because managing risk is essential for a rational allocation of capital among competing investment projects, which is essential for economic growth. although the strategic objectives of management in the public sector are often different from those in the private sector, effective risk management is essential in both sectors. the timing of the workshop is especially opportune, coming in the wake of the most severe global financial crisis in more than 50 years. the global financial crisis has provided salutary lessons for risk managers in financial institutions all over the world. risk managers have begun to understand that financial risk is a much more complex phenomenon than had hitherto been realized, prior to the crisis, not least because risk can be generated endogenously within the financial system, rather than being simply the consequence of exogenous shocks to the financial system. the global financial crisis has demonstrated that even those assets and financial institutions regarded as relatively risk free – investment grade securities for example – can suffer substantial losses. we now know that tail risks, the low probability risk of very large losses – sometimes referred to as “ black swans ” – occur much more often than is predicted by many statistical models. risk managers have also learned that the liquidity of financial assets and institutions is much more fragile than they had previously thought, especially in transactions based financial systems, and that a drying up of liquidity can generate large losses in asset values. the value of rating agencies and the ratings that they provide have also become the subject of critical review as a result of their performance in the run up to the global financial crisis. reputable rating agencies issued panglossian ratings for securities, such as collaterised debt obligations, the risks of which they did not properly understand. investors who purchased these securities in the belief that they carried negligible risk suffered serious losses. looking ahead, it is difficult to be sanguine about the prospects for stability in global financial markets. the large structural imbalances which characterize the global economy will eventually have to be rectified ; a process which could generate further volatility in asset prices, such as the exchange rates of the major international currencies. the global economic crisis itself has severely damaged public finances in many of the industrialized economies and this is bound to have consequences for the price of government debt and possibly also exchange rates in the medium to long term. as a result, the type of assets which traditionally comprise the bulk of central bank foreign exchange reserves may become much more volatile in the future. in such circumstances

been on the supply side of the credit market rather than on the demand side, with banks turning down loan applications because of concerns about borrower creditworthiness or the realisable value of loan collateral, given the saturated state of the property market. as you are all aware, the bank of uganda had to intervene in crane bank and take it into statutory management in november. the cause of crane bank ’ s distress was non performing loans, which had risen to more than 20 percent of its total loan portfolio and which left it significantly under capitalised. because it is a systemically important bank, we intend to resolve crane bank in a manner which preserves its core functions and services to customers. fortunately, all of the other commercial banks are meeting their capital adequacy requirements. one of the most important strengths of our banking system, and the key to its resilience, is the strong capital buffers which banks hold. in aggregate, the banking system holds total capital equivalent to 22. 5 percent of its risk weighted assets, which affords it with large buffers to absorb adverse shocks. this conclusion is also borne out by the macro stress tests which the bou carries out on a regular basis as part of its financial stability monitoring and which show that it is the large capital buffers held by banks which is the main source of their resilience to withstand adverse shocks. what are the causes of the rise in npls in the banking system? there are macroeconomic, sectoral and a variety of idiosyncratic factors which have contributed to the problems. on the macroeconomic front, the rise in interest rates in 2015, which was necessitated by inflationary pressures, combined with exchange rate volatility increased the stress on borrowers. at the sectoral level, there have been problems in the commercial real estate sector, where heavy investment in recent years has led to oversupply in the market with the result that occupancy rates have fallen and many owners have not been able to generate sufficient income to service their loans. mounting government arrears to suppliers and contractors has also contributed to npls while borrowers with business in south sudan have suffered losses because of the acute political and economic problems in that country. the idiosyncratic problems mainly pertain to failures among borrowers themselves, such as the diversion of borrowed funds from their intended uses. these factors are not mutually exclusive. for example, a poorly managed business will find it much more difficult to survive a sector