Central Bank appoints technical committee to study bank risk management

The Central Bank is to implement the Basel II Capital Adequacy Accord from 2007, which will improve the overall risk management of the banking system.

The Central Bank also has increased the minimum capital requirement for banks recently to encourage consolidation in the banking system with the presence of strong banks to facilitate the provision of better services to customers and to withstand adverse situations, the Bank said in a release.

The Central Bank continues to issue prudential requirements and guidelines prepared in consultation with the banking industry to improve the health of the banking system.

It should be emphasised that in terms of international best practice, one of the core pillars of prudential management of banks is self-regulation which is established through effective corporate governance. In this connection, a voluntary code of corporate governance developed by a committee consisting of representatives of banks and the Central Bank is presently being complied with by banks in Sri Lanka.

In the light of the on-going debate on the issue of share ownership concentration in banks, the Central Bank continues to examine corporate governance, disclosure requirements and the legal framework with a view to improving the prudential requirements. This would be done in consultation with the banking industry and other regulatory authorities to attain the best compliance and effectiveness.

One of the two core objectives of the Central Bank of Sri Lanka is the securing of financial system stability. Financial system stability, which will safeguard depositor interests, is achieved through the imposition of prudential requirements by the Central Bank as authorised by law.

Share ownership concentration in banks, per se, is neither new nor illegal. It has its advantages as well as disadvantages. The Central Bank, like many other banking regulators around the world, places heavy emphasis on prudential management of banks on sound corporate governance principles to achieve financial system stability.

The current Banking Act contains provisions in respect of share ownership in banks in Sri Lanka by connected parties.

The share ownership of investors in the three banks in question has been examined by a team of professionals in relation to these provisions, and it has been found by the examinations conducted so far that there has not been a violation of law in respect of which enforcement action can be taken by the authorities.

The current prudential regulations of banks throughout the world are based on the principles recommended by the Basel Committee set up by the Bank for International Settlements based in Basel as international best practice, the Bank said in a release.

The Central Bank has appointed a technical committee of professionals to examine the issues involved and make appropriate recommendations.