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Bank CEOs to go on air to ward off run on banks - Naveed Yaseen - 10-14-2008 05:45 AM
By Ikram Hoti
ISLAMABAD: Chief executives and senior executives of top banks are set to appear on major television networks and trade forums to float the packages of better services that would ward off false alarms about the run on banks.
A bank run (also known as a run on the bank) occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent. As more people withdraw their deposits, the likelihood of default increases, and this encourages further withdrawals. This can destabilise the bank to the point where it faces bankruptcy.
Speaking to The News, most top bankers were shy of being quoted by name and designation, while National Bank of Pakistan President, Ali Raza was willing to face any question in this regard.
Reza said he was ready to come out with details on ‘firewalls in which Pakistani banks operate and are saved’ in the face of looming financial crunch elsewhere in the world. These firewalls or safeguards prevented bankruptcy, he said.
The panic presently spread by unscrupulous commentators was uncalled for, Reza asserted. “It rather speaks of their poor understanding of the crisis across oceans and their own banking system.”
Reza warned that the false alarm of the run on banks might trigger unsustainable losses and business slide.
When asked if he was aware of the false alarms at bank branches Ali Reza said he was, and would further tighten up security at the Computer Division and at the cash-draft-info desks at all the branches operating in the country.
He agreed that the situation worsened on account t of false alarms when customers at bank branches found the officials struggling to bring cash-monitoring and distribution back from online suspensions from the headquarters.
At these moments panic spread and most customers shout of ‘the run’ as they feel cash flows are draining out of the entire system.
Whereas, the bankers say the cheque bouncing on account of cash-drain is unlikely in foreseeable future.
The banking money vaults have been guarded by firewalls some of which are traditional while others are built on the inflow-outflow mechanism operational in the US and the West, said senior bankers.
These bankers are busy drawing up comparisons on safeguards that would prevent run on Pakistani banks. They conceded that the tight collateralising and products that prevented small incomes to be dynamic in the past in fact proved a blessing in disguise.
As per details being drafted for television channels and trade forums, the safety management comparisons show that banking crisis appears to be remote possibility.
These comparisons indicate that capital adequacy in Pakistan is 12-13.5 percent on the average, whereas, in Europe and America it ranges between 8-9 percent.
Pakistani capital adequacy is thus 50 percent better than the rest of the world’s banking system.
The reserve requirements against customers’ deposits at Pakistani banks are 27 percent on the average, whereas in the rest of the world they are at 13-13.5 percent, indicating that the Pakistani banks are 100 percent stronger on this side.
As regards the loan books at Pakistani banks, the margin is 35-40 percent, one of the highest in the world, whereas the collaterals are not only stringed at 100 percent value but are monitored on market-value in all possible trade and property spheres.
On the mortgage side, the American and most European banks allow house-loans at as low as 25 percent of the value, allowing the equity to go even negative whereas, the cash flow to go lower than the credit dished out.
Whereas, in Pakistan most houses happen to be 100 percent non-bank-financed and those built partly with bank loans are heavily collateralised.
The entire personal, mortgage and credit card loans obtainable in Pakistan happen to be negligible 16 percent of portfolio, whereas, they are as high as 85 percent of the portfolio elsewhere in the world.
The Asian loan standards range between 63-65 percent of the GDP; in Europe 100 percent and in USA they are 123 percent of the GDP, whereas, in Pakistan they are just 23 percent of the Rs2,089 trillion GDP.
The senior bankers said they would not shy away from liberalising the collateral system as the demand for money should be met in all possible limits to avoid economic slide, but they would surely take stringent actions at their computer divisions and at branch-desks to prevent all false alarms regarding run on the system in scare of cash-drain.
http://www.thenews.com.pk/daily_detail.asp?id=140816