Universal Banking Risk
25 November 2008
Ghana’s banking laws have been changed to introduce a universal banking concept that has removed restrictions on banks.  It therefore means that banks that meet the minimum capital requirement can engage in more financial services products; in addition to services related to savings and loans, they can also provide investment services. This has improved the depth of banking in the country, and has, no doubt, served as the magnet that has attracted a lot of foreign banks into the country.
But does the upside potential with universal banking outweigh the downside risk? The most critical problem that banks operating under a universal banking regime face is that of operational risk. As the banks engage in more products, they are also open to more risk. Every financial product comes with risk, and without the proper risk management tools, some banks have suffered. Even traditionally strong universal banks are suffering today.
Take the case of Citigroup. Within corporate America, Citigroup is viewed as the standard-bearer for universal banking. The company is experiencing severe problems and its share price has plummeted to unprecedented levels. The causes of the bank’s problems are many, but some analysts believe that the fact that Citigroup is a universal bank with assets of more than US$2,000bn has made the situation worst. But not many analysts would support this view wholly. After all, most banks in the advanced countries operate under a universal banking license and have been successful.
The determining factor is how well the banks are equipped to deal with the problems of risk that increase with every new product. Better risk management and regulation has become critical in recent months because of the financial market turmoil the world is experiencing today.
And this is where emerging market economies must take note. Understanding risk management is paramount. Generally, risk management would involve the assessment of the level of risk, including external risks, within an organisation, the attempt to ensure that all these risks are mitigated, including the allocation of reserves (capital), and the evaluation of the probability of how this level of risk will vary in the future.  Ghanaian banks must understand their exposure level and ensure that they have the best risk management tools that will ensure that they are not taken aback by financial market events, especially the contagion effects from global markets.
The Basel II framework
Basel II, the risk-based capital regime has come to stay. As we have reported on page......, it is a regime that will help improve banking supervision and ensure that financial markets are sound.
But not all analysts are convinced that Basel II captures risk fully. “Basel II did us all a great disfavour by definitively excluding large parts of possible risks, strategic and reputational risks; largely ignoring others such as liquidity risk; and not even mentioning areas such as government, regulatory and environmental risks. We concentrated on what we could understand and what we could, or believed we could, quantify – and we thought we were safe”, analysts at Chase Coopers have expressed.
According to the analysts, there is the need for more to be done. “We believe we can manage market risk. We think that we can manage credit risk, if only the ratings were accurate.  We have a go at managing a small part of operational risk, unfortunately the parts with the lowest impacts - failure of services, fraud, theft, process breakdown, etc. We ignore the impact of liquidity risk because we don’t know how to measure it. We have no idea how to assess and mitigate against the herd effect of reputational risk, We do not include the risks of government decisions, poor management skills, and remuneration practices that encourage risk taking”. Does it also mean that the Basel II framework will also fail?
Source: Graphic Business