Resources for Basel II Capital Accord (Basel II)

Mandatory Corporate Governance Code and the Central Bank

Basel II

Recently, the Central Bank of Sri Lanka announced the new directions for the maintenance of Capital Adequacy by Banks, under the Basel II, and at the same time its Supervision Department published a Mandatory Code of Corporate Governance for Licensed Banks in Sri Lanka. While the Central Bank wants licensed banks in Sri Lanka to observe the Code of Corporate Governance, the regulator itself is unable to observe the rules under this Code.

The IMF has serious doubts about the independence of Sri Lanka’s Central Bank and its ability to regulate banks fairly, due to the presence of a Treasury representative on the Monetary Board. This creates a conflict of interest between the obligations and responsibilities of the Central Bank and the requirements of the Treasury to meet their payments. The Monetary Board’s independence is also constrained by the presence of the Secretary to the Treasury on its Board. The Secretary to the Treasury is also the largest shareholder of the two state banks, the Bank of Ceylon and the People’s Bank.

The Treasury Secretary has been given the responsibility for appointing members to the boards of the two state banks. This action is inconsistent with the standards of Corporate Governance expected by the Central Bank from the banks whom they are expected to supervise.

In the UK, the Bank of England does not control the banking system as it may be in conflict, with the primary goal of achieving price stability. In India, the Reserve Bank of India, does not appoint members to the boards of state-owned banks. Several independent Central Banks all over the world no longer regulate commercial banks. Even in the US, the smaller banks are supervised by agencies separate from the Federal Reserve Bank.

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