Sri Lanka Drafts Resolution Framework for Banks, Finance Companies

The CBSL will have the ability to replace an institution’s management, operate an agent institution and bail out an institution where necessary.

The CBSL (Central Bank of Sri Lanka) is drafting a resolution framework for banks and finance companies that will be introduced in the new bill to update the Banking Act.

The resolution framework aims to identify weak institutions before they go bankrupt to ensure depositors are paid, a senior CBSL official told Regulation Asia.

Currently, the Monetary Law Act, the Finance Business Act and the Companies Act provide for resolution measures for distressed financial institutions in Sri Lanka.

“This isn’t enough. We need a carefully planned mechanism for failing institutions to exit the market will lead to uncertainty and disruption in the system,” the official said.

“We need a stronger set of regulations for banks and a new framework for finance companies. So we are considering a separate law on this resolution framework.”

The new framework will offer practical guidelines in the areas of problem identification, corrective action, resolution techniques and exit strategies.

“When a bank is no longer viable, or likely to be no longer viable, without a prospect of becoming viable once again, the CBSL should resolve the institution without rigid systemic disorder and without exposing the public to losses.”

The official said the framework will additionally seek to ensure continuity of access to the critical functions of an institution in resolution, to sustain financial stability and confidence in the financial system.

Under the new framework, the CBSL will have the ability to supersede shareholders’ rights, replace an institution’s management, take over its operations, and bail out an institution where necessary.