Premium
Resolving Bank Failures in Uganda: Policy Lessons from Recent Bank Failures
Author(s) -
Brownbridge Martin
Publication year - 2002
Publication title -
development policy review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.671
H-Index - 61
eISSN - 1467-7679
pISSN - 0950-6764
DOI - 10.1111/1467-7679.00171
Subject(s) - moral hazard , recapitalization , bank failure , insolvency , closure (psychology) , business , shareholder , restructuring , financial system , deposit insurance , audit , economics , finance , accounting , corporate governance , incentive , market economy
In 1998/99 four insolvent commercial banks were intervened and closed by the central bank in Uganda. One bank was closed promptly while the other three were all subject to some form of attempted open bank resolution before eventual closure. This article examines the lessons from this experience and concludes that, in general, prompt closure is preferable to open resolution. This is because the losses incurred by distressed banks are likely to be much greater than the estimates made by regulators or auditors prior to closure, while the prospects for recapitalisation by private sector shareholders are likely to be very limited at best. Open resolution entails serious dangers of moral hazard, which increase the eventual cost to depositors and taxpayers.