During the period 1986–1988, several finance companies showed some distress due to mismanagement of funds. This required the Central Bank to bring in swift reforms to maintain overall stability and efficiency of the companies in the non-bank financial sector of Sri Lanka. Accordingly, the Finance Companies Act, No. 78 of 1988 was enacted and the Department of Supervision of Non-Bank Financial Institutions was established at the Central Bank in late 1988. However, with the continuous and rapid development in the NBFI sector, the regulations effected by the 1988 Act became futile, despite the amendments made in 1991. Ambiguities in the supervisory powers in respect of the Licensed Finance Companies and inadequate regulatory framework to deter unauthorised deposit taking persons and institutions that existed in the Act compelled the Authorities to introduce a more effective legislation. Accordingly, Finance Business Act, No. 42 of 2011 was enacted addressing all prevalent concerns and lacunas of the Finance Companies Act. With regard to the banking sector, the Banking Act was also amended from time to time, inter-alia, to introduce more prudential standards such as the amendments made in 1990, 1995, 2005 and 2006. These banking laws and regulations are regularly updated in line with the best practices in the industry, both locally and internationally, covering requirements, principles and guidelines issued by the “Basel Committee for Banking Supervision” of the Bank for International Settlements (BIS). Basis 3: International experience on financial sector consolidation Ladies and gentlemen, I would like to share with you the global experiences of financial sector consolidation.
Monetary policy needs to take this onboard, even before considering other issues such as risk-management at the zero bound. I have argued today that the central bank needs to have a major role in ensuring that the financial system is sound. Without this, the central bank cannot ensure that monetary policy will be effective in achieving its objectives. This is the important linkage of monetary policy to banking. Now some express concern that involvement in banking regulation and supervision may lead a central bank to bias the setting of monetary policy to try to help troubled banks or other institutions. This fear is misplaced. Problems in the financial sector are taken into account for monetary policy purposes only to the extent that they affect the transmission of policy to the real economy. There is a separate tool kit to address problems at the level of the banks themselves. Others will argue that having the central bank involved in the oversight and regulation of the financial system puts too much power in the hands of one authority. Another concern is that such a consolidation of responsibilities is dangerous for the central bank because it could threaten the central bank’s independence with respect to monetary policy. I think these are legitimate issues. But the bigger risks, in my view, are a monetary policy that fails to accomplish its economic objectives because of financial instability, and difficulties that stem from the inevitably imperfect coordination that takes place between multiple agencies with divided responsibilities during a crisis.