👑 Too Big To Fail

Welcome to the latest edition of ፍራንክ Digest!

Your weekly brief on all things Finance and Investing. Quick, enjoyable reads for busy professionals in 5 minutes or less.

Here’s what’s coming your way:

• ⚡BUZZ: CBE Almost Went RIP

• 💼 Letter of Credit: An Old Friend With a Few Tricks Up Its Sleeve

• 🗝️ The Key Takeaways

Thanks for reading!

Cheating Death? Commercial Bank and Its 900 Billion Birr Bailout

Banking

If it wasn’t for a huge cash injection into the largest bank in the country, we would have all been sitting around inside of a gigantic tent ⛺, eating ንፍሮ, and mourning the loss of our money.

During a televised speech to parliament, the PM revealed that the Commercial Bank of Ethiopia (CBE) was in dire situation just recently.

Action was taken to swiftly make CBE’s balance sheet rock solid again— financial jargon for ‘it doesn’t have enough cash to cover all of its liabilities, what it owes to customers, lenders, depositors etc.’

Seems like regulators had saved Andrew Sorkin’s Too Big To Fail book on their shelves, which details how the US government swooped in to save the big financial institutions from insolvency during the 2008 mortgage fueled crisis (even though they had a huge hand in creating the mess!)

We’re not saying that’s the case here, CBE is not a public company and we don’t know how far its tentacles spread but what we do know is that it has become a systematically important bank where if it encounters some distress, like the equivalent of a financial stomach bug, it can infect other institutions alike (loans turning bad, no cash to lend out, cutting back on investments, overall lack of confidence in banking)

While this incident is puzzling given the fact that CBE reported record breaking profits just a few months ago, it showcases the fragility of the financial sector.

Can you imagine CBE coming out and saying ‘Our bad 🤷🏾, we messed up…closing shop in a few’? The queue of people inquiring about their money would be as far as Timbuktu!

THE MAIN QUESTION: Was it a liquidity or solvency issue? The distinction between liquidity and solvency is crucial— liquidity is the ability to meet short-term financial obligations (depositor withdrawals and other current liabilities) without incurring significant losses, which may be solved by taking on interbank loans and implementing withdrawal limits.

Solvency, on the other hand, is the capacity of a bank to service its long-term debts and meet its overall financial obligations, and failing to do so would lead to bankruptcy.

We’re still waiting on details on how the bailout was achieved, from CBE above all, but it begs the question if the same action would be taken had it been a private bank? ወደድሽም ጠላሽ, CBE will always be in our hearts, and our cash in its wallets!

Catch us next week as we look into interbank money market and CBE’s financial books. If you’ve been enjoying our newsletter these past months, make sure to spread the love to a friend or two.

Key Takeaways

1. The government saves CBE’s 🍑: A capitalization of 900 billion birr gave the bank a life line, avoiding a potential financial crisis  

2. Banking is complex: The interwinding nature of lending and borrowing can have a knock-on effect on the financial sector and economy at large

3. What Does It Mean To YOU: As a precaution, you can spread your money throughout different banks and take advantage of that deposit insurance coverage