained over a relatively short period of time in bonds yielding around 1-2% whereas the Federal Reserve has in recent months been offering bonds that yield 4-5%. So when SVB tried to sell the bonds it held, it suffered discounts. Last week, it lost $1 billion from the sale of bonds, quite a significant haircut. Its customers were also adamant in withdrawing deposits, causing an irreversible run on the bank. Try as it could, SVB did not get many takers when it wanted to sell new shares to raise liquidity to service the needs of customers.
Professional observers of the banking system believe that some of this happened to some banks in Ghana who held receivables from government in 2018 and 2019. did not factor in all of this the potential impact on deposit and small businesses. So the economy took a huge hit. Today, it is the Domestic Debt Exchange Program (DDEP) that experts say has put some banks into jeopardy. What they recommend, is for the Ghanaian system to study what the Americans have been doing to protect depositors and ensure a healthy banking system. Perhaps, the Bank of Ghana and other authorities in the country should also go back and revisit decisions made about some banks. It is clear that the Ghanaian economy relies on the financial sector and as that sector has suffered these past five or so years, the economy and the people have also taken a massive hit on the negative side.
The following is a reproduction of the Press Release issued by the Board of Governors of the Federal Reserve System:
“To support American businesses and households, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy
The Federal Reserve is prepared to address any liquidity pressures that may arise. The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress. With approval of the Treasury Secretary, the Department of the Treasury will make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP. The Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds. After receiving a recommendation from the boards of the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, Treasury Secretary Yellen, after consultation with the President, approved actions to enable the FDIC to complete its resolutions of Silicon Valley Bank and Signature Bank in a manner that fully protects all depositors, both insured and uninsured. These actions will reduce stress across the financial system, support financial stability and minimize any impact on businesses, households, taxpayers, and the broader economy. The Board is carefully monitoring developments in financial markets. The capital and liquidity positions of the U.S. banking system are strong and the U.S. financial system is resilient. Depository institutions may obtain liquidity against a wide range of collateral through the discount window, which remains open and available. In addition, the discount window will apply the same margins used for the securities eligible for the BTFP, further increasing lendable value at the window. The Board is closely monitoring conditions across the financial system and is prepared to use its full range of tools to support households and businesses, and will take additional steps as appropriate.
