The “too big to fail” maxim asserts that certain corporations, and particularly financial institutions, are so large and so interconnected that their failure would be disastrous to the greater economic system, and that they therefore must be supported by government when they face potential failure.
Proponents of this theory believe that some institutions are so important that they should become recipients of beneficial financial and economic policies from governments or central banks.
This scenario is not new for some of African big banks which tumble due to unavoidable mistakes but they are quickly rescued.
In August 2014 African Bank, a subsidiary of African Bank Investments Limited (Abil), ground to a halt under a mountain of bad debt. The Reserve Bank moved to salvage African Bank, placing it under Winterboer’s curatorship, though not without investors avoiding losses.
Holding company Abil, which also incorporated furniture company Ellerines and insurance arm Stangen, was placed into business rescue.
The rehabilitation process involved folding the good business written by African Bank, both before and since its crash, into a “good bank” and its bad loans into a residual bank.
Despite skating to the edge of total closure under the weight of bad debt, its rehabilitation and the launch of the “good bank” took centre stage.
Elsewhere, The Central Bank of Nigeria (CBN) discreetly worked on stress tests in which at least nine commercial banks had earlier demonstrated a level of distress that requires they recapitalize in order to avert the banks’ possibly falling into distress.
Emphasizing that none of the affected banks was “in imminent danger of collapsing,” a source at the Central Bank of Nigeria (CBN) said the regulatory bank’s action was meant to pre-empt any bank collapses in the near future.
The source said affected banks included United Bank for Africa (UBA), First Bank, Diamond Bank, Sterling Bank, Skye Bank, and Heritage Bank. The other banks are Wema Bank, Unity Bank and Fidelity Bank.
According to the source, several of the affected banks have neglected to maintain healthy capital liquidity levels. As a result, some of the banks were described as tethering on the brink of collapse.
In 1993, Kenya’s state owned National Bank suffered a bank run. It had been in the red nearly all its life, with political connections determining to whom loans were given.
This particular bank run was triggered by the fall of Post Bank Credit, a bank owned by the government. If another government bank was to fall, depositors reasoned, and then it would definitely be National Bank.
The bank had recorded a huge loss in 1979. When banks were failing in 1986, National Bank had 40 percent of its deposits in banks that were collapsing or had already collapsed. In response, the government got rid of the bank’s top management, gave it loan guarantees and money, and got National Social Security Fund to transform its deposits into shares. It was fast and decisive action.
Most financial systems in Africa are still grappling with this theory of not allowing the so called big banks to wind up for making unwarranted mistakes and courting unethical behaviors.
Some Banks have made mistakes that need to cost them but with the theory of “too big to fail” they still dominate the financial markets after receiving bail out packages.
Patrick Wameyo is a consultant at the financial academy in Kenya and he says
‘’ Any bank can fail in a spur of a moment since banking is purely based on confidence. Customers can in a short moment bring down the bank once their trust is affected by rumors or factual information.
We have recently seen in Kenya, customers who panicked after getting half baked information from social media and rushed to withdraw their cash from Chase bank causing a bank run . ’’
Wameyo adds that banks rocked by unethical practices should never be left to operate regardless of size, customer base and impact on the economy.
‘’ A company that benefits from these protective policies will seek to profit by it, deliberately taking positions that are high-risk high-return, as they are able to leverage these risks based on the policy preference they receive.’’
The International Monetary Fund and other sources in 2014 reports said the new regulation for systemically important banks, additional capital requirements, and enhanced supervision and resolution regimes likely reduced the prevalence of the Big to fail theory.
However other researches show that this theory is still highly practiced in African Banking system and millions of money has been wasted on revamping the collapsing banks.
– Wamoyi . M. M., AfricanQuarters, Kenya