Legal Aspects Of Central Banks’ Emergency Rescue Powers In Respect Of Distressed Banks: Lessons For Uganda From The South African Experience
In the aftermath of the 2008 Global Financial Crisis (GFC), distressed bank rescue has become a major topic of discussion. This has largely been prompted by public outrage against the several bail out packages extended to the financial services firms in the US and Europe. In post-GFC policy and legal framework, various jurisdictions are exploring risk allocation strategies that can transfer the risk of saving distressed banks from public costs to make them private costs. Furthermore, reliance on bail out schemes has been discredited by the problem of moral hazard- whereby bank owners and managers deliberately run the entities into a financial plunge with the expectation that governments will bail them out (socialization of losses and privatization of profits). Another justification for this shift in approach is the traditional insolvency theory that resources should be liberated from ineffectual enterprises and distributed to profitable going concerns. However, it is widely acknowledged that banks are not ordinary businesses. There is a high public interest because they operate using depositors’/customers’ deposits. Furthermore, there are deeper public policy considerations underpinning the need and desire to maintain public confidence in the banking system in specific, and the financial system in general. This regulatory theory, therefore, makes it inevitable that Central Banks will exercise their lender of last resort function to save distressed banks suffering from temporary liquidity problems, with a view of safe-guarding the banking system.
Secondly, it is also widely acknowledged that some banks are Significantly Important Financial Institutions (SIFIs), and are so interconnected within the financial system that their collapse would destabilize the system as a whole. Such entities are increasing in size and complexity because of the concept of “universal banking”. Some banks also provide vital products to the market and consumers, failure of which would cause massive public inconvenience and market distortion. The recent curatorship of African Bank and the 2015 amendments to the Banks Act will be explored in terms of legal ramifications on the powers and duties of the curator. These concepts are particularly important to the South African regulatory landscape because of the anticipated shift to the “Twin Peaks” model of financial sector regulation. Therefore, this article seeks to analyze the exercise of the distressed bank rescue mandate by the South African Reserve Bank (SARB), and Bank of Uganda (Uganda’s Central Bank), with a view of advocating for a more rescue-based interventionist approach for Uganda.
For purposes of delimitation, this article will focus mainly on aspects pertaining to bank rescue. Therefore, aspects of bank resolution such as winding up procedures, depositor insurance protection schemes, and consultations concerning enactment of the South African Resolution Bill are outside the scope of this research.