CB tells banks to prepare for sweeping industry changes with new Banking Act
New Banking Act to come
into effect in 2021 Banks will have to address supervisory concerns or risk monetary penalties
The Central Bank (CB) wants Sri Lanka’s banking sector to start preparing for the anticipated transformation of the current banking industry landscape as the new Banking Act is set to come into effect in 2021 with the regulator gaining more ‘teeth’ to impose monetary penalties on errant banks.
The Central Bank (CB) is planning to complete the final draft of the proposed Act by end of this year, and consequently the draft document will be made available for consultations and observations from stakeholders aiming to get it enacted in 2021.
“The key areas to be factored into the proposed new Banking Act include an overall mandate for supervision and regulation, a differentiated regulatory framework to facilitate proportionality, strengthening corporate governance, consolidated supervision, a resolution framework, the capacity to impose monetary penalties/fines, ring-fencing of banks to mitigate contagion risk, strengthening provisions for mergers, acquisitions and consolidation, subsidiarisation of large foreign banks and holding company structure for banks,” the Central Bank (CB), Governor, Dr. Indrajit Coomaraswamy elaborated.
He shared these details at the 31st Anniversary Convention of the Association of Professional Bankers of Sri Lanka, held in Colombo this week.
The CB, Director Bank Supervision, A. A. M. Thassim stressed that banks will have to adopt for the upcoming changes as CB will no longer tolerate failures in addressing supervisory concerns in a timely manner.
“The landscape of the banking sector will change once the new Banking Act comes, because the banks will need to change the way they do things, and they will also have to change their attitude and they will need to address supervisory concerns.
There will be no repetitions or repeated concerns, because monetary penalties are going to come in. Therefore, the banks have to be ready for this change,” he stressed.
Thassim noted that the current definition of related parties in the banking sector will be broadened and will become dynamic with the new Act coming into force.
He also shared that the CB plans to limit the business areas of banking subsidiaries with ring-fencing to further enhance the resilience of banks. Except for financial services, he said the CB would also consider subsidiaries in sectors such as properly development and IT.
The consolidated supervision of banking groups is also scheduled to come into effect from 2021 which is aimed at protecting banks from contagion risk, and ensuring the stability and the soundness of the banking sector and the financial system.
“Accordingly, a regulatory framework on consolidated supervision will be formulated and provisions in this regard will also be brought into the Banking Act,” Dr. Coomaraswamy said.
In order to strengthen inter-regulatory cooperation and collaboration in this regard, the CB, Securities and Exchange Commission of Sri Lanka (SEC) and the Insurance Regulatory Commission of Sri Lanka (IRCSL) have entered into a tri-partite memorandum of understanding on risk-based consolidated supervision this year where the Central Bank will be the lead regulator. In addition, the CB is also currently working on changing the framework to define Domestically Systemic Important Banks (DSIBS) more accurately.
While noting that the current definition is based on assets exceeding Rs. 500 billion, Thassim said that in future, it will be based on factors such as interconnectedness, substitutability, complexity, and crossjurisdictional activity of banks.
Further, the systematically important banks will also be required to submit recovery plans on a yearly basis to the regulator in the future.