Central Bank get wider powers over private banks

The Central Bank of Sri Lanka (CBSL) is to be given a wide range of powers including proactively intervening with licensed banks that face existential threats in order to ensure financial stability.

The powers are to be given through a bill which is due to be passed in Parliament.

A fresh Banking Special Provisions bill  has been submitted by President Ranil Wickremesinghe this week.

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 bail-out package despite severe concerns raised on the impact it would leave on the local banking industry.

With additional powers, the CBSL will become an all-powerful “Resolution Authority” to intervene in order to resolve capital, liquidity, and insolvency risks faced by any licenced bank and ensure the interests of depositors and creditors.

The bill submitted by President Wickremesinghe in his capacity as Minister of Finance, Economic Stabilization and National Policies sought to establish a dedicated department to exercise resolution authority with regard to license banks under the Act.

“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 reads.

The bill is vested with overriding powers to CBSL from other existing relevant laws to exercise its powers as resolution authority. In addition, the CBSL can also apply provisions of the Act to hold 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, direct all or selected licenced banks to prepare recovery plan now,

If CBSL is of the view that a licensed bank has failed or is likely to fail but if the entity failed to comply, the bank can cancel the license issued to that bank.

The Resolution powers of the Central Bank include appointing an Administrator, overseeing the transfer of shares of such licenced 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 reads.

If the licensed bank is too big to fail, where the government is of the view that the failure of the bank can have systematic importance or impact, the CBSL will facilitate the government to infuse capital or can take over the respective licensed bank into temporary public ownership.

Meanwhile, the Governor of the Central Bank of Sri Lanka Dr Nandalal Weerasinghe who took part in a public seminar on Tuesday took the time to reiterate once again that CBSL has taken necessary steps to ensure the financial stability of the country and it will continue to do so therefore there is no need for the public to panic.

“There have been speculations about the stability of public deposits and some banks. One of our responsibilities as CBSL is to ensure the banking system's stability. In case of any local debt optimization process, we will safeguard the stability of banks and protection of public deposits,” Governor Weerasinghe said.

The sweeping powers vested with 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 Silicon Valley Bank (SVB) in March. Weeks later, SVB said that the portfolio of SVB was sold to Goldman Sachs, a leading US investment banking firm.