The Accountant Nov-Dec 2016

Finance and Investment
for instance, the Central Bank of Kenya
(CBK), established a credit line to financial
institutions affected by liquidity pressures
arising from no faults of their own.
4.1.3 Insurance of Deposit: In many
economies, a deposit insurance scheme/
fund is established to cushion depositors
against losses emanating from inability of
banks to honour their financial obligations
when due. This mechanism is usually an
element of the financial system that is
aimed at promoting financial stability.
In Kenya, Section 36 of the Banking
Act, Chapter 488 of the Laws of Kenya
established the Kenya Deposit Insurance
Corporation (KDIC) which is responsible
internal models as they make banks appear
less risky when they are actually more risky.
It is suggested that this committee would
impose new rules to standardise the way
banks assess these risks. This is likely to
raise the minimum capital requirements
for some banks.
4.1.5 Declaring Emergency Bank
Holiday: This approach was used by
United States Congress in 1933 in an
attempt to stabilize the banking system
after the Great Depression. Following his
inauguration in March 1933, President
Franklin Roosevelt set out to rebuild
confidence in the banking system, in which
he pronounced 4-day banking holiday that
4.2.1 Change in Structure and
Governance Practices
In the past, top management of banks has
been focusing on controls, governance and
risk management approaches governed by
mathematical models. This is not working
anymore because individual behaviors are
dynamic and ever evolving. Put simply, it is
incumbent among the bank leaders to pay
attention on cultural dynamics or the socalled
‘soft risks’ such as behaviors, choices
and values. Such changes in organization
culture take time to realize results but it’s
inevitable in the 21stCentury.
Banks need governance and
management practices that are hinged
on disciplined execution and continuous
innovation to cope with customers and
staff dynamisms. Banks need to follow
the example of Steve Jobs and become
agile organizations that are capable of
continuous innovation.
This entails:
• Self-organizing teams;
• Coordinating work through agile
practices;
for protecting depositors’ savings/deposits
and thereby ensuring depositors remain
confident enough to continue keeping
their savings within the banking system.
4.1.4 Setting Optimal Capital
Requirements: Adequately capitalizing
banks reduce the possibility that a bank
becomes insolvent. Under full-reserve
banking, the reserve ratio is 100% in
which banks are required to match loan
maturities and deposits, thus reducing the
risks of bank runs. An alternative to this
is a reserve ratio requirement which limits
the proportion of deposits which a bank
can lend out.
Prior to Basel III regulatory
requirements on bank liquidity and
leverage, banks were using their own
models when estimating “operational risk”,
which captures a wide range of aspects
from the potential impact of system
failures to conduct fines. However, the
Basel Committee on Banking Supervision
has since has established defects in such
shut down the banking system, including
the Federal Reserve.
In his address to the public, the
president said that only sound banks
would be licensed to reopen by the U.S
Treasury. “I can assure you that it is safer to
keep your money in a reopened bank than
under the mattress,” said the President.
The holiday succeeded partly because of
people’s confidence in the President who
was persuasive and seemed to believe in
them and was giving them action.
4.2 Internal approaches
• Embracing the values: transparency,
continuous improvement and
sustainability, not merely efficiency at
all costs;
• Communicating horizontally as well as
vertically.
4.2.2 Focusing on the Right Goal
There is need of a paradigm shift from
“maximizing shareholder value” to
“profitably adding value to customers”. This
stems from Peter Drucker’s foundational
insight of 1973: “The only valid purpose
of a firm is to create a customer.” It’s
undeniable truth that with availability of
reliable information and many choices,
the customer is now in charge of the
marketplace and indeed the real boss.
Customer focus demands for a change
in the way the corporation is run. The
critical question is whether banks can
make money on a large scale if they totally
focused the organization on delighting
customers. Let’s recall Steve Jobs at Apple.
In 1997, Apple was practically bankrupt.
NOVEMBER - DECEMBER 2016 31