East African Community member states are working on joint rules and regulations to rescue troubled banks, as part of measures to enhance the stability of the sector in the region.
The region’s deposit insurers started by sharing information on best practices as a first step to merging the rules and regulations governing the protection of depositors’ cash in the region.
The insurers are considering the possibility of adopting a common framework for addressing the issues facing financially distressed banks to avert further failures.
“What we need to do as a region is to strengthen our financial system by adopting a common framework for bank resolution. This will go a long way towards ensuring banking stability and boosting confidence in the industry,” said Kenya Deposit Insurance Corporation chief executive.
“As regional deposit insurers we need to have common bank intervention measures to deal with problematic banks.”
EAC member states through the Monetary Affairs Committee resolved in 2016 in Kigali to jointly put in place measures to deal with troubled banks.
These measures include increased surveillance of the cash position of banks to offer early intervention.
The member states also agreed that each country develops a Resolution Funding Framework and improve Prompt Corrective Actions (PCAs) for banks in the East African region.
As a result, the region’s banking regulators started working towards improving the operations of their deposit protection insurance schemes to boost confidence in the banking industry.
For example, Kenya plans to increase the compensation to depositors of failed institutions to Ksh500,000 ($5,000) from Ksh100,000 ($1,000).
The deposit insurer KDIC has also disclosed plans to establish interim banking institutions to manage the good assets and liabilities of troubled banks for two years.
The move is expected to protect banks in receivership against a run on deposits and give regulators enough time to search for their potential buyers.
The temporary banks to be called “Bridge banks” will be owned by KDIC and will each have a lifespan of two years within which it would be sold to strategic investors.
Globally, the concept of bad bank resolution is entrenched in the US, UK, Spain, Sweden, Ireland, Malaysia and Korea.
In Uganda, depositors are covered up to Ush5 million ($1,333) of their total deposits, and the law provides that all depositors be paid within 90 days of a bank failure. The failed institution should also have its assets auctioned within six months of its takeover by the central bank.
In Tanzania, the Deposit Insurance Board increased the amount of protected deposits from Tsh500,000 ($217) to Tsh1,500,000 ($651), while the Deposit Guarantee Fund of Rwanda protects eligible deposits up to Rwf500,000 ($559) per depositor per member bank and microfinance institution.