Download Financial Crisis Management Plan COMESA Monetary Institute

Financial Crisis Management Plan
COMESA Monetary Institute
Workshop on Financial Stability, Systemic Risk Assessment and Macroprudential Policy
23 August - 4 September 2015
Outline
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Introduction
Rationale
Financial Crisis Detection
Financial Crisis Management
Financial Crisis Resolution
Conclusion
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Introduction
• A financial crisis arises from financial system shocks
that are likely to be serious enough to damage the
real economy.
• The unfolding of a crisis follows a systemic shock,
which propagates through the financial system:
– financial institutions (including banks, insurance
companies, pension funds and securities firms)
– Markets
– Infrastructure
• In the banking sector, it may arise from a shock to a
large bank, or many small or medium-sized banks
simultaneously.
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Introduction
• This Financial Crisis Management Plan provides a framework
for the decision-making process in the event of a systemic
shock to the banking sector, and provides guidance to staff
on:
Crisis Detection
Crisis Management
Crisis Resolution
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Rationale for the plan
• The global financial crisis highlighted that many
countries were ill-prepared to deal with distress and
excessive risk taking in their financial sectors.
• Bank of Uganda, with assistance of World Bank,
conducted a crisis simulation in 2012 to test the
financial crisis preparedness, and identify gaps in
financial crises management framework.
• One of the recommendations from the exercise was
to prepare a ‘Financial Crisis Management Plan’ to
facilitate the orderly resolution of a crisis.
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Financial Crisis Detection
The main crisis detection channels include:
Payments and Settlements
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The BoU acts as an “operator” in the payments system and as a result can
monitor liquidity pressures arising amongst participants.
Director National Payments Systems Department is responsible for informing the
Supervision Directorate in case a bank is facing difficultly meeting obligations
in the payment system
Market Operations
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BoU operates in the domestic money and foreign exchange markets on a
daily basis, and is in position to identify unusual trading behaviour by banks e.g
bidding aggressively for BoU liquidity, requests for additional flexibility in its
transactions with the BoU.
Director Financial Markets is responsible for informing the Supervision
Directorate when market standing of a bank appears to have deteriorated, or
its trading behavior is unusual.
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Financial Crisis Detection
Bank Supervision:
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BoU obtains most of its intelligence about the financial condition of individual
banks through the Supervision Directorate, through off-site and on-site reviews
directed towards determining financial strength of licensed institutions and
their ability to withstand financial and economic shocks.
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The Directors in the Directorate must immediately inform Executive Director
Supervision when there is a material and immediate threat to a bank’s
solvency and doubts exist about the bank’s ability to meet its financial
obligations as and when they fall due.
Media and the General Public:
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Concerns about the health of a bank could be expressed by members of the
public or the media.
These concerns should be conveyed by Director Communications to the
Executive Director Supervision
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Financial Crisis Detection
Other regulatory authorities
• Insurance Regulatory Authority (IRA), The Uganda Retirements
Benefits Regulatory Authority (URBRA), Capital Markets
Authority (CMA) may become aware of a financial threat in
the course of exercising their statutory obligations
– Need to inform other regulators
• Inter-agency cooperation can be achieved through the
Financial Sector Surveillance committee (FSSC).
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Financial Crisis Management
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Once alerted to the existence of a potential financial crisis, BOU must respond
promptly.
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Responsibility for financial crisis management ultimately resides with the
Governor.
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The Executive Director Supervision is responsible for informing the Governor
about the existence of a potential financial crisis.
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The Governor will discharge this responsibility with the assistance of a crisis
management team consisting of BoU Financial Stability Committee (FSC)
members and specialist staff.
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The Governor will also ensure that :
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the BOU Board is kept informed of developments and, where appropriate, seek their
approval for remedial plans.
keep the Government informed as, and when, appropriate and ensure that the BoU
also engages with FSSC members.
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Financial Crisis Management
Crisis Management Team
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Financial Crisis Management
Mandate of Crisis Management Team:
1. Diagnose the exact nature of the crisis, whether it is of
technical or operational type, likely to be speedily resolved, or
whether it reflects more deep-seated, protraction problems;
2. Determine the systemic implications of the unfolding
problems;
3. Assess the liquidity position of any distressed bank;
4. Assess the solvency position of any distressed bank;
5. Consider cross-border implications when foreign-owned banks
are involved;
6. Holding actions;
7. Communication strategy.
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Financial Crisis Management
Diagnosis
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There should be clear diagnosis of the problem: a clear summary of what has
happened and exactly which institutions are involved.
There is a wide range of reasons which prompt a financial crisis at one or more
banks including:
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Rapid deterioration in financial health of a bank;
News of a large unexpected loss;
Operational problems including systems-related issues;
Loss of confidence due to contagion from other distressed financial
institutions.
The Executive Director Supervision will provide the crisis management team
with a summary of known facts and a summary of the distressed bank(s)
liquidity and solvency positions.
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Financial Crisis Management
Systemic Impact
• To assess whether the problems of bank have the potential to
inflict damage on the financial system and, ultimately the wider
economy
• Whether there are any signs of contagion within the financial
system
– Larger than usual deposit outflows
– Discrimination within wholesale funding markets
– Abnormal payment flows
• Assessing the systemic importance of a bank will be informed
by:
– size;
– substitutability;
– interconnectedness.
