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.

a) The liquidity problems experience by Barbican Bank and Intermarket bank were as a result of poor risk management. Discuss? (6 marks)

b) Identify the speculative risk that was taken by Barbican Bank? (2 marks)

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 (4 marks)

2. Discuss the benefits of Enterprise Risk Management (ERM)? (4 marks)

3. Discuss how an audit committee would have to test the effectiveness of the risk management arrangements in place? (4 marks)