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Implications of Bank Holding Company under the New Banking Model in Ghana and under Basel III rules

Written by: Emmanuel Akrong –[email protected]/+1-416-414-2638Executive Summary

When we think of banks, we typically have in mind our local bank branch that stores deposits and issues personal or business loans. Prima facie there is nothing wrong with this image. After all, there are still almost 35 unique commercial banks in Ghana that specialize in deposit-taking and loan-making. What we typically forget, however, is that most commercial banks are subsidiaries of larger bank holding companies (BHCs), and in fact nearly all commercial bank assets fall under such BHCs.

Becoming a bank holding company makes it easier for the firm to raise capital than as a traditional bank. The holding company can assume debt of shareholders on a tax free basis, borrow money, acquire other banks and non-bank entities more easily, and issue stock with greater regulatory ease. It also has a greater legal authority to conduct share repurchases of its own stock. Act 930 930 and the Basel III capital rules have curbed many of the benefits of a BHC.

Basel III has eliminated the most significant advantages that BHCs had compared to banks when issuing capital instruments. Under the new rules common stock instruments must meet 13 criteria to qualify as common equity tier 1 capital. Holding companies whose capital structures include multiple classes of stock or that are comprised of “non-traditional” elements should review the instruments to ensure they satisfy these criteria.

The, Specialised Deposit-Taking Institutions (SDIs) Act, 2016 (Act 930) requires registration of BHCs and also restrict the activities of BHCs. It should be noted that a BHC will not be registered by Bank of Ghana (BoG) among others unless BoG is satisfied that the capital of the applicant is adequate and the original sources of capital are not tainted and do not include borrowed funds the arrangements for corporate governance, including accounting, risk management, and internal control systems and records of the applicant are adequate and the proposed significant shareholders are suitable and the ownership

and managerial structure of the proposed financial holding company will not hinder effective supervision, including supervision on a consolidated basis.

If the BHC is a foreign company, the Bank should consider if the foreign bank is adequately supervised on a global consolidated basis and that Bank of Ghana (BoG) have arrangement in place for cooperation, coordination and information sharing with home country supervisor.

The main aim of the Act 930 as it relates to holding company is the protection of depositors by “ring fencing” banking business from non -banking activities. In essence the Act seeks to ring-fence depositors' funds from risks inherent in non-core banking businesses. This is achieved through the registration requirement and supervision on consolidated basis.

There are several questions that many in the public have regarding why did UT Bank and Capital Bank became insolvent and ceased to exist as Banks. Aside from Non-Performing Loans (NPL), many observers are attributable the failure of the two banks to the abuse use of Banks holding companies and the activities of the holding companies that put depositor’s money at risk.

As Banks in Ghana planned to meet the new capital requirement of GHS 400 million by December 31, 2018, many are considering mergers and acquisitions and private equity/placement through holding companies. While such ideas are laudable, the concept of BHC under Act 930 should be carefully be examined.

For Banks with holding companies in Nigeria, the Guidelines for Licensing and Regulation of Financial Holding Companies in Nigeria specifies among others the following1 :

- Consolidated supervision of financial holding companies- A financial holding company shall ensure that it and all its subsidiaries are adequately capitalized

at all times ( section 3.4)

- Subsidiaries are prohibited from acquiring shares of other subsidiaries of their parent holding company

1 https://www.cbn.gov.ng/Out/2014/FPRD/HoldCo%20Regulation%20(Cleaned)%20-%20Final%20for%20issuance%203.pdf

- Subsidiaries of a financial holding company are prohibited from acquiring shares in the financial holding company

- A financial holding company shall be a source of financial strength to the subsidiaries. In serving as a source of financial strength to its subsidiaries, a financial holding company shall maintain financial flexibility and capital-raising capabilities for supporting its subsidiaries.

- Excess capital in one subsidiary shall not be used to make up a shortfall in another subsidiary.

The impact of holding companies rules under Act 930 is far reaching especially for local holding companies. Many banks in Ghana are faced with a potential reorganization as a result of the new regulations by the Act 920. In addition to the ever increasing regulations, banks are also required to comply with IFRS.

