Shareholders to be held liable for bank collapses
http://www.theindependent.co.zw/
November 9, 2012 in Business
TREASURY is finalising sweeping amendments to the Banking Act which will,
among other things, see shareholders being held responsible for bank
failures.
Report by Paidamoyo Muzulu/Clive Mphambela
The amendments will compel impromptu and mandatory stress tests, limit the
number of shares an individual can hold in a bank as well as outlaw multiple
directorships for banking institutions.
Finance minister Tendai Biti is spearheading the amendments to the Banking
Act to bring lasting stability to the financial services sector after two
banks –– Interfin Banking Corporation and Renaissance Merchant Bank ––
collapsed this year and last year respectively, owing to poor corporate
governance and lack of periodic stress tests on banking institutions.
Genesis Investment Bank also collapsed.
“We are working on comprehensive amendments to the Banking Act which are now
with the principals,” Biti told parliamentarians at the pre-budget seminar
in Victoria Falls last week.
“The amendments will address the failing corporate governance we witnessed
at Interfin and Renaissance, where shareholders were more powerful than the
board and management,” said Biti.
If the amendments are incorporated into law, a bank’s shareholders will
become liable for its collapse.
“We will lift the corporate veil so that the shareholders will also feel the
pain of the collapse of their banks, just like depositors,” Biti said.
“We will put a limit to the number of shares an individual can control in a
banking institution and a banker would only be allowed to sit on not more
than two boards of a financial institution,” he added.
The proposed Banking Bill will also introduce a banking ombudsman who will
look into issues such as interest rates and would have the same powers as
provided under the Consumer Protection Act.
The banking ombudsman will adjudicate matters relating to fair trade
practices.
There will be mandatory and random stress tests on a bank’s financial
position to protect depositors, Biti said.
He said the amendments would also create synergies among the three financial
regulatory bodies –– the Securities Commission of Zimbabwe, the Insurance
and Pensions Commission and the Reserve Bank of Zimbabwe.
Stakeholders have called on the regulatory authorities to improve the
governance structures within the local banking sector.
Biti’s proposals also come soon after the International Monetary Fund staff
team, in its concluding report following Article IV consultations in June,
identified the reduction of financial sector vulnerabilities as a key
objective for government.
“The IMF welcomed that the financial regulatory framework was being
strengthened after a long period of forbearance. In July 2012, the RBZ
announced steep capital requirement increases, to be phased over two years.
The announced increases in minimum capital requirements is expected to speed
up consolidation in the banking system. The RBZ will need to monitor closely
banks’ efforts to comply with the new requirements, which will undoubtedly
alter the banking system structures,” the IMF said.
The frequent and unannounced spot checks and stress tests on banks’ balance
sheets will help detect trouble early, enabling authorities to take timely
corrective action.
The IMF strongly advocated for a more proactive approach to banking
supervision, noting that a significant number of banks remained inadequately
capitalised and relatively weak despite meeting minimum capital
requirements.
The team raised concern credit risks were unacceptably high, particularly
for smaller banks that have low capital buffers, adding asset quality had
deteriorated due to unsound lending practices, poor risk management and weak
corporate governance.
The IMF said it would also be essential to ensure tight and transparent
governance in the banking sector.
Analysts have attributed the breakdown of corporate governance structures in
banks and public listed companies to the overbearing influence and power of
some shareholder managers as well as multiple directorships blamed for
diluting board member effectiveness and compromising their independence.
“Staff welcomes planned amendments to the Banking Act to improve oversight
and surveillance. The authorities plan to strengthen the Troubled and
Insolvent Bank Resolution Framework to incorporate prompt corrective
actions, and improve corporate governance,” the IMF team said in its report.