Louis Kasekende: Financial stability - restructuring and resolution of
financial institutions
Speech by Dr Louis Kasekende, Deputy Governor of the Bank of Uganda, at the Bank of
Uganda-Deutsche Bundesbank seminar on "Financial stability - restructuring and resolution
of financial institutions", Kampala, 3 July 2013.
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Distinguished Guests
Good morning ladies and gentlemen.
On behalf of Bank of Uganda, I wish to formally welcome you all to this seminar with the
underlying theme "Financial Stability - Restructuring and Resolution of Financial Institutions".
This seminar is occurring under the Bank of Uganda and the Deutsche Bundesbank
technical cooperation. The main objective is to strengthen the Resolution framework for
dealing with banks and financial conglomerates. This initiative emerged from the
recommendations of the IMF Regional Crisis Preparedness Mission of February 2011 and
the FSAP Mission of August 2011. Both these missions recommended that Bank of Uganda
reviews the Bank Resolution framework and in addition, ensure that it conforms to the
Financial Stability Board's (FSB) guideline on Key Attributes of Effective Resolution Regimes
for Financial Institutions.
At the Seoul Summit on 11-12 November 2010, the G20 Leaders endorsed the FSB policy
framework for reducing the moral hazard of systemically important financial institutions
(SIFIs). This framework called for action in five areas, of which a key area was to make
improvements to resolution regimes so that any financial institution, whatever its size and
complexity, can be resolved without disruption to the financial system. The Key Attributes of
Effective Resolution regimes for Financial Institutions outline the policy framework to meet
this objective. These key attributes have been identified by the Financial Stability Board
(FSB) jointly with its members including the IMF, World Bank and the standard-setting
bodies.
The purpose of an effective resolution regime is to make possible the resolution of financial
institutions without severe system-wide disruption. Such a resolution regime needs to take
into account the taxpayers, and minimize the losses to them, while protecting vital economic
functions. It should employ mechanisms which make it possible for shareholders and
unsecured and uninsured creditors to absorb losses in a manner that respects the hierarchy
of claims in liquidation. Finally, the resolution regime should provide for timely and early entry
into resolution before a firm is balance-sheet insolvent and before all equity has been fully
depleted. These attributes set out the responsibilities, instruments and powers that national
regimes should have to resolve failing financial institutions, some of which may be
systemically important financial institutions (SIFIs).
Any financial institution that may be systemically significant or critical if it fails should be
subject to a resolution regime and to this effect, the FSB Key Attributes help to address one
of the key themes of "too-big-to-fail" in global finance by making it possible to resolve any
financial institution in an orderly manner, regardless of the size and complexity of the
financial institution.
Two key themes emerge in this overarching area of resolution of SIFIs; one, resolution
authority, powers and hierarchy of stakeholders and two; the detailed mechanisms for
resolution such as the collateralization, safeguards and funding of firms in resolution.
For resolution to be feasible, the authorities should have the required legal powers and the
operational capacity to apply them in order to ensure the continuity of functions that are
significant to the economy. The mechanisms employed in resolving problematic firms should
follow the "Respect of creditor hierarchy" and "no creditors worse off than in liquidation"
principle' as laid down in the FSB Key Attributes. In other words, resolution powers should be
exercised in a way that respects the hierarchy of claims while providing flexibility to depart
from the general principle of equal treatment of creditors of the same class. In particular,
equity should absorb losses first, and no loss should be imposed on senior debt holders until
subordinated debt has been written-off entirely. Creditors should have a right to
compensation where they do not receive at a minimum what they would have received in a
liquidation of the firm under the applicable insolvency regime. Directors and officers of the
firm under resolution should be protected in law, for instance, from law suits by shareholders
or creditors for actions taken when complying with decisions of the resolution authority. I
hope that the first training session this morning on the institutional framework within the EU
and the sharing session on Thursday about the German Bank Restructuring Act will shed
light on some of these issues.
Second key issue is that there is a need to put in place pre-determined methods of
resolution, sources of funding and identified assets acceptable as collateral against such
emergency funding in a crisis. Most importantly, authorities should have statutory or other
policies in place so that authorities are not constrained to rely on public ownership or bail-out
funds as a means of resolving firms. Therefore, in support of the preparations of recovery
and resolution plans and the effective implementation of resolution measures in a crisis, a
framework should be developed in advance. As they say, it is already too late to dig a well
when you are thirsty. These are some of key issues which have prompted international best
practices in the area of resolution regimes, and we are looking forward to understanding
these from the historical examples and restructuring case studies that will be shared during
the training seminar.
The G20 and the FSB are calling on countries to undertake the reforms necessary to
implement these standards. In Uganda, this will require cooperation amongst authorities, that
is, among the Bank of Uganda, the Ministry of Finance, Planning and Economic
Development, the Insurance Regulatory Authority and the Capital Markets Authority, to
review business structures, legal powers, policies and operations to improve recovery and
resolution planning as well as the mechanisms employed in resolution of firms. Therefore, as
a capstone, I am glad that the participants will also have the opportunity to do some
handson decision making in the group exercises at the end of each day.
Over the course of the next three days, the team from Deutsche Bundesbank which includes
Mr. Peter Spicka and Mr. Martin Pontzen, with their wealth of experience will be taking us a
step further towards these areas. I believe that the seminar will be enriching as they share
their experience in Europe on relevant areas including the analytical tools for
macroprudential supervision. Of particular importance will be the section where the seminar
goes into the details of international and European initiatives for developing efficient
resolution frameworks for financial institutions and explains fundamental features of the
German Bank Restructuring Act.
I hope that this seminar, bringing all the players in the financial sector together, will help to
facilitate sharing of ideas and experience and will promote the development of an effective
framework for the restructuring and resolution of financial institutions, especially SIFIs so as
to safeguard financial stability in Uganda. I am very grateful for the opportunity to have
addressed you this morning. Thank you very much.