The Central Bank (CB) is closely examining its various, market-related activities, whether proper risk management processes were followed and whether any individuals – within the regulator and outside – need to be prosecuted in the Golden Key fiasco.
The bank, under a new Governor, is also unlikely to adjust the rupee value right now and would retain it at current levels.
“There is a whole bunch of things that needs to be examined,” noted CB Governor Arjuna Mahendran in an interview with the Business Times on Thursday, emphasising that he is particularly looking at whether there is an Investment Policy Statement, was it followed and, if not, the need to create one.
The CB in the past few years has been criticised for investments – via the Employees Provident Fund (EPF) – in doubtful listed stocks and also in disastrous Greek bonds. The regulator also came under criticism in its handling of the crash of the Golden Key and the resultant collapse in many finance companies.
Mr. Mahendran said the Sri Lankan CB model – with its multifarious activities – was more powerful that the typical central bank model elsewhere and as a result drew a lot of criticism in the proposed merger of banks and using EPF monies to invest in various avenues including the stock market
“The control structure for these various investment activities is something that I am looking at very closely,” he said, adding that what needs to be examined is whether there was a clear separation of the compliance (with all laws) and risk management processes similar to any global bank. “We need to see whether we are properly controlling these risks,” he said, adding “Our priority is to take measures to stabilise the system”. (See Page 2 for comprehensive interview)
On the Golden Key fiasco, he recalled the words of former Chief Justice Sarath Silva, in a judgment saying that the CB had absconded from its duty of ensuring that any institution involved in financing activities must be supervised, and added: “The CB appears to have absolved itself of any responsibility. The chief justice made a very clear point that the CB had flouted its responsibilities. These are issues that we need to look at – the finance company structures, the Golden Key and several other similar companies”.
He said the CB is discussing with the Attorney General (AG) to ascertain whether “we could prosecute certain people (based on evidence) and I am optimistic that we can help the depositors at the end of the day”.
On the financial sector consolidation, he said he was not in agreement with the rationale of consolidation being to make banks bigger so that they could go to the international markets and tap bond and equity funding.
“Even with consolidation, for example, the DFCC and NDB combined are still too small in my view to really make an impact. To me the only consolidation that would make sense is to merge say the NSB and the Bank of Ceylon and then have a US$10 billion bank which is reasonably sized,” he said adding that with his international experience any bank with less than $10 billion won’t make a dent in the market.
The CB has requested technical support from the International Monetary Fund (IMF) to look at these issues from an international perspective and they have agreed to do so. “They would be looking at the financial stability of our financial system; how stable is it and what is impeding faster growth,” he said.
Asked whether the regulator strayed from its stated role, he was of the view that sometimes it did citing the example of its annual report last year praising the Mattala airport.
“The Central Bank’s role is to be more objective… not gush about projects where the feasibility study had not been done. From that point of view, the CB seems to have strayed from its role of being an objective advisor to the Government and the people of Sri Lanka.”
But he was quick to point out that this didn’t mean the entire bank was ‘rotten’ and irredeemable. “I don’t think the CB has lost its way – we just need a slight course correction to get back on track,” Mr. Mahendran said, adding that the bank had a qualified and very competent team of officials to move forward.
On the value of the rupee, he said the currency is at a critical stage with global markets being very volatile. “… exchange rate flexibility has to be the last option; we have to preserve confidence. At the moment the markets are waiting for the budget and the parliamentary election in June, and in that situation you need an anchor and the currency plays that role,” he added.
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The bank, under a new Governor, is also unlikely to adjust the rupee value right now and would retain it at current levels.
“There is a whole bunch of things that needs to be examined,” noted CB Governor Arjuna Mahendran in an interview with the Business Times on Thursday, emphasising that he is particularly looking at whether there is an Investment Policy Statement, was it followed and, if not, the need to create one.
The CB in the past few years has been criticised for investments – via the Employees Provident Fund (EPF) – in doubtful listed stocks and also in disastrous Greek bonds. The regulator also came under criticism in its handling of the crash of the Golden Key and the resultant collapse in many finance companies.
Mr. Mahendran said the Sri Lankan CB model – with its multifarious activities – was more powerful that the typical central bank model elsewhere and as a result drew a lot of criticism in the proposed merger of banks and using EPF monies to invest in various avenues including the stock market
“The control structure for these various investment activities is something that I am looking at very closely,” he said, adding that what needs to be examined is whether there was a clear separation of the compliance (with all laws) and risk management processes similar to any global bank. “We need to see whether we are properly controlling these risks,” he said, adding “Our priority is to take measures to stabilise the system”. (See Page 2 for comprehensive interview)
On the Golden Key fiasco, he recalled the words of former Chief Justice Sarath Silva, in a judgment saying that the CB had absconded from its duty of ensuring that any institution involved in financing activities must be supervised, and added: “The CB appears to have absolved itself of any responsibility. The chief justice made a very clear point that the CB had flouted its responsibilities. These are issues that we need to look at – the finance company structures, the Golden Key and several other similar companies”.
He said the CB is discussing with the Attorney General (AG) to ascertain whether “we could prosecute certain people (based on evidence) and I am optimistic that we can help the depositors at the end of the day”.
On the financial sector consolidation, he said he was not in agreement with the rationale of consolidation being to make banks bigger so that they could go to the international markets and tap bond and equity funding.
“Even with consolidation, for example, the DFCC and NDB combined are still too small in my view to really make an impact. To me the only consolidation that would make sense is to merge say the NSB and the Bank of Ceylon and then have a US$10 billion bank which is reasonably sized,” he said adding that with his international experience any bank with less than $10 billion won’t make a dent in the market.
The CB has requested technical support from the International Monetary Fund (IMF) to look at these issues from an international perspective and they have agreed to do so. “They would be looking at the financial stability of our financial system; how stable is it and what is impeding faster growth,” he said.
Asked whether the regulator strayed from its stated role, he was of the view that sometimes it did citing the example of its annual report last year praising the Mattala airport.
“The Central Bank’s role is to be more objective… not gush about projects where the feasibility study had not been done. From that point of view, the CB seems to have strayed from its role of being an objective advisor to the Government and the people of Sri Lanka.”
But he was quick to point out that this didn’t mean the entire bank was ‘rotten’ and irredeemable. “I don’t think the CB has lost its way – we just need a slight course correction to get back on track,” Mr. Mahendran said, adding that the bank had a qualified and very competent team of officials to move forward.
On the value of the rupee, he said the currency is at a critical stage with global markets being very volatile. “… exchange rate flexibility has to be the last option; we have to preserve confidence. At the moment the markets are waiting for the budget and the parliamentary election in June, and in that situation you need an anchor and the currency plays that role,” he added.
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