New Enforcement and Resolution unit at CBSL

The Central Bank of Sri Lanka (CBSL) is to set up a separate entity named ‘Enforcement and Resolution Department’ to take tougher action on financial institutes that violate CBSL regulations, including Basel III requirements that are currently being imposed on banks.

Speaking to the Media at a recent seminar, CBSL officials revealed that the Enforcement and Resolution Department would be set up early next year, following amendments to the Finance Business Act No. 42 of 2011 and Banking Act No. 30 of 1988.

They asserted that as at present the CBSL required wider powers to enforce tougher action on financial institutes and punish banks which don’t comply with Basel III, the new Department would allow CBSL to regulate the financial sector more effectively.

Financial institutes that are non-compliant with CBSL regulations and Basel III requirements would be directly transferred from Banking Supervision and Supervision of Non-Bank Financial Institutions Departments to the new Departments which would take action ranging from financial institutes restructuring……to liquidating institutes flouting financial regulations.

According to CBSL, the majority of banks were en route to meet Basel III minimum capital requirement by 2019 as scheduled. Banks have been raising its debt capital, issuing subordinate debentures and increasing retained earnings to meet capital requirement. However, CBSL officials said that one particular bank under the Rs 200 billion asset base failed to meet minimum capital requirements for this year. CBSL is expected to take action against the bank, after reviewing the bank’s quarterly report in October.

Moreover, a CBSL official speaking to Ceylon Today revealed that currently three finance companies with a combined asset base of Rs 3 billion were facing serious liquidity issues. The particular companies are currently in discussion with potential investors to improve its liquidity rates. CBSL currently has Rs 30 billion in its Deposit Insurance Scheme where in case of failure of a financial institute, depositors would be compensated up to Rs 300, 000.

Commencing July 2017, Basel III was adopted as a regulatory response to strengthen the resilience of the financial sector by banks in Sri Lanka under the Banking Act Direction No 01 of 2016. The country’s banking sector is expected to be fully compliant with Basel III by 2019 with banks under Rs 500 billion asset base maintaining a minimum 12.5 per cent capital requirement while banks above Rs 500 billion maintaining a 14 per cent of minimum capital requirement.

Moreover, in terms of Basel liquidity requirements, the Sri Lankan banking sector is set to fully implement 100 per cent liquidity converge ratio by 2019 to withstand the 30- day stressed funding through high quality liquid assets, the current ratio is at 90 per cent. In addition, Net Stable Funding ratio is proposed to be implemented in late 2018 for banks to address liquidity mismatches in the long run.

As at June 2017, the Sri Lankan banking sector had assets worth Rs 9.8 trillion, where seven licensed banks accounted for 71 per cent asset, the rest was distributed among five medium-sized banks and 21 small banks.