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Central Bank Not Obliged to Bailout Distressed Banks – Mutebile

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Mutebile explained that although the central bank was incessantly criticized when it took over Crane Bank in December 2016, Bank of Uganda had no other option other than putting Crane Bank under administration and later selling it.
Mutebile greeting Rugunda at the Bankers Conference

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Bank of Uganda Governor Emmanuel Tumusiime Mutebile has said that the central bank has no obligation to bail out distressed banks. Mutebile says that the role of the central bank whenever there is a crisis in the banking sector is to protect depositors' cash.

He explains that bailing out distressed banks would be extremely dangerous because it would allow the bank to continue running in the same manner that caused its crisis.

Mutebile further argued that a bailout would send a signal to other players in the financial sector that mismanagement carries no consequence for the owners and managers which would completely undermine the financial system.  He was speaking at the Annual Bankers Conference at Kampala Serena Hotel today.

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Explaining the rationale for and modalities of Bank of Uganda's intervention in distressed banks, Mutebile said the central bank has a responsibility to curtail regulatory forbearance.

"A fundamental tenet of our 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 regulation," Mutebile said.

He further argued that regulatory forbearance crates a 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 that although the central bank was incessantly criticized when it took over Crane Bank in December 2016, Bank of Uganda had no other option other than putting Crane Bank under administration and later selling it.

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But Mutebile admitted that Crane Bank intervention was the most problematic out of the five interventions which the central bank has undertaken since 2010. This was due to its size and magnitude of losses that the bank had incurred. Nonetheless, Mutebile said the Crane Bank debacle was successfully handled.

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Mutebile said that the central bank cannot guarantee that no bank will ever fail, arguing that its role is to put in place measures to ensure that bank failures are exceptions, not norms. Attempts to guarantee that no bank would ever fail would mean curtailing all risks in the financial sector which can hinder the sector's progress.

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