Why not allow weak banks to go bust?

The Bangladesh Bank has identified 10 banks as weak due to irregularities, corruption and lack of good governance, and they are struggling to stay afloat since the last few years. Four of those are state-owned, one is foreign, and five are private commercial banks.

After two banks in the USA went bankrupt within just a few weeks, a question started to be prevalent, what are the chances of the ten weak banks in Bangladesh to go bankrupt as well?

To find an answer to this theoretical possibility, The Business Post reached out to former lead economist of World Bank Dhaka Office Zahid Hussain. He said, “The failure of one or two US banks matters little to that country.

“It is a somewhat common issue of the USA, and the financial crisis that is now plaguing Bangladesh will not happen there, because the USA has laws to mitigate the impacts of such an incident.”

He added, “But Bangladesh does not allow weak banks to go bankrupt out of fear. The country fears what will happen if a bank is allowed to go bankrupt? But if this fear is overcome, then confidence will grow.

“A bank’s bankruptcy can be proof that the regulator is working. It happens in every developed and underdeveloped country across the globe. However, Bangladesh must make any such decision through the right process, and its implementation must be transparent.”

Zahid Hussain continued, “We like to keep dirt under the carpet. But doing so will create more fear when the carpet is torn. So instead of being afraid of what will happen, if a bank’s performance is poor, the regulator should allow it to go bankrupt.”

Zahid Hussain then pointed out, “If we think the depositors would withdraw money in fear and the government should recapitalise a weak bank from the budget, it is not a good way of thinking.

“Government support can help weak banks survive for now, but their problems will not go away.”

Posing a number of questions in this regard, the eminent economist said, “The budget allocation being used for recapitalising weak banks, whose money is it? By whose money who is being saved?

“Without solving the lack of governance issue, supporting weak banks in such a way will never bring us any solution.”

In response to a question on how to overcome the ongoing crisis, Zahid said, “There are legal complications in the case of any bankruptcies, as the existing laws are not up to date. Loopholes in the Bankruptcy Act should be identified and amended.

“Besides, there should be an insolvency mechanism as well.”

When asked what the regulator should do with the weak banks, Zahid Hussain – also an independent director of Brac Bank, said, “I recommend dissolving the boards of directors of these weak banks as soon as possible, and appointing honest competent people instead.”

“Then, the asset quality of such banks should be diagnosed. Bad loans which can never be recovered should be removed from the balance sheet. If a bank becomes unable to repay depositors their money, it must file for bankruptcy.”

When asked how the regulator can protect the depositors’ interest in such a case, the economist said, “The first thing is that a depositor deposits their money in a bank with a risk. Banks do not force anyone to deposit money.

“On the other hand, when a bank fails, it does not mean that it will be left with nothing.”

He recommended, “What remains on hand of a bankrupted bank should be distributed to fulfill the depositors’ claims. In such a case, fixed depositors will get priority over demand depositors. The government and Bangladesh Bank can jointly decide for the rest of the depositors.

“If the depositors are marginalised customers, then they should get their money back through social assistance from the government.”