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Financial Crisis Management
Liquidity Assessment
• This will determine the ability of the bank to meet its
obligations as and when they fall due.
The adequacy of liquid assets;
Expected cash flows for at least the next 30 days;
Availability of confirmed funding lines;
If foreign-owned, the prospect of immediate liquidity support for
the Ugandan bank from the parent bank.
– Liquidity pressure points within the maturity profile of assets and
liabilities over a longer time frame;
– Scope for access to funding across different markets.
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Financial Crisis Management
Solvency Assessment
• Assessment of the bank’s net worth with regard to:
– Recent and prospective trends in the level of loan impairments
both for the individual bank and for the banking industry more
generally;
– The recent pace of write-offs at the bank and within the industry
more generally.
• Conservative assumptions will be applied to the valuation of
assets and liabilities. Worst case scenarios will be considered in
the economic outlook.
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Financial Crisis Management
Cross-border considerations
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If the distressed bank is foreign owned there is a need to consider
‘ring fencing’ the local bank to stop lending to the parent bank or
the repatriation of capital overseas. This can be achieved using BoU’s
intervention powers under Section 82 of the Financial Institutions Act
2004 which includes a cease and desist order.
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EDS will also need to contact the home regulator of the distressed
bank to brief them on developments and to determine the prospect
of parent bank support for the Ugandan bank.
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If the crisis involves a Ugandan bank that operates overseas, EDS has
a responsibility to inform the foreign financial regulator at the earliest
opportunity.
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Financial Crisis Management
Holding actions
Immediate steps the BoU can take to limit potential for further deterioration:
• Withhold any distributions to shareholders;
• Withhold payments to related parties unless approved by BoU;
• Not enter into any new credit obligations without approval;
• Remove directors or senior management identified as an impediment to
investigations or contributor to existing problems.
Communication Strategy
It is essential from the outset that a strategy be developed to handle
communications with the media. The media strategy should incorporate the
following broad principles:
• The objective of public communication should be clear;
• Where possible, avoid definitive public statements until facts are known;
• Where possible, release ‘bad news’ with the ‘good news’;
• Pre-positioning by FSSC agencies with material ready for placement on
agency website at short notice.
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Financial Crisis Resolution
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Resolution options should facilitate both “open” and “closed” resolution
outcomes
Resolution may be achieved with liquidity support, or restructuring involving
Government Support
The choice of resolution tools will be determined based on the criteria of
systemic risk and solvency.
Scenarios I and II – A
liquidity crises as the
distressed banks are
otherwise sound.
Scenario III – Insolvent
but not systemically
important.
Scenario IV – Systemically
important but in deep
financial trouble.
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Financial Crisis Resolution
Liquidity Support
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The BoU provide short-term liquidity support to solvent banks through allowing
banks to borrow up to 25 percent of required reserves for 3 months, or
rediscount its Treasury securities with less than 91 days to maturity at BOU
Banks may also borrow for longer periods not exceeding fifteen years if they
have eligible collateral.
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Where a bank is judged insolvent and systemically unimportant (Scenario III),
requests for liquidity support beyond BoU facilities should be declined,
consistent with the overriding objective of minimising ‘moral hazard’ in the
financial system
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Where a bank is potentially insolvent but systemically important BoU may
provide emergency liquidity assistance but subject to Ministerial approval and
lodgement by the Government of sufficient funds or debt securities to cover
the advance in full.
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Financial Crisis Resolution
Closed resolution
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A “closed resolution” outcome is where the bank is closed to new business
and wound-up with depositors either paid out or transferred to another bank.
If a bank is insolvent and cannot be restored to solvency then under Financial
Institutions Act (Section 94) BoU may close the bank and place it under
receivership. Under receivership BoU may choose to liquidate the assets of
the institution.
The resolution tool is appropriate for non-systemic banks.
Deposit Protection Scheme
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In case of liquidation, depositors must be paid promptly by the Deposit
Protection Fund (DPF) since delays may further undermine confidence in the
financial system and add to contagion.
The DPF covers depositors up to USh. 3 million per depositor per bank. The
Financial Institutions Act requires payment within 90 days.
The Director Non-Bank Financial Institutions at BoU coordinates insured
deposits payout.
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Financial Crisis Resolution
Open resolution
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An “open resolution” is an outcome in which a distressed bank is
enabled to meet its existing obligations and its core functionality is
retained.
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This is the preferred resolution option if a distressed bank is
systemically important.
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BoU may approach the Minister of Finance, Planning and Economic
Development (MoFPED) for support to resolve the a systemically
important insolvent bank , to preserve those parts of the business that
provide vital services to the financial system and the wider economy,
which would cause system-wide damage if lost.
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Conclusion and way forward
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There should be quick resolution of financial crisis, so as to maintain
confidence in the banking system.
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Coordination with other financial sector regulators and MoFPED in
resolution is important to avoid financial sector regulators working at
cross purposes.
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The crisis plan will continue to be reviewed and updated as the
financial crisis management framework at BoU is enhanced.
– Expanding the scope to financial sectors other than the banking
sector, to include: insurance, capital markets and pensions.
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Thank You
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