Bank of Ghana Cites Contained Liquidity Risks, Flags Interest Rate Pressures in Banking Sector

The Bank of Ghana has affirmed that liquidity risk across the country’s banking sector remains manageable, provided that Government of Ghana (GoG) bonds retain their market liquidity.

Recent stress tests by the central bank reveal that, under a liquid GoG bond market, most banks would be able to endure daily deposit withdrawals ranging from 1% to 4% for a full month.

However, if the GoG bond market were to face liquidity strains, many banks would struggle to withstand withdrawals beyond 1% of deposits over a 30-day period.

Interest Rate Headwinds Pose Challenge to Capital Adequacy

Despite the manageable liquidity outlook, the banking sector remains susceptible to significant interest rate movements.

Stress test results show that a 16-percentage-point rise in interest rates over the next year could drive the industry’s average Capital Adequacy Ratio (CAR) down from a post-Eurobond restructuring level of 13.85% to 11.57%, edging closer to regulatory thresholds.

The BoG noted, however, that an environment of gradually declining interest rates may provide relief, with liabilities repricing at a faster pace than assets, potentially shoring up sector-wide solvency.

Minimal Exposure to Exchange Rate Volatility

The central bank also pointed to limited direct exposure to exchange rate risk, even amid potential swings in the cedi against the US dollar.

Stress testing indicates that a significant depreciation of the cedi would have a marginal impact on banks’ solvency metrics, given the regulatory caps on Net Open Positions (NOP) in the sector.

The Bank of Ghana’s assessment of the banking industry’s liquidity risks underscores a cautiously optimistic view of the banking sector’s stability while emphasizing the importance of a liquid bond market and prudent fiscal management as crucial supports for ongoing resilience amid macroeconomic pressures.

Source: Norvanreports