News
CBSL to get wide powers to ensure stability of licensed banks
View(s):By S. Rubatheesan
A fresh Banking Special Provisions Bill proposes to give the Central Bank of Sri Lanka (CBSL) a wide range of powers, including the right to proactively intervene with licensed banks that face existential threats to ensure financial stability.
The move came in the wake of the Government preparing to go ahead with the local debt restructuring process — one of the key requirements of the International Monetary Fund as part of its bailout package despite severe concerns raised on the impact it would have on the local banking industry.
With additional powers, the CBSL will become an all-powerful “Resolution Authority” to intervene and resolve capital, liquidity, and insolvency risks faced by any licensed bank and ensure the interests of depositors and creditors, according to the bill.
The bill submitted by President Ranil Wickremesinghe in his capacity as Minister of Finance, Economic Stabilisation and National Policies seeks to establish a dedicated department to exercise resolution authority with regard to licensed banks.
“Any licensed bank, regulatory or supervisory authority or such other person on whom an Order, regulation, direction or instruction has been issued or a request has been made by CBSL under this Act shall comply with such Order or direction within the specific time frame,” the bill says.
The bill vests the CBSL with overriding powers. It supersedes other existing relevant laws enabling the CBSL to exercise its powers as resolution authority. In addition, the CBSL can also apply provisions of the Act to direct the holding company of a licensed bank as well.
Accordingly, every licensed bank should prepare a recovery plan as part of its risk management and it should be kept up to date. The CBSL, if it’s considered necessary, could direct all or selected licenced banks to prepare recovery plans.
If the CBSL is of the view that a licensed bank has failed or is likely to fail but if the entity failed to comply, the CBSL can cancel the license issued to that bank.
The CBSL’s resolution powers include appointing an administrator, overseeing the transfer of shares of such licensed banks, or any selected assets and liabilities or requesting the minister to provide capital to establish a bridge bank as well.
In addition, the CBSL will also be able to remove or replace the directors, chief executive officer or key management personnel or any other employee of such licensed bank, according to the bill.
To ensure the continuity of essential services and critical functions of the bank, the CBSL is vested with powers to override the rights of shareholders of such licensed bank in any transactions or permit it to be run by its successor or an acquiring company for a temporary period, the bill says.
Where the Government is of the view that the failure of the bank can have systematic impact, the CBSL will facilitate the Government to infuse capital or can take over the respective licensed bank into temporary public ownership.
Meanwhile, at a public seminar on Tuesday, Central Bank Governor Nandalal Weerasinghe reiterated that the CBSL had taken necessary steps to ensure the financial stability of the country and it would continue to do so and therefore there was no need for the public to panic.
“There has been speculation about the stability of public deposits and some banks. One of our responsibilities is to ensure the banking system’s stability. In case of any local debt optimisation process, we will safeguard the stability of banks and protection of public deposits,” Dr. Weerasinghe said.
The sweeping powers vested with the CBSL will enable it to take proactive steps against licensed banks facing risks to ensure stability — similar to how the US Federal Reserve responded to the failure of the Silicon Valley Bank (SVB) in March. Weeks later, SVB said its portfolio was sold to Goldman Sachs, a leading US investment banking firm.
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