The Bank of Ghana has disclosed that liquidity risks in the banking sector are manageable, contingent on the liquidity of Government of Ghana (GoG) bonds.
Central Bank stress tests indicate that, with a liquid GoG bonds market, most banks could withstand daily deposit withdrawals between 1.0% and 4.0% over a 30-day period.
However, if the GoG bond market becomes illiquid, most banks would struggle to sustain withdrawals beyond 1.0% of deposits per day over the same period.
The banking sector is strong enough to handle possible interest rate hikes.
A stress test (a kind of financial simulation) indicates that if interest rates were to rise by 16 percentage points over the next year, banks would still remain stable, though their capital adequacy ratio (a key measure of financial health) would drop from 13.85% to 11.57%.
Interestingly, the report also notes that if interest rates were to fall sharply, the banking sector might actually become more stable. This is because banks’ liabilities (what they owe) would adjust faster than their assets (what they own), which could improve their financial standing. Therefore, a gradual drop in interest rates is expected to make the banking sector even stronger financially.
Exchange Rate Risk
The Bank of Ghana observed that exchange rate changes have little effect on the banking sector’s solvency.
According to test results, a sharp fluctuation in the Ghana cedi’s value against the US dollar would likely have minimal impact on banks’ financial stability. This outcome is attributed to existing restrictions on the Net Open Position (NOP) within the banking sector.