For local holding companies that existed before Act 930 are advised to take the following step

a. Reach out to BoG for its expectation of the application of Act 930b. Register the Holding company with BoG if that is not done alreadyc. Obtain BoG manual of supervision for holding companiesd. Ensure timely audits of holding companiese. The Bank and its holding company can take the following steps- Diversify its non-banking/financial activities such as construction, energy, farming etc.- Diversify its Investment in non-financial firms- Strength its corporate governance , including accounting, risk management , and internal control

systems and recordsf. Take steps to obtain written approval from BoG for holding companies to provide shared services

to the group g. Take steps to ensure shared services and lending arrangements are at arm’s length

Banks with foreign holding companies should reach out to BoG to obtain a written confirmation that BoG is satisfied that the foreign holding company is adequately supervised on a global consolidated basis by its home country supervisor and that BoG has satisfactory arrangement for cooperation, coordination and information sharing with its home country supervisor.

The rest of the article is to examine some of the regulations of holding companies under the current New Banking Model in Act 930.

Q1: What are the Pros and Cons of having a Bank holding company?

Pros

- Increased access to capital markets is one of the primary advantages to the BHC structure. A BHC has the ability to raise capital in forms other than common stock, including considerable latitude in assuming or incurring debt subject to BoG limits. This might be done, for example, to fund a capital injection to the subsidiary bank or to pay for an acquisition.

- Structural flexibility is another reason to form a BHC. It is sometimes desirable to conduct an activity outside the insured depository.

- BHCs also offer increased flexibility in regard to merging with or acquiring additional banks. In addition to merging a bank into a BHC’s subsidiary bank, a BHC can acquire an additional bank and operate as a multibank BHC. In the case of multi-bank BHCs, these entities can be utilized to provide centralized services to its banks such as independent loan review or asset liability management. A BHC can also provide tax advantages through filing consolidated tax returns.

Cons

- There are additional costs and more complexity in the start-up phase associated with the formation of a BHC.

- Also, there are ongoing costs related to Bank of Ghana supervision and reporting requirements under Act 930. Additionally, a BHC may be subject to additional cost and regulation if it is required or elects to register its securities with the Security and Exchange Commission of Ghana.

- Another con is that a BHC would likely need to increase the organization’s initial capital offering by at least several hundred thousand Ghanaian cedi in order to provide working capital for the BHC. (It is important to anticipate the BHC’s funding needs because a bank will not be able to pay dividends for the first few years.)

- Finally, forming a BHC will place and increase burden on management who must become familiar with BoG BHC regulations and provide for distinct governance in the form of separate director and officer positions, policies and procedures, and risk management.

Q2 what is Bank of Ghana supervisory approach for Bank and its holding companyAct 930 makes it very clear, that every bank that wants to go into any group holding, must be purely a financial holding and you are now going to report on consolidated basisSection 42 of Act 930 requires Bank of Ghana to provide a consolidated supervision. This means Bank of Ghana supervision extends beyond the Bank and its includes the Bank holding company and its subsidiaries. This means BoG supervisory department will now collaborate with other regulatory agencies in the financial sector (such as NPRA, NIC, Pensions Fund, etc.) to enforce the rule. This means when BoG visit any bank, they are looking at everything about your bank. To achieve this in line with section 42 of Act 930, the Bank which is a member of corporate group shall at least twice in each year at times prescribed by the Bank of Ghana, furnish the Bank of Ghana with a complete organizational structure of the group. The organizational structure shall include

(a) a diagram of the group,(b) direct and indirect affiliates and associates of the bank or specialised deposit-

taking institution,(c) the nature of the relationship between the affiliates and associates and the group,

and(d) any other information that the Bank of Ghana may require

As it relates to foreign holding companies. BoG relies on the supervision of the holding company by its supervisor. To gain the comfort of the holding company supervisor in its home country, BoG has to be satisfied that the foreign holding company is adequately supervised on a global consolidated basis by its home country supervisor and that BoG has satisfactory arrangement for cooperation, coordination and information sharing with its home country supervisor.

Q3: What is Holding company of a Bank in Ghana?

Section 156 of the Specialised Deposit-Taking Institutions (SDIs) Act, 2016 (Act 930) financial holding company as comp any that controls a bank or a specialised deposit-taking institution which is subject to registration requirements under this Act.

