Bank of Uganda has responded to the Daily Monitor story headlined "How BOU blew Shs 478 billion in the Crane Bank takeover". Bank of Uganda took over the management of Crane Bank in October 2016 before the bank was sold to a rival bank, DFCU in January 2017.
Governor, Emmanuel Tumusiime Mutebile in a press statement issued today says the blowing of Shs 478 billion story is "seriously misleading." According to Mutebile, claims that Bank of Uganda (BOU) spent Shs 478.8 billion from an undisclosed account in the Central Bank under the cover of liquidity support is erroneous.
"First, the BOU did not take Shs 478 billion from an "undisclosed account". The BOU provided a loan to Crane Bank and this money came from the BOU's own resources. The BOU is a Central Bank and like any other Central Bank it can create financial assets and liabilities. In this case the BOU created a financial asset (the loan to Crane Bank) which was matched by an equivalent liability (an increase in the money supply)." the statement reads.
"Secondly, the claim that the BOU spent Shs 478 billion "under the cover of liquidity support" implies that the money was actually used for something else besides liquidity support. In fact, the vast majority of this money - Shs 466 billion - actually was liquidity support. Crane Bank had been losing liquidity for months prior to its takeover by the BOU.
This was because a large share of its loan portfolio was not being serviced by the borrowers and because customers were losing confidence in the bank and withdrawing their deposits. Between the end of June 2016 and the end of September 2016, Crane Bank's deposits fell by Shs 148 billion."
Mutebile says as Crane Bank's liquidity drained away, the bank requested liquidity support from the BOU, before the bank was taken over by BOU.
He added that at this point, BOU had two possible courses of action; either to provide liquidity support to Crane Bank or not.
"If the BOU had chosen the latter course of action, Crane Bank would have been unable to honour its liabilities. It would not have been able to pay depositors who wanted to withdraw their money from the bank or repay the money it had borrowed from other banks in Uganda through the interbank market."
"In effect Crane Bank would have collapsed. Because Crane Bank was such a large bank, its collapse would have risked chaos in the financial system, possibly causing contagion to other banks and bank runs by depositors. That would have caused a huge amount of economic damage. No responsible Central Bank could allow this to happen. Apart from the Shs 466 billon of liquidity support to Crane Bank, the BOU also spent Shs 12 billion in resolving Crane Bank."
According to the governor, these were expenses that were necessary to ensure that the assets and liabilities of Crane Bank could be transferred to another bank, thereby allowing Crane Bank's customers to continue having access to normal banking services."
"In effect Crane Bank would have collapsed. Because Crane Bank was such a large bank, its collapse would have risked chaos in the financial system, possibly causing contagion to other banks and bank runs by depositors. That would have caused a huge amount of economic damage. No responsible Central Bank could allow this to happen. Apart from the Shs 466 billon of liquidity support to Crane Bank, the BOU also spent Shs 12 billion in resolving Crane Bank."
According to the governor, these were expenses that were necessary to ensure that the assets and liabilities of Crane Bank could be transferred to another bank, thereby allowing Crane Bank's customers to continue having access to normal banking services."
The Shs 478 billion was a cost of ensuring that Crane Bank did not collapse in a disorderly manner, threatening chaos in the banking system and the wider economy and ensuring that its customers retained access to their deposits and to banking services, Mutebile said.
In any case, BOU, Mutebile says is recovering the Shs 200 billion of the Shs 478 billion through the sale of assets and purchase of assumption transaction which transferred assets and liabilities of Crane Bank to DFCU Bank.
In any case, BOU, Mutebile says is recovering the Shs 200 billion of the Shs 478 billion through the sale of assets and purchase of assumption transaction which transferred assets and liabilities of Crane Bank to DFCU Bank.
The rest of the money (about Shs 278 billion), according to Mutebile will be recovered from Crane Bank's shareholders, who BOU says were responsible for the bank's huge losses.