emmanuel tumusiime - mutebile : uganda ’ s banking sector speech by prof emmanuel - tumusiime mutebile, governor of the bank of uganda, at the uganda bankers ’ association dinner, kampala, 27 november 2009. * * * the guest of honor, hon minister of finance, planning and economic development distinguished guests, ladies and gentlemen, allow me to congratulate uganda bankers association ( uba ) for organizing this inaugural annual diner. you must continue so that you allow the chairmen and members of the board of directors of banks to understand some of the things we discuss every month between the governor and chief executives of banks. i wish to take this opportunity to congratulate all the banks upon satisfactory operating results for the year ended 2008 and hope that the operating results for the year ended 2009 will be as good if not better despite the world trends. when i first stated that the world financial crisis would not affect uganda ’ s banking and financial sector, i was called all sorts of names : “ crank ” ; one newspaper said i should go back to school! they have not apologized because now at the end of it all, the crisis hasn ’ t affected ugandan banks. but the economic crisis may be having second round effects, but all the banks are strong, safe and sound. i also take this opportunity to thank banks for enabling us maintain a sound and stable financial sector. many other countries envy what you have done and let us continue working together to ensure that we are the envy of those people who sometimes call us names because of other events unrelated to banking. the banking sector has remained largely profitable and solvent with average capital averaging 22 percent of risk weighted assets as in the third quarter of 2009. it is testament to the prudent macroeconomic policies and the strengthening of banking supervision that the bank has put in place. notwithstanding, it ’ s important to note the second round effects of the economic crisis due to external shocks which has affected both the current and capital accounts and reduced growth in aggregate demand must be felt. slower growth in aggregate demand has put real gdp growth lower with gdp growing at 7 percent in 2008 / 09 which was lower than 9. 5 percent growth rate projected. but this growth rate is still much higher than the rates of sub saharan african countries. let us not go down and say economic situation is bad because it ’ s good and together with you we can make it even better. and in particular i want to tell you that bou is

3 - month libor / ois spread. prior to the onset of the financial crisis, this spread had been very narrow. very soon after the bnp paribus announcement, the “ fever ” shot up dramatically. the first new liquidity facility that was introduced to deal with these problems was the term auction facility or taf on december 12, 2007. the taf program was designed to deal with the stigma problem associated with the discount window and also to make it easier for the new york fed to sterilize the liquidity injections into the financial system. the taf program auctioned off a fixed quantity of term funding to depository institutions using the same collateral to back up the loans as can be pledged at the discount window. since the quantity of funding was set in advance, it made it much easier than for discount window borrowing to offset this liquidity injection. more important, however, was the design concept : term funding priced and distributed in a competitive auction would hopefully avoid any stigma for the winning participants of the auction. the taf auctions were essentially a better way to dump more water on the same section of the forest covered by the discount window. however, the fire was still burning elsewhere. the inadequacy of the fed ’ s traditional liquidity tools and their recent enhancement with the taf came to the forefront in the spring of 2008. conditions were deteriorating for several primary dealers, including bear sterns. the board of governors of the federal reserve system ( all of the governors are appointed by the u. s. president and confirmed by the senate ) decided to activate a little known or used section of the federal reserve act – section 13 ( 3 ) – which gives the fed the ability lend to any “ individual, partnership or corporation ” in “ unusual and exigent circumstances ”. on march 11, 2008, the fed announced the establishment of the term securities lending facility ( tslf ). this program allowed primary dealers to swap a broad range of what had become illiquid assets for treasury securities that could be easily financed. this program leveraged the fed ’ s large holdings of treasury securities. the tslf, however, came too late for bear sterns. on march 14, the fed again using its section 13 ( 3 ) emergency powers approved the takeover of bear sterns, the fifth largest investment bank, by jpmorgan chase. without the acquisition by jpmorgan chase, bear sterns would have had to file for bankruptcy since they