Subsection 1 of section 44 of Act 930 specifies that a person shall not take an action that causes a company to function as a financial holding company unless that company is registered as a financial holding company by the Bank of Ghana.

Regarding foreign applicant, subsection 4 (g) of section 44 of Act 930 specifies that the Bank of Ghana will only register such a company as financial holding company unless Bank of Ghana is satisfied that the foreign bank or specialised deposit-taking institution is adequately supervised on a global consolidated basis by the home country supervisor of that bank or specialised deposit-taking institution, and arrangements satisfactory to the Bank of Ghana for cooperation, coordination, and information-sharing with the home country supervisor are in place

The above sections of Act 930 means that a Company cannot be parent of a Bank unless such Bank is registered with Bank of Ghana and complies with Bank of Ghana regulations. Act 930 makes it very clear, that every bank that wants to go into any group holding, must be purely a financial holding and you are now going to report on consolidated basis This means when BoG visit a bank, they are looking at everything about the bank.

Q4 .What is the Holding Company Threshold requiring approval by BoG

Section 156 defines control as a relationship where a person or a group of persons acting in concert, directly or indirectly

a. owns twenty five percent or more of the voting rights of a person;b. has the power to appoint or remove the majority of the members of the board of directors of the

person ;c. has the ability to exert a significant influence on the management or policies of a person; ord. has the ability to direct the activities of the person so as to affect the financial returns on any

investment made with the person;

In effect a BHC needs approval for its control of a bank when it owns more than 25% of a bank. This is consistent with regulations in Kenya. In Nigeria and South Africa control is based on IFRS 10 definition of control which is 50%.

Q5: Under what conditions that Bank of Ghana refuse to register a Bank Holding company

Subsection 4 of section 44 of Act 930 specifies that Bank of Ghana shall not register an applicant as a financial holding company unless Bank of Ghana is satisfied that ( only key item listed below)

- the capital of the applicant is adequate and the original sources of capital are not tainted and do not include borrowed funds

- the arrangements for corporate governance, including accounting, risk management, and internal control systems and records of the applicant are adequate

- The proposed significant shareholders are suitable and the ownership and managerial structure of the proposed financial holding company will not hinder effective supervision, including supervision on a consolidated basis.

Q6: Are there separate capital requirements of Bank’s holding company

Yes.

Subsection 4 of Section 28 of Act 930 specifies that a financial holding company shall maintain at all times a minimum paid up capital, unimpaired by losses or other adjustments, as may be prescribed by the Bank of Ghana.

Please note that the GH¢ 400 million is the capital requirements for a Bank and not a financial holding company.

Q7 what are permissible activities of a Bank’s holding company

Subsection 1 of Section 46 of Act 930 specifies that a financial holding company shall not

(a) without the prior written approval of the Bank of Ghana, directly or indirectly control any member of another financial group, whether through establishment or acquisition or otherwise; or

(b) Directly or indirectly, acquire or hold a share or ownership interest in a commercial, agricultural or industrial company or unincorporated entity.

The above section and section 18 which talks about permissible activities of a Bank makes it clear that a Bank and its parent (holding company) cannot undertake activities that are non-financial such as construction, farming, energy related activities, etc.

In the nutshell, the permissible BHC activities are those activities that are so closely related to banking or managing or controlling banks as to be a necessary incident thereto

Q8 : what happens to a Holding company if it is not playing by Act 930 requirements and Bank of Ghana rules/regulations Section 48 of Act 930 specifies that Bank of Ghana may withdraw the registration of a financial holding company and require divestiture of a bank or specialised deposit-taking institution licensed under this Act, where

(a) the financial holding company persistently fails to comply with the requirements of this Act,

(b) the financial holding company fails to comply with the conditions of registration,

{c) the financial holding company ceases to meet the requirements for registration as a financial holding company,

(d) the Bank of Ghana determines that registration was granted based on false or inaccurate information,

(e) the Bank of Ghana determines that the financial holding company is insolvent or is likely to become insolvent,

(/) the parent company of the financial holding company loses its authorisation to conduct deposit-taking business in its home jurisdiction, or

{g) proceedings for bankruptcy, insolvency or an arrangement with creditors are initiated against that financial holding company.

