The Central Bank of Kenya (CBK) denied liquidity support to Chase Bank a week before the lender collapsed under the weight of massive withdrawals by fretful customers, running away from news of restated financial results and the exit of two top officials.
It has now emerged that Chase Bank on March 30, 2016 sought Sh10 billion from the CBK, and offered to sell the regulator its portfolio of government bonds with a similar face value.
The bank offered to buy back the bonds from the CBK — in a round-trip transaction technically known as a reverse repo — once it had resolved its liquidity problems in an estimated two months starting April 1, 2016.
“We request that the reverse repo facility be for the total face value of our securities (Treasury bonds) without the ‘hair cut’ discounting,” Chase Bank’s chief executive, Paul Njaga, wrote in a letter to CBK governor Patrick Njoroge.
The plea was, however, not granted, leaving Chase Bank to its own devices and leading to its collapse last Thursday after failing to honour a torrent of withdrawal orders. Ironically, the CBK would barely a week later announce the establishment of a special facility to support any bank or micro-finance institution facing liquidity problems “for as long as is necessary to return stability and confidence to the Kenyan financial sector.”
Dr Njoroge said the decision to offer liquidity support was informed by the contagion arising from Chase Bank’s sudden failure and evident in flight-to-safety transactions that have seen banks perceived as risky lose deposits to rivals deemed sound.
The decision to deny Chase Bank liquidity support during its time of need, letting the bank fail and then coming in a few days later with a facility to support struggling lenders , has cast Dr Njoroge as a regulator — who though a stickler for the law — is lacking in vision that is expected of a central banker. The action has also raised questions as to whether the CBK acted in good faith when it denied Chase Bank support even after the lender agreed to secure the debt with its Treasury bonds.
The CBK’s decision was reminiscent of the US Federal Reserve’s actions in 2008 when it declined to rescue Lehman Brothers only to later make available a $700 billion bailout fund to stave off an impending financial apocalypse.
Besides size, Chase Bank’s plea for help was based on solid assets while the American investment bank’s capital position could not be ascertained by Fed officials at the time. While the behaviour of Chase Bank’s management and shareholders was not above reproach, letting it fail has seen its problems snowball into an industry-wide crisis that the CBK should ordinarily be expected to help fix.
In the letter to Dr Njoroge, Mr Njaga said the reverse repo facility was to be retired through capital injection from shareholders and funding from development finance institutions as well as from internally generated cash.
“We are also working on entering into strategic partnerships and alliances with global banking players for equity, growth and innovation transfers into the bank,” Mr Njaga wrote.