HomeOpinion & AnalysisColumnistsToo big to fail: are narrow banks a solution?

Too big to fail: are narrow banks a solution?


In September 2009, the G20 group of leading countries agreed that all systemically important financial institutions should have contingency plans in place for speedy, orderly wind-up by the end of 2010.

Systemically important institutions are, loosely speaking, those that would not be able to wind up operations without inflicting mayhem of epidemic proportions on the markets.

The failure of such institutions would have significant negative implications on the financial standing of other institutions, on employment levels, on the integrity of payment systems and many other facets of civilised banking.

The G20 plans, it was reported then, would focus on so-called living wills in a bid to lessen the need for public bailouts in future.

Understandably, this made banks jittery about the prospects of being forced to simplify their structures and being required to face prohibitively heavy capital charges on their riskier activities such as trading.

In the wake of the global financial crisis, many countries had to rescue banks at a huge cost to the taxpayer and this has, in some countries such as the United Kingdom, sparked debate on whether banks need clear legal separation of commercial and riskier investment banking activities.

The collapse of Lehman Brothers was a wake-up call which caused investors to wake up and smell the coffee, even leading financial institutions are not too big to fail!

Suddenly it became clear that there really is no bank which can be said to be too big to fail, if we are prepared to walk our talk and count the costs afterwards.

The too-big-to-fail phenomenon has since become topical the world over and regulators have been seized with trying to find a solution for it or at least to draw lessons from it.

The big question for Zimbabwe has to be whether we should be talking about such banks at the moment?

The answer is “Yes” and “No”.

No, because at a time when we are still talking about rebuilding the economy and, alongside it the financial sector, that would probably be a misnomer, if not downright putting the cart before the horse.

Yes, because lest we forget, there once was something called the Troubled Bank Fund, which was deployed unsuccessfully by the Reserve Bank to try and save a number of local banks during the banking turmoil of 2003-2004.

History has this nasty tendency of repeating itself and besides, when we have a situation whereby only four banks account for 60% of the country’s deposits in the financial sector, it should not be misdirected to ask if there are some “too-big-to-fail” institutions.

After all, the near-collapse of the US financial system was widely blamed on the troubles at a handful of very large banks whose reach spread throughout Wall Street and beyond.

In the so-called First World, experts have suggested the creation of narrow banks as a solution to the too-big-to-fail problem.

Well, I don’t think the creation of narrow banks would be a solution for Zimbabwe because, in a way, we have been there before and the trend over the years has been to move from away from narrow banks to “bigger banks”.

We used to have “lean and mean” merchant banks that primarily carried out investment banking activities and commercial banks that focused on retail banking, but that is no longer the case.

Over the years, the lower-level merchant banking licences have been converted to commercial banking licences, although commercial banks still carry out investment banking activities through their corporate finance departments.

The other trend in Zimbabwe linked to the too-big-to fail issue has been the deliberate creation of large diversified banking octopuses with tentacles spread over many sectors of the economy such as insurance, stockbroking, and mortgage finance, property and even agriculture.

Good examples of such behemoths are CBZ Holdings Limited, whose subsidiaries include CBZ Bank Limited, CBZ Asset Management (Pvt) Ltd (Datvest), CBZ Building Society and Optimal Insurance Company (Pvt) Ltd. FBC Holding Limited is made up of FBC Bank Limited, FBC Building Society, FBC Reinsurance and a stake in Turnall Fibre Cement.

In these and other cases, the banking subsidiary is the main operating subsidiary, accounting for close to 90% of the group’s assets.

From that perspective, I would say that diversity is not really conferring size upon the group but other synergistic benefits such as captive group business.

In reality, a narrow bank would not survive in the current environment in Zimbabwe by carrying out purely investment banking business because of the liquidity challenges and feast-and-famine nature of the business, but there is always an exception to the rule.

Banks like ReNaissance Merchant Bank and Tetrad Investment Bank could buck the trend and continue to operate as investment banks because of the synergies bestowed upon them, by belonging to large diversified groups with interests in banking, insurance, property, stockbroking and agriculture.

Such banks can be assured a significant portion of deposits from sister companies, despite the sister company’s efforts to avoid concentration risk.

For the foreseeable future, probably the workable solution for the “too-big-to-fail”, institutions will be the implementation of a framework that forces them to set aside more profits as a cushion against hard times.

Experts have also called for bold and international commitment to put in place a framework for orderly resolution of large cross-border institutions.

The answer is not in curtailing growth but in improving the quality of capital and making regulation sharper and more responsive to evolving banking needs.

As for Zimbabwe, I don’t think we can talk about “too-big-to-fail” yet because in my book, no single bank can be considered to have such a pervasive effect on the economy that we can’t do without it.

Perhaps in the context of the cut-throat competition and the prolonged recapitalisation woes, what we can maybe talk about is the “too-small-to succeed” phenomenon.

Size actually does matter in the banking sector at the moment and those who don’t actively seek it are sitting ducks for those who do.

FSS would be interested to hear your perspective on the “too-big-to-fail” phenomenon.

Omen N. Muza is a banker and Managing Director of TFC Capital (Zimbabwe) (Pvt) Ltd.

He writes in his personal capacity.

Feedback: omen.muza@gmail.com

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