Deposit insurance scheme should strike the right balance

The financial sector is a very critical sector of every economy which makes it imperative for goverments to protect and strengthen it to ensure economic development.

And to ensure a robust financial services industry, the Bank of Ghana, which is the regulator, must provide adequate and strong safety net arrangements to give depositors clarity, reassurance and confidence to enable them to play their role as surplus units.

Financial safety net arrangements may include the central bank serving as the lender of last resort for troubled banks, explicit government guarantee of limited deposits and strict prudential supervision of banks and other deposit-taking entities.

One of the safety nets is the Ghana Deposit Protection Act, which seeks to establish a deposit insurance scheme to protect depositors in the event of a bank failure.

Like any other business, banks and other financial institutions can fail. however, when depositors know that their savings are protected against failure, it will make them confident in keeping their savings in the banks and other financial institutions.

Banks and specialised deposit taking institutions assume and manage risks which make them vulnerable to liquidity, solvency and other risks, and these risks sometimes crystallise into failures, leading to loss of customer deposits.

The introduction of the deposit insurance scheme is, therefore, to augment the existing financial safety nets by providing explicit protection to depositors.

The scheme will also impose on banks the responsibility to contribute towards the cost of resolving failed institutions, thus reducing the burden on fiscal and monetary authorities.

The Daily Graphic, therefore, commends the Bank of Ghana for taking steps to introduce a deposit insurance scheme in the country.

This positive development, we trust, will further increase confidence in the banking sector and help keep the financial system stronger and beneficial to all.

We are also urging the BoG to tackle the concerns raised over the independence of the Ghana Deposit Insurance Corporation, the body that has been mandated to manage the scheme.

The paper believes that the operations of the corporation should be independent and not be made as a department under the BoG because the central bank must be focused to discharge its duties as mandated.

It is a fact that properly designed deposit insurance schemes remove the incentive of panic runs on banks and lack of confidence that can lead to systemic contagion.

The paper also thinks that a deposit insurance scheme should strike the right balance. It should not provide an incentive for depositors and regulators to ignore excessive risk taking by banks.

Finally, we commend the Graphic Business, from the stables of the Graphic Communications Group and Stanbic Ghana Limited, the lead sponsor of the forum, for getting experts to share their views on the scheme.

It is our expectation that such constructive thought leadership platforms will help shape the policies of the government and institutions.