The Governor Bank of Uganda, Emmanuel Tumusiime- Mutebile, has asked the distressed banks he did not name to stop wasting time begging for bailout and warned that such move would be “extremely dangerous”.
Speaking at the second annual bankers’ conference at Kampala Serena Hotel on Wednesday, the governor said BoU has no obligation to bail out any distressed bank because the central bank’s role is to protect depositors of the commercial banks and not the shareholders.
The theme of the conference was Financial Sector Stability: Managing Risk in a Fast Growing and Fast Changing Environment.
The Governor in his speech emphasized that while it is not possible for regulators to guarantee that no bank will ever fail, because that would require the elimination of risk-taking by banks – which would in turn hinder the very purpose of financial intermediation – regulators can ensure that bank failures are the exception rather than the norm.
He explained the central bank’s intervention in Crane Bank saying;
“After the BoU had intervened in Crane Bank and taken it over in October 2016, an inventory of its assets and liabilities was commissioned and carried out by a reputable accounting firm. This inventory found that Crane Bank was massively insolvent, with core capital of negative Shs240 billion, as a result of mismanagement and fraud.”
He added: “The notion that this bank could have been rehabilitated by its owners – the same people who were responsible for its failure – if only the BoU had provided more liquidity support and allowed the owners to remain in control, is not tenable. In reality the BoU had no other options, if it wished to minimise the losses incurred by the bank and protect the interests of its depositors, other than to take over Crane Bank and resolve it.”
He said a fundamental tenet of this prudential regulation is the avoidance of regulatory forbearance, which involves the regulator allowing a bank to breach prudential regulations or to continue operating as normal when it cannot meet the minimum capital adequacy regulations.
Regulatory forbearance crates moral hazard, which worsens the incentives for banks to be managed in a safe and sound manner. This is particularly pertinent in respect to a bank’s ability to comply with capital adequacy regulations, Mutebile explained.
“Capital investment provides an incentive to the owners of a bank to manage it prudently, in order to protect their interests. Higher levels of capital help to align the interests of bank owners and depositors for sound bank management.”
He said conversely, when a bank is undercapitalised or insolvent, the incentives facing its owners for sound management are weakened.
“ In order to protect the interests of a distressed bank’s depositors, the regulator has a responsibility to intervene promptly in a bank that is severely undercapitalised or insolvent, and, if necessary, to take over the bank and resolve it.”
He clarified: “The BoU has no obligation to bail out a distressed bank by providing it with liquidity support, in the hope that it will somehow be restored to financial health. Such an option would be extremely dangerous. It would allow the distressed bank to continue being mismanaged in the same manner that caused it to become distressed, thereby incurring further losses at the taxpayers’ expense.”
He said this would also send a signal to all participants in the financial markets that mismanagement carries no consequences for the owners and managers of banks.