Why avoiding bank collapses is vital – Reflections on 2022 Nobel Memorial Prize in Economic Sciences

New Nobel Laureates will be announced in October. They’ll be a select few scientists, activists, economists and writers whose works have made an immeasurable impact on humanity. 

The Nobel Prizes are among the world’s most prestigious awards and are given for demonstrated excellence in the fields of Physiology or Medicine, Physics, Chemistry, Literature, Peace and Economic Sciences.

I revisited October 2022 to reflect on an important event therefrom and what relevance it may have had for Ghana’s economy.

On October 10, 2022, Ben S. Bernanke (of The Brookings Institution, USA), Douglas W. Diamond (of University of Chicago, USA) and Philip H. Dybvig (of Washington University in St. Louis, USA) were announced winners of the 2022 Nobel Memorial Prize in Economic Sciences “for research on banks and financial crises.”

I immediately realised the announcement may hold clues to some of the origins of Ghana’s ongoing economic crisis.

But when I scanned the Ghanaian media landscape to see if the prize announcement received news coverage, I found no sign. Or maybe I did not surge hard enough.

Big deal

Elsewhere, the annual Nobel Prize announcements are a big deal and dominate the news headlines for a while. In Ghana, most people don’t bother about these things.

According to the Royal Swedish Academy of Sciences, the winners of the 2022 Nobel Memorial Prize in Economic Sciences were considered for the honour because “their discoveries improved how society deals with financial crises.” In particular, the press release announcing the Prize said the following, among others:

“This year’s laureates in the Economic Sciences, Ben Bernanke, Douglas Diamond and Philip Dybvig, have significantly improved our understanding of the role of banks in the economy, particularly during financial crises.

An important finding in their research is why avoiding bank collapses is vital… Modern banking research clarifies why we have banks, how to make them less vulnerable to crises and how bank collapses exacerbate financial crises…

Their analyses have been of great practical importance in regulating financial markets and dealing with financial crises.” Tore Ellingsen, who chaired the Prize Committee, added: “The laureates’ insights have improved our ability to avoid both serious crises and expensive bailouts.”

Question

When I first read the Prize announcement, it reminded me of an enduring question foreshadowing the ongoing economic crisis in Ghana, as to the extent to which the collapse of several Ghanaian financial institutions from 2017 through 2018 was contributing to our economic woes.

It was reported that about GH₵ 25 billion was spent on the “financial sector clean-up”, as it was called, which could rise to GH₵ 34 billion. However, some experts have questioned the prudence of this expenditure, arguing only a small fraction of that could have resolved the problems.

It was argued that those who mismanaged these institutions could have been isolated and dealt with according to the law while preserving the sanctity of the Ghanaian banking sector and protecting the thousands of jobs that were lost in the process.

Since reading the 2022 prize announcement, my own questions have been the following:

a) At the time the numerous financial institutions were under consideration for “dissolution”, were the managers of the Ghanaian economy aware of the landmark studies that ultimately won the 2022 Prize?

These studies originated in the US in the early 1980s and some key managers of the Ghanaian economy today were at various times graduate students of economics/management at some of North America’s leading universities and would have come across these pivotal studies.

Take, for example, immediate-past Finance Minister Ken Ofori-Atta, who finished Columbia University in 1984 and Yale University in 1988; Bank of Ghana Governor Ernest Addison (McGill University, 1993); and Vice President Mahamudu Bawumia (Simon Fraser University, 1995).

b) If the managers were aware of these studies, why did they choose the path they took? Were their decisions informed by any rigorous scholarship on the potential ramifications of their intended actions, or did they simply believe that dissolving those numerous banks would truly help the Ghanaian economy?

Regardless, we now know, in light of the 2022 Nobel Memorial Prize in Economic Sciences and the body of work informing it, that the “financial sector clean-up” in Ghana may have been misguided in some ways.

While the oft-cited reasons for Ghana’s ongoing economic crisis are the COVID-19 pandemic and the Russia―Ukraine war, the “financial sector clean-up” may have contributed significantly to the crisis. And the entire episode probably suggests the dearth of intellectual rigour in policy formulation/implementation in Ghana.

Consequently, Ghana may need some deep soul-searching, if our sinking ship would ever come afloat again.

The writer is a Scientist at the University of Cape Coast.