Financial system remains stable - CBSL
Sri Lanka's financial system remained stable and resilient the
Central Bank's financial system stability review 2010 said.
The stability of the financial system strengthened with the
resurgence in domestic economic growth and the recovery in international
trade, and underpinned by a more stable macroeconomic environment and
improved investor confidence. The soundness and resilience of domestic
financial institutions was maintained with adequate capital and
liquidity buffers and improvements in asset quality and earnings, within
a regulatory framework with prudential safeguards to mitigate excessive
risk-taking. Overall, credit risk, market risk and liquidity risk in
financial institutions declined during the year. Conditions in domestic
financial markets improved as interest rates have come down with the
decline in inflation and the easing of monetary policy.
Financial markets also became more liquid largely due to an increase
in capital inflows.
The price indices, capitalization and turnover of the stock market
soared to record levels. Prudential policies were introduced to address
a possible build-up of an asset price bubble in the market. The
systemically important payment and settlement systems operated smoothly
and safely, with improvements to business continuity arrangements and
the introduction of a new regulatory framework for electronic payment
cards thereby further enhancing the security of the payment system. An
early warning system covering the key financial sectors was also put in
place to alert the Central Bank of Sri Lanka (CBSL) on developments that
could trigger an adverse impact on the financial system.
The banking sector recorded an increase in credit growth and remained
financially strong and resilient with a high capital position and lower
risk levels. Bank lending recovered and rose significantly in the first
nine months of 2010 from negative growth in the previous year.
The profitability of the banking sector improved, with the net
interest margin being maintained at a stable rate for a number of years.
The banking sector remained well capitalized with the predominant
capital component being loss absorbing common equity.
The capital adequacy ratios (CAR) have increased after migration to
Basel II under the Standardised Approach for credit and market risk and
the Basis Indicator Approach for operational risk in 2008. Both the
total and Tier 1 CAR are well above the regulatory minimum requirements.
The asset quality of the banking sector improved from mid 2010
signaling a decline in credit risk. The statutory liquid asset ratio of
the banking sector comprised substantial holdings of government
securities was almost double the required minimum, which provided an
ample cushion to mitigate liquidity risk.
The credit to deposit ratio was at a comfortable level indicating
that banks had a stable source of funds. The leverage ratio was also at
an acceptable level demonstrating that banks were not unduly dependent
on borrowings. The exposure to market risk was also not significant due
to the low level of trading book activities. Stress tests indicated that
the banking sector has sufficient capital and liquidity buffers and
would be resilient to large credit risk, market risk and liquidity risk
shocks. The review said performance and soundness of other financial
institutions improved.The finance and leasing company sector recorded
significant growth in accommodations and earnings, owing to the better
macroeconomic environment.
The financial soundness indicators of the two sectors, excluding the
distressed companies, have shown an improvement.
Directions on corporate governance and effective risk management
systems have also been introduced.
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