Tuesday, November 10, 2009

The "too big, please don't fail" banks in Kenya

In this post, I talked about how banks can grow to a size that presents systemic risk to their domestic economies. That is, there are so large, that their likely failure would mean guaranteed govt assistance which would off-course mean every taxpayer peaks up the bill. Further, it was/is my opinion that such banks being deemed to be too large to fail and too expensive to rescue, should have applied to them, more stringent regulatory measures. The examples were higher capital and liquidity requirements to match their size or growth.
So do we have such banks in Kenya? The answer is yes:

  1. KCB: At close of play in September 2009, KCB had a balance sheet of Ksh189bn, which si roughly speaking 27% of Kenya's total budget. It also has around 200 branches, 150 of those in Kenya. Thus its a large employer as well. Its collapse won't be pretty. Remedy: At 13%, its tier 1 capital ratio looks strong for versus some Western banks, but its target should be 20% or more given its host economy.
  2. Equity: Holds just under 50% of Kenya's banking account population irrespective of the size of their accounts. And has 155 branches (130 of them in Kenya). Its collapse would lead to a severe dislocation SMEs and agriculture for which it serves a significant portion. I see its risk coming from liquidity rather than capital concerns. Remedy: Should be required to hold at least 12% of its assets in form of t-bills and or AAA-rated gilts.
  3. BBK: At Ksh170bn (June 2009), its also a behemoth in the local economy. Included here because of its corporate client content which would again cripple our economy were it or the parent to collapse. Remedy: As with KCB, probably more suspect to lower capital thresholds and should thus be required to hold at least 15% tier 1 capital ratio at all times.
  4. Co-op: The banker of co-operative societies and Saccos country-wide. And like Equity, therefore, carries systemic risk for the economy. Has a history of appalling size of bad loans coupled with political inteference. Remedy: Higher liquidity and capital requirements. The broker licence was probably a mistake.


coldtusker said...

Liquidity can be an issue for any bank of any size... matters little... A bank with 50% liquidity can be 'wiped out' if there is a run on the bank.

There needs to be thorough evaluation of most loans in the Kenyan banking system. And then take the necessary writedowns asap.

I fear the NPLs (esp the Provisioning) is inadequate in many banks.

Equity is a different challenge... unlike other 'traditional' bank... how do you assess level of risk in Equity's portfolio?

I am NOT saying EB has understated its NPLs but I am not sure of the methodology they use.

MainaT said...

CT- I don't you think you read my post.

Thanks for the comments though