Ghana: red alert on public banks Between emergency relief and the challenge of governance

The banking crisis that has shaken Ghana since 2017 is not an isolated accident, but the culmination of long-standing weaknesses. It reveals how management weaknesses, incomplete supervision and political choices can turn into massive costs for public finances. The bailout of state-owned banks, a highly visible feature of this process, has crystallized debates on financial governance and the transparency of state action.

Even before the bank closures, there were many warning signs. Asset quality reviews in the mid-2010s revealed undercapitalized banks, with very high non-performing loan ratios. In several institutions, credit growth was based on concentrated exposures, sometimes linked to related parties, and public banks responsible for financing strategic sectors were particularly hard hit when the projects supported turned out to be less profitable than expected.

In this context, supervision did not fully play its role as a safeguard. A number of studies highlight the prolonged use of regulatory tolerance: the authorities allowed situations of capital weakness to persist, rather than rapidly imposing recapitalizations or resolutions. This strategy bought time, but also allowed losses and implicit state commitments to accumulate, making the final bill much heavier.

From 2017, the regulator opted for a clean break. Several commercial bank licenses were revoked, dozens of microfinance and credit institutions were closed or placed in liquidation, and a transitional bank was created to take over deposits and certain assets. At the same time, the minimum capital requirement for banks was raised to 400 million cedis, forcing the entire system to recapitalize rapidly in order to restore depositor confidence.

It is in this context that the specific question of public banks arises. Some are deemed solvent in the long term, but unable to reach the new capital threshold on their own. Their disappearance would have meant a loss of financing capacity in key sectors, and sent a worrying signal to the market. The government therefore chose to bail them out, not directly via the budget, but by creating a dedicated vehicle, the Ghana Amalgamated Trust (GAT), financed in particular by local pension funds.

GAT's mandate is twofold. It injects equity capital into a group of indigenous-controlled banks, including several public institutions, and supports their transformation to improve profitability and governance. In exchange, the vehicle obtains significant shareholdings and a stronger presence on boards of directors. On paper, the banks are saved under certain conditions: rationalization of networks, improved risk management and better regulatory compliance.

The financial effort, however, remains considerable. Official estimates put the cumulative cost of the clean-up - bank bailouts, depositor protection, transition bank and GAT - at around 21 billion cedis, or just over 3% of GDP. Taking these charges into account, debt reports show a debt-to-GDP ratio sustainably above 60%, and recent budgets indicate that the bill associated with the financial sector is now approaching 30 billion cedis.

In the short term, however, stability is the name of the game. A generalized banking panic has been avoided, household and corporate deposits have been preserved and several solidity indicators have improved. The ratio of non-performing loans has fallen after the first waves of restructuring, while the remaining banks have higher equity capital and improved liquidity. For public-sector banks, recapitalization means they can continue to finance priority segments, while complying with new prudential requirements.

The other side of the coin can be seen in macroeconomic terms. By increasing domestic debt and implicit guarantees, bailouts reduce the fiscal space available for public investment and social policies. They also tighten the link between bank and sovereign balance sheets, as public banks recapitalized with government securities remain highly exposed to debt. When the sustainability crisis calls for a restructuring of domestic bonds, losses on these securities once again dent bank capital.

Debates on governance are commensurate with the sums involved. The authorities emphasize the targeting of interventions and the conditions imposed in terms of recovery. On the contrary, many analyses highlight the grey areas: bank selection criteria, the link between commercial objectives and public mandates, the risk of moral hazard for institutions anticipating a rescue. The central question becomes that of incentives: does the new system really reduce the probability of a future bailout?

The Ghanaian experience shows that bailing out state-owned banks can be a necessary crisis management tool, but that it is no substitute for rigorous supervision and demanding governance of state-owned enterprises. Stabilizing the financial system has made it possible to avoid a more costly collapse, at the cost of increased debt and greater interdependence between the state and the banking sector. The credibility of the reform will depend on transparency regarding the use of funds, monitoring the performance of recapitalized banks and clear scenarios for state disengagement.