Question

GROUP ASSIGNMENT (25 marks) On the 14 August, 2017 "The Bank of Ghana approved a Purchase and Assumption transaction with GCB Bank Ltd that transfers all deposits and selected assets of UT Bank Ltd and Capital Bank Ltd to GCB Bank Ltd. The Bank of Ghana has revoked the Licences of UT Bank Ltd and Capital Bank Ltd. This action has become necessary due to severe impairment of their capital." Critically examine the following: 1. The business model of the then UT Bank Ltd and Capital Bank Ltd. 2. The role of corporate governance in the eventual collapsed of these two banks. 3. The effect of the GCB take over on all the stakeholders of GCB and the two collapsed banks SUBMISSION DEADLINE: 20TH APRIL 2020.

Answer 1

Purchase and assumption transaction means a bank with good financial ability takes over the assets and liability of the bank with higher bad loans or unhealthy bank in other terms.

• Business Model of UT bank and capital bank - These Banks are common and with normal banking operations, the usual banking operation i.e to take deposits and give loans. This is considered to be a normal business model of a bank and both these banks fall under this business model.
• Role of corporate governance - With the given information it is difficult to determine the actions that led to the collapse of thse banks however i will try to explain the common corporate governance issue in a bank. Effective corporate governance is necessary for a bank to function smoothly. Under corporate governance a bank rules are determined on who is accountable for various roles and the capability of the management to undertaje the banking operations. Ineffective Corporate governance standards has been a ground reason for the failur of banks which leads to financial crisis.  

Suppose if a bank has excess deposits so banks might start giving extra loans without much background checks which might lead to a large number of bad loan and then unable to fulfil the deposit required. This is a corporate governance failure as banks failed to check the loan criteria and ineffectiveness of the personnel in approving the loans withour proper checks.

• Effect of Takeover - The shareholders of the company might get an option to swap for the shares of the takeover bank at a discount or in return of the share of the healthy bank. The banks might benefit on their balance sheet as they takeover on the loss of the other bank and hence might get tax excemptions. Also the depositors might get their deposits returned safely after the GCB bank takes over of the opertaions of UT & Capital bank