In the wake of the recent quest to ensure the resilience and stability of Ghana’s financial sector, banking and financial consultant, Dr. Richmond Atuahene, is highlighting a set of “protective shields” the Bank of Ghana can deploy to safeguard the savings and livelihoods of everyday Ghanaians.
Dr. Atuahene supports the International Monetary Fund’s call for the BoG to move beyond traditional banking supervision to embrace macro-prudential policy, a strategy aimed at stopping what can be described as “financial wildfires” before they consume the entire economy.
In support of the IMF’s recommendation, the banking expert is proposing some remedies to the BoG to enable it to shield the entire financial sector to prevent any seismic risk that might affect the entire sector with ripple to the economy.
Protecting the Homeowner: The LTV and DTI Shield
One of the foremost tools proposed by Dr. Atuahene involves new rules for borrowing. To prevent what he describes as a boom-bust cycle in the housing market, the BoG is urged to utilize tools like the Loan-to-Value (LTV) and Debt-to-Income (DTI) ratios.
LTV Ratios: These limit how much you can borrow relative to the value of the property you are buying.
By keeping the loan amount well below the property value, the BoG ensures that homeowners do not become “underwater”, a dangerous situation where you owe the bank more than your house is worth.
DTI Ratios: These limit the fraction of a household’s income that can be spent on servicing debt.
Together, these tools act as a “brake” on excessive debt, ensuring families don’t fall into debt traps that could lead to defaults if the economy takes a downturn.
Building a Rainy Day Fund for the Nation
The banking consultant further proposes that banks must also do their part by building dynamic capital buffers. Think of this as a mandatory “savings account” for banks.
During good times when credit is growing rapidly, banks are required to set aside extra capital.
This Countercyclical Capital Buffer (CCyB) serves a dual purpose. It slows down risks, exuberant lending during a boom, and provides a resilient cushion that can be released during a recession.
This ensures that even in a crisis, banks can continue to provide essential services like credit and payments, preventing a costly credit crunch that would otherwise hurt businesses and individuals.
Why This Matters for Your Savings
When the financial system is unprotected, the consequences are severe. Dr Atuahene cites the 2022/2023 Domestic Debt Exchange Program (DDEP) as a stark example. He argues that losses suffered by lenders led to a curtailment of credit to households and firms, which in turn depressed overall economic activity.
With this, he believes that by targeting systemic risk, macro-prudential policy protects what can be described as the “plumbing” of the economy.
For instance, it could prevent the failure of a single large institution, like GCB Bank, from triggering a domino effect or contagion that could cause bank runs or a collapse in payment services.
A Vital Complement for Stability
Dr. Atuahene indicates that agree that these measures are a vital complement to existing policies.
While traditional monetary policy fights to keep prices stable, macro-prudential tools act as a second pillar, specifically tackling sector-specific risks like asset bubbles or excessive foreign currency lending.
Ultimately, these practical remedies are about more than just numbers on a balance sheet; they are about boosting financial resilience so that the next time a shock hits, the savings, jobs, and livelihoods of Ghanaians remain secure.