Q9: what happens to a Bank if its Holding company registration is withdrawn?Subsection 2 of section 48 of Act 930 specifies that where a registration is withdrawn under subsection (1), the Bank of Ghana may

(a) require the divestiture of the bank or specialised deposit taking institution in the country,

(b) restrict transactions between the bank or specialised deposit taking institution in the country and the financial holding company and other members of the financial group, or

{c) place the financial holding company in official administration or receivership.

Q10. What are some of the restrictions of intercompany transactions between a Bank and its holding company?

No financial holding company shall:

i. purchase or transfer non-performing asset among related parties ( section 65) ii. Grant or permit an outstanding exposure to an insider or financial holding company or related

party except such transaction is conducted at arm’s length; (sections 67 and 70)

iii. The Bank grant a loan or advance including guarantee against the security of the shares of the Bank, financial holding company , shares of its subsidiary and the financial holding company (section 61

iv. A Bank shall not issue shares that are paid for from funds borrowed from the Bank

Q11. What are Basel III implications of Holding Companies?

Under the new rules common stock instruments must meet 13 criteria to qualify as common equity tier 1 capital. Holding companies whose capital structures include multiple classes of stock or that are comprised of “non-traditional” elements should review the instruments to ensure they satisfy these

criteria. The application of the criteria is aimed to preserve the quality of the instruments by requiring that they are deemed fully equivalent to common shares in terms of their capital quality as regards loss absorption and do not possess features which could cause the condition of the bank to be weakened as a going concern during periods of market stressThe criteria include for an instrument to be included in Common Equity Tier 1 capital under Basel III are

1. Represents the most subordinated claim in liquidation of the institution.2. The investor is entitled to a claim on the residual assets that is proportional with its share

of issued capital, after all senior claims have been paid in liquidation (i.e. has an unlimited and variable claim, not a fixed or capped claim).

3. The principal is perpetual and never repaid outside of liquidation (setting aside discretionary repurchases or other means of effectively reducing capital in a discretionary manner that is allowable under relevant law and subject to the prior approval of the Superintendent).

4. The institution does not, in the sale or marketing of the instrument, create an expectation at issuance that the instrument will be bought back, redeemed or cancelled, nor do the statutory or contractual terms provide any feature which might give rise to such expectation.

5. Distributions are paid out of distributable items, including retained earnings. The level of distributions is not in any way tied or linked to the amount paid in at issuance and is not subject to a contractual cap (except to the extent that an institution is unable to pay distributions that exceed the level of distributable items or to the extent that distributions on senior ranking capital must be paid first).

6. There are no circumstances under which the distributions are obligatory. Non-payment is, therefore, not an event of default.

7. Distributions are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. This means that there are no preferential distributions, including in respect of other elements classified as the highest quality issued capital.

8. It is in the form of issued capital that takes the first and proportionately greatest share of any losses as they occur. Within the highest quality of capital, each instrument absorbs losses on a going concern basis proportionately and pari passu with all the others.

9. The paid-in amount is recognized as equity capital (i.e. not recognized as a liability) for determining balance sheet solvency.

10. The paid in amount is classified as equity under the relevant accounting standards11. It is directly issued and paid-in and the institution cannot directly or indirectly fund

the purchase of the instrument. 12. The paid-in amount is neither secured nor covered by a guarantee of the issuer or

related entity or subject to any other arrangement that legally or economically enhances the seniority of the claim. A related entity can include a parent company, a sister company, a subsidiary or any other affiliate. A holding company is a related entity irrespective of whether it forms part of the consolidated banking group

13. It is only issued with the approval of the owners of the issuing institution, either given directly by the owners or, if permitted by applicable law, given by the Board of Directors or by other persons duly authorized by the owners.

14. It is clearly and separately disclosed as equity on the institution’s balance sheet, prepared in accordance with the relevant accounting standards.

