In: Finance
QUESTION 1
Read the two cases of Barbican Bank and Intermarket of Zimbabwe and answer the questions below:
Barbican Bank (BB)
Barbican Bank was formed in the late 1990s at the height of a
rush into the financial services sector by domestic investors. It
was born out of an asset management company. The founder
was a flamboyant businessman who was a public figure in the
financial services sector. At formation the bank declared its focus
would be the elite market. Its products were therefore
targeted specifically at the top market. The bank also declared an
intention to operate a very small branch network, no more than five
branches. Barbican started experiencing liquidity
problems in early 2003 and was placed under the curator in March
2003. Before being placed under the curator Barbican had been
reporting fabulous profits most of them having come
from non interest transactions. According to the Central Bank,
Barbican ‘‘was experiencing serious liquidity problems as a result
of imprudent banking behaviours. There was no clear separation
between various related entities within the group which led to
cross funding of operations and excessive risk taking among other
shortcomings.’’ The Central Bank also noted
that the bank was involved in ‘‘questionable cross-border foreign
exchange activities.’’ The bank had shifted funds to South Africa
from local operations with the object of establishing a
new company in South Africa. During its operation the bank
introduced the derivatives (junk bonds) market, which had been
non-existent in the country’s financial sector. When
liquidity
problems besieged Barbican the Central Bank placed the banking
division under the curator and the asset management company under
liquidation. At the time of taking these measures
the Central Bank had injected money into the bank as liquidity
support but the bank appeared to be on a serious slide. The bank
has since failed to repay on time the loan from the Central
bank’s Troubled Bank Fund. On seeing his financial companies in
difficulties, the Chief Executive (the founder) skipped the
country. Despite problems in the home operations, the
founding chief executive was trying to set up another financial
services company in South Africa. During his tenure the Chief
Executive is said to have been so dominant the board
appeared clueless and powerless to restrain him. The bank has now
been placed into liquidation by the Central Bank. It will be
amalgamated into a merger of liquidated banks to form a new
bank.
Intermarket (IM)
The founder established Intermarket Holdings during the late
1990s through acquisitions. At the time of inset of financial
distress, the founder owned 72 percent of Intermarket
Holdings
through an investment company called Transnational Holdings.
Transnational Holdings comprised companies in banking and insurance
among others. Its influence in the financial
services sector was in every sphere. Intermarket Banking
Corporation one of the subsidiaries of the holding company started
showing signs of liquidity problems in early 2004. This was
during the period of a cash crisis in the country. Much as all
banking institutions were affected by the cash crisis, Intermarket
appeared completely outstretched by the crisis. In March 2004
the bank was placed under the management of a curator by the
Central Bank when it appeared it could not pay its creditors and
depositors on demand. On investigation, the Central Bank
discovered that the Executive Chairman had loaned himself Z$90
billion of depositors’ money and the insider loans were not being
serviced. The Executive Chairman was said to have been so dominant
he had the veto power on everything that took place in the
corporation. Investigations by the appointed curator have led to a
rise in the figure for insider loans to
Z$174 billion. The Executive chairman fled the country when
authorities appeared to point at him as the main contributor to
financial distress in the institution. Intermarket has been
trying
to enter into partnership with other banking institutions, in order
to shore up its capital, without much success. Instead Finhold,
another Zimbabwean financial institution whose banking
subsidiary is owed Z$100 billion is positioning itself to take over
major shareholding in Intermarket Bank through a combination of
cash and debt swap. Finhold’s strategy is an
attempt to protect possible collapse of Intermarket since it is a
major creditor. Intermarket has to raise its capital base to Z$10
billion before 30 September 2004 as per regulatory authority
requirements. Fraud by some IM employees taking advantage of weak
management systems has exacerbated financial distress in
Intermarket. The curator has however opened the banking division
for limited services to depositors.
Questions:
a) The liquidity problems experience by Barbican Bank and Intermarket bank were as a result of poor risk management. Discuss?
b) Identify the speculative risk that was taken by Barbican Bank?
c) Lack of board independence inadvertently creates an epicentre for corporate governance failures. Discuss using the two cases and outline the ideal role of a board in corporate governance and risk management
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