Tribute to Prof Ndulu: Responses to the 2008 crisis

February 22, 2021 will go down in history as the date when Tanzania in general and the economics fraternity in particular lost one of the most accomplished economists of our time.

It is the day when the former Governor of the Bank of Tanzania (BoT), Prof Benno Ndulu, passed away. Accomplished as he was, he will be remembered for many things including his tenure at the BoT.

He was appointed to the Governor’s position in 2008. This is the year in which one of the greatest financial and economic crises of our times saw the light of the day.

The crisis had many and far-reaching negative economic impacts across the world. Various kinds of responses made recovery possible. Among the responses are those in the banking sector.

BoT responded to the crisis in the banking sector through various measures. The aim was to ensure stability in the sector in particular and the economy in general. This piece is a tribute to Prof Ndulu who was at the top of central bank during the crisis.
Specific responses by commercial bank
Under the watch of the regulator – BoT - commercial banks responded differently to the crisis. However, there are some patterns of responses by these banks. Some of the ways in which the banks responded are outlined in what follows.
Freezing of Lending
Some banks responded to the 2008 economic crisis by the way of freezing of lending.
This is mainly due to the risks embedded in some sectors, businesses and individuals in times of economic crisis such as that of 2008. Freezing lending amidst increased risks, implies a risk-aversion behaviour.
While some banks froze lending, others responded to the crisis by reducing lending.
Increased Risk Assessment
Increasing risk assessment of borrowers was partly done through improvement of oversight of credit risk and more conservative approach for collateral valuations.
Risks managed include foreign exchange risk, interest rate risk, credit risk (loans and advances, investments) risk, market risk, liquidity risk and other operational risks.
Stress-testing
Requirements by BoT for banks to conduct stress-testing was among the strategies to respond to the 2008 economic crisis. A bank stress test is an analysis conducted under unfavourable economic scenarios such as the 2008 economic crisis. The aim is to determine whether a bank has enough capital to withstand the impact of adverse developments in the market. Stress-tests are meant to detect weak spots in a particular bank or the banking system at large at an early stage, so that preventive action can be taken by the bank and the regulator such as BoT.
Financial stability measures
Banks ensured that there is absence of excessive volatility, stress or crises like the 2008 economic crisis.
They responded to the crisis by adopting some financial stability measures as recommended by the BoT.
More adherence to regulations
Adhering more to BoT regulations including capital requirement and maintaining the needed ratios was important.
BoT required banks to hold a minimum level of the regulatory capital of five billion Shillings and maintain a ratio of total regulatory capital to the risk-weighted asset (the Basel ratio) at or above the internationally agreed minimum of 10 percent. Provision of Emergency Liquidity
Banks were needed to provide for emergence liquidity as a strategy to respond to the 2008 global economic crisis. Generally banks in Tanzania had adequate liquidity over and above the regulatory minimum.
Analysis of the responses
Some of the responses were reactive aiming at reducing impacts of the crisis and its spreading.
These include such responses as stress-testing, increase of reserve requirements on government deposits held in commercial banks, enhanced monitoring of the banking sector, easy monetary policy in terms of expansionary monetary policy and its various instruments, prudential oversight, liquidity management and review of lending rates.
Other responses were proactive aiming at reducing impacts of a possible future crisis. These include enhanced monitoring of the banking sector, increase in banks’ capital requirements by 200 percent, establishment of Financial Sector Stability Department at BoT, establishment of Financial Regulators Forum and strengthening crisis preparedness.
Responses by individual banks included more cautious lending, preference for safer money market instruments and resumed lending following signs of recovery.
Relevance today
The responses seen in Prof. Ndulu’s era at BoT are as relevant today as they were then. They provide lessons in today’s economic crises globally over Covid – 19 among others. The author has a long publication in these responses.