[BCBS June 2011 par 53]

Q12 what is the accounting requirements of Bank and its holding company?

a. International Accounting Standard (IAS) 24 related party disclosures paragraph 13 specifies that relationships between a parent and its subsidiaries shall be disclosed irrespective of whether there have been transactions between them. An entity shall disclose the name of its parent and, if different, the ultimate controlling party. If neither the entity's parent nor the ultimate controlling party produces consolidated financial statements available for public use, the name of the next most senior parent that does so shall also be disclosed.

b. IFRS 10 paragraph 2 requires an entity (the parent) that controls one or more other entities (subsidiaries) to present consolidated financial statements. However, a parent need not present consolidated financial statements if it meets all of the following conditions2:

2 IFRS 10:4(a)

a. It is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements;

b. Its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets);

c. It did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market; and

d. Its ultimate or any intermediate parent produces consolidated financial statements available for public use that comply with IFRSs.

Q13: what is the advice of Banks with holding companies?

As noted in the table below, almost all Banks in Ghana have a holding companies. It appears that Act 930 impact is higher on local holding banks than foreign holding companies.

Name of Bank Year of incorporation

Ownership

Is the Bank involved in a group structure

Is the Bank the Ultimate parent in the group structure

Is the Bank owned by a Holding company

Is the Holding company a foreign Bank

If the holding company is a local company, Is the holding company involved in non-financial activities (look at the top 20 shareholders of the FS)

1 GCB Bank Limited 1953 Local Yes Yes No No Yes. SSNIT (29.81%) and The Government of Ghana (21.36%)

2 Barclays Bank of Ghana Ltd.

1917 Foreign Yes No Yes Yes N/A

3 Zenith Bank Ghana Limited


4 Stanbic Bank Ghana Ltd


5 Standard Chartered Bank Ghana Limited


6 Ecobank Ghana Limited

1990 Foreign Yes No Yes Yes. N/A

7 uniBank (Ghana) Limited

1997 Local Yes No No No Yes. HODA Holdings Limited (56.63%) , Integrated Properties Limited (16.86%) and Telemedia Company Limited (14.49%)


Ownership






5 Fidelity Bank Limited 1996 Local Yes No No No Yes. Africa Capital LLC ( 34.46%) and KTH Africa Investments (16.94%)

6 CAL BANK LIMITED 1990 Local Yes No No No Yes. SSNIT (33.18%) and SCGN/ADP I HOLDINGS 4, SCGN/ADP I HOLDINGS 4 (27.69%)

7 Societe General Ghana Limited


8 ACCESS BANK (GHANA) PLC


9 ADB Bank Limited 1965 Local Yes No No No Yes Government of Ghana (32%), Belstar Capital ( 24%)

10 First National Bank Ghana Ltd


11 Sovereign Bank Limited 2015 Local Yes No No No Yes. Kwame Achampong Kyei (35%) and Tetteh Nettey (25%)

12 Guaranty Trust Bank (Ghana) Limited


13 Premium Bank Ltd 2016 Local Yes No Yes Yes. Yes . Vanguard Group (39.51%) and Awuah-Darko Holdings Ltd (26.03%)

14 Heritage Bank Limited 2017 Local Yes No Yes Yes. New Bank and


Ownership






information is not available online

15 GN Bank Limited 2014 Local Yes No Yes No Yes. Groupe Nduom 16 United Bank for Africa

(Ghana) Ltd.2004 Foreign Yes No Yes Yes. N/A

17 Bank of Baroda (Ghana) Limited


18 First Atlantic Bank Ltd 1994 Foreign Yes No Yes No Kedari Nominees Limited (71.73%)

19 The Royal Bank Limited 2011 Local Yes No Yes No Yes. Alhaji Abdul Aziz Adamu Iddrisu (39.59%) and Alhaji Abdul Mumuni Adamu (23.99%)

20 Universal Merchant Bank (Ghana) Ltd

1971 Local Yes No Yes No Yes. Fortiz Private Equity Fund Limited (96.00%)

21 BANK OF AFRICA GHANA LIMITED


22 Prudential Bank Limited

1993 Local Yes No Yes No Yes J. S. Addo Consultancy (24.82%)

23 FBNBank Ghana Ltd 2006 Foreign Yes No Yes Yes. N/A 24 HFC Bank 1990 Foreign Yes No Yes Yes. N/A 25 Energy Bank (Ghana)

