J. Bagyenda (Mrs.) Executive Director Supervision Bank of Uganda

1. Designing a suitable response for Low Income Countries (LIC) to post-crisis regulatory Developments J. Bagyenda (Mrs.)Executive Director SupervisionBank of Uganda

2. Presentation outline • Introduction • Basel Committee • Post crisis regulatory Developments • Vulnerability of LICs to systemic crises • LICs Responses • Conclusion

3. Introduction The global economic crisis has prompted a profound shift in the approach towards financial regulation; namely • The search for feasible “macro prudential” regulation of the financial sector • The recognition that supervision of large and systemically important financial institutions must be strengthened – In God we trust, in supervision we verify -Trust less, verify more.

4. Basel Committee Basle Committee proposals: • improving the quality of banks’ capital; • improving risk coverage of the capital framework; • supplementing the capital adequacy ratio with a leverage ratio;

5. reducing the procyclicality of the financial system; addressing risks arising from systemically important financial institutions and introducing minimum standards for funding liquidity. Basel Committee (Cont’d)

6. Post crisis regulatory Developments Post crisis regulatory developments will depend; • Vulnerability of LICs to systemic banking crises which as we know (Reinhart and Rogoff) are incredibly costly. • Post crisis regulatory reforms are effective in reducing systemic vulnerabilities.

7. Vulnerability of LICs to systemic crises Sub-Saharan African Countries escaped relatively unscathed due; • Majority of banks had virtually no exposure to toxic assets • Banks had limited exposure to banks in developed economies

8. Vulnerability of LICs to systemic crises (Cont’d) Caution ; policymakers need not be complacent, we know; • LICs are vulnerable to systemic crisis because of their macroeconomic volatility and, • Financial systems of many LICs are undergoing massive transformation viz; • Getting larger in relation to size of the economy • High competition • New financial products • global and regional integration ( banking without borders)

9. Response for post crisis regulatory reforms • Develop capacity for macro-prudential surveillance and Regulation; • This should not be at the expense of micro- prudential supervision, which given the nature of financial systems in LICs, provides the first line of defence against a systemic crisis.

10. Response for post crisis regulatory reforms (Cont’d) 2.Improve quality of Bank Capital • Raising equity capital components • Buffers above minimum capital requirements • Extension of risk leverage – derivatives, securitization, trading book Maintain the existing Basle 1 Capital Adequacy framework.

11. Response for post crisis regulatory reforms (Cont’d) 3. Adopt measures to curb excessive credit booms. • credit booms appear likely to be one of the most important sources of systemic vulnerability as financial systems develop in LICs. • Forward looking provisioning –cover expected losses vs incurred losses • Credit risk reserves – provisions on performing loans • Uganda is applying the above

12. Response for post crisis regulatory reforms (Cont’d) 4.Consider the multiple aspects of foreign exchange risk for financial systems. • Intermediation of foreign currency resources can create both foreign exchange and credit risk for banks. • Deposit dollarization also carries liquidity risks which are potentially more serious for the banking system than domestic currency liquidity risks.

13. Response for post crisis regulatory reforms (Cont’d) 5.Improve information sharing between home and host country supervisors of international banks. • Subsidiaries in small countries are unimportant in terms of the health of the overall banking group, and therefore, home country supervisors rarely comply with their responsibilities to the host supervisors. • Minimize complacence of home supervisors

14. Response for post crisis regulatory reforms (Cont’d) 6.Harmonise legislation across countries for resolving failed banks which operate across borders. • Put in place a framework which does not favour creditors in one country of the failed bank’s operations at the expense of creditors in another country.

15. Conclusion LICs stand to benefit from a genuinely fair international regulatory and resolution framework.

16. Thank you Questions and comments