|
Kavari on Liquidity Implications |
|
|
|
Written by Dr. Gift Kavari
|
|
Page 2 of 2 The American banking giant, the Citigroup in May 2008 has indicated that it will sell $400bn assets over the next three years to boost its liquidity position. Since late 2007, the Citigroup has raised more than $36bn in capital to fund its losses and write-downs from sub-prime mortgages and other debts. Citigroup rival Merrill Lynch has lost $1.96bn in the first quarter of 2008 compared to profit of $2.1bn in the same period in 2007. The UK’s second largest bank, the Royal Bank of Scotland in April 2008 has requested its shareholders for an extra £12bn to rebuild its capital base. Another British bank, Barclays has recently in May 2008 reported first quarter loss of £1.1bn in 2008.
The cost of central banks intervention is estimated at more $400bn since last year. Until all hidden non-performing loans and substantial losses linked to the downturn in the US property market and sub-prime investments are fully disclosed by affected banks, further liquidity injection will do little to resolve the global liquidity crisis in the banking sector. Spiraling write-downs facing many international banks have prompted many banks to raise more capital in order to ensure long-term liquidity and strengthen their capital base. Similar to what is happening elsewhere in the world, African banks should therefore implement long-term measures, such as, taking long-term funds (> 5 years) to boost liquidity and strengthen the capital base, even if they claim to be well capitalised with undoubted, strong liquidity levels.
Thanks to central banks’ intervention, worldwide coordinated monetary policy actions have been instrumental to temporarily restore global financial stability. Full balance sheet disclosure of affected banks will lessen the liquidity crisis so as to restore confidence in the financial markets, but ongoing liquidity injections will not have long-term impact in ensuring global financial stability. The current liquidity crisis has therefore diverted financial resources away from other productive investments in the developing world.
|