Ltd 2010 Foreign Yes No Yes No Global Fleet Oil & Gas

(Nigeria) - 70% and Global Fleet (UK)-20%

26 BSIC Ghana Limited 2008 Foreign Yes No Yes Yes. N/A


Ownership






27 National Investment Bank Ltd

1963 Local Yes No Yes No 100% owned by the Government of Ghana.

28 OmniBank Ghana Limited

2016 Local Yes No Yes No 2016 FS is not available online

29 The Beige Bank Limited 2017 Local Yes No Yes No Yes. BEIGE Group

30 The Construction Bank (Gh.) Limited

2017 Local Yes No Yes No New Bank and information is not available online

31 GHL Bank Limited 2017 Local Yes No Yes No New Bank and information is not available online

32 ARB Apex Bank Ltd Local Yes No Yes No New Bank and information is not available online

For local holding companies that existed before Act 930 are advised to take the following step

i. Reach out to BoG for its expectation of the application of Act 930ii. Register the Holding company with BoG if that is not done alreadyiii. The Bank and its holding company can take the following steps

- Diversify its non-banking/financial activities such as construction, energy, farming etc.- Diversify its Investment in non-financial firms- Strength its corporate governance , including accounting, risk management , and internal control

systems and recordsiv. Take steps to ensure shared services and lending arrangements are at arm’s length

v. Since shared services are specified under the Act as part of the list of permissible activities, The financial holding company or any of its subsidiaries should in line with subsection 2 of section 46 seek a written approval from BoG to provide shared services to the group in respect of:

- Information and Communication Technology; - Facilities (Office Accommodation including Electricity, Security and Cleaning Services in that

accommodation); and - Legal services.

Banks with foreign holding companies should reach out to BoG to obtain a written confirmation that BoG is satisfied that the foreign holding company is adequately supervised on a global consolidated basis by its home country supervisor and that BoG has satisfactory arrangement for cooperation, coordination and information sharing with its home country supervisor.

References

- Specialised Deposit-Taking Institutions (SDIs) Act, 2016 (Act 930) - Federal Reserve Bank supervisor manual for Bank Holding Companies

https://www.federalreserve.gov/publications/files/1000.pdf

- Guidelines for Licensing and Regulation of Financial Holding Companies in Nigeriahttps://www.cbn.gov.ng/Out/2014/FPRD/HoldCo%20Regulation%20(Cleaned)%20-%20Final%20for%20issuance%203.pdf

- Bank Holding Company Regulation in Kenya, Nigeria and South Africa: A Comparative Inventory and a Call for Pan-African Regulationhttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=2881819https://www.researchgate.net/publication/318794523_Bank_holding_company_regulation_in_Kenya_Nigeria_and_South_Africa_a_comparative_inventory_and_a_call_for_Pan-African_regulation

- Deloitte on Africa Banking regulatory environment and supervision in Africahttps://www2.deloitte.com/content/dam/Deloitte/au/Documents/international-specialist/deloitte-au-aas-banking-regulatory-environment-supervision-africa-12.pdf

- Shareholding structure disclosure made in 2016 and 2015 financial statements of Banks in Ghana

https://www2.deloitte.com/content/dam/Deloitte/au/Documents/international-specialist/deloitte-au-aas-banking-regulatory-environment-supervision-africa-12.pdf

https://www2.deloitte.com/content/dam/Deloitte/au/Documents/international-specialist/deloitte-au-aas-banking-regulatory-environment-supervision-africa-12.pdf

https://www.researchgate.net/publication/318794523_Bank_holding_company_regulation_in_Kenya_Nigeria_and_South_Africa_a_comparative_inventory_and_a_call_for_Pan-African_regulation



https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2881819

https://www.cbn.gov.ng/Out/2014/FPRD/HoldCo%20Regulation%20(Cleaned)%20-%20Final%20for%20issuance%203.pdf

https://www.cbn.gov.ng/Out/2014/FPRD/HoldCo%20Regulation%20(Cleaned)%20-%20Final%20for%20issuance%203.pdf

https://www.federalreserve.gov/publications/files/1000.pdf