A few weeks ago, the Uganda Bankers Association hosted the 2nd Annual Bankers Conference. It was a conversation for the whole day. The topic “Financial Sector Stability: Managing Risk in Growing & Fast-Changing Environment”. Quite timely. Why? Two factors. Technology and Regulation. The two are linked. For banks to continue “innovating” around financial services, they have to be regulated in order to ensure there are proper risk management mechanisms in order to protect the depositor.
“Sustainability & growth of the Banking Sector is built on information security, confidentiality, privacy and resilience in the face of shocks. Banks are also increasingly depending on ICT and digital platforms to drive their day to day operations the same way other sectors in the economy are adapting to technologically driven platforms including social media. There has however been a slow pace in progressing important pieces of legislation related to Data Privacy & protection. These delays risk exposing financial institutions to legal challenges and loss of customer confidence if they do not feel adequately safeguarded in terms of information risk” – Patrick Mweheire, Chairman Uganda Bankers Association
However, this is not the focus of this article. In as much as it is a critical issue if banks are to survive the surge of financial innovation by non-bank institutions, there are still other matters regarding regulation.
Banking is not like real-estate in Uganda. Banking is regulated. There are a set of rules that govern operations. In his remarks to the bankers, Prof. Emmanuel Tumusiime-Mutebile the governor of BoU emphasized the primary role of the regulator.
“As a regulator, the primary objectives of the Bank of Uganda (BoU) are: to protect the interests of depositors and to ensure the overall stability of the financial system, through prudential regulation and supervision of deposit taking institutions. We seek to enhance public confidence in the financial system; thereby fostering financial intermediation and limiting the harmful effects of systemic crises” – Mutebile
So at the end of the day, BoU is trying to achieve “depositors protection and ensuring that there is confidence in the financial system.” This would encourage more people to use banks and also increase genuine investment in the sector. Ever since the takeover of Crane Bank and the eventual sale of some assets and liabilities, questions have been raised about the role of the regulator. Again, this shall not be the focus.
The rarely discussed subject is whether if Crane Bank was struggling, why was it not bailed out? It was the third largest bank at the time. Surely, it was too big to fail. It has been documented that the cracks at Crane Bank started being visible – at least according to the regulator – about one year prior to its takeover. The regulator on several occasions notes that it informed Crane Bank directors to recapitalize and clean-up. This did not happen fast enough. Then the regulator started bit-by-bit issuing directives on what the bank could do. It could no-longer issue short-term credit lines to traders. Then attempts by directors to bring in a new shareholder to inject equity fell through. But then couldn’t BoU had bailed them out? Apparently not.
“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 Shs.240 billion, as a result of mismanagement and fraud. 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” – Mutebile
The issue raised is that Crane Bank could not be bailed out because of the alleged fraud and mismanagement by its directors. What Mutebile tries to put across is that if they bailed out Crane Bank, the money would go down the drain. It would be like pouring water into a jerry can with a hole at the bottom. It would delay the inevitable.
However, had it not been for mismanagement and fraud could a bailout have been possible?
“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. It would also send a signal to all participants in the financial markets that mismanagement carries no consequences for the owners and managers of banks” – Mutebile
If we take a closer look at Crane Bank, once it was taken over by Bank of Uganda and the directors sent packing, then it had to keep operating like any “normal” bank. Prior to it being taken over, it had liquidity issues. For it to keep operating “under the management of BoU” liquidity was needed. BoU did pump some money to keep Crane Bank afloat especially for depositors who were always in need of cash.
Can this be considered a bailout?
Partly because the bank did not collapse. Depositors and borrowers were safe. However, for the directors and shareholders, they got nothing. In fact, BoU is pursuing them through a court process in order to recover millions of dollars.
For the bankers in the room, they knew that managing risk is their only savior if they are to avoid a situation where they need a bailout.
That said, “never-say-never”. A bailout can be possible.