The Central Bank’s decision to liquidate the bank was challenged in the Court of Appeal which quashed the Central Bank decision on the ground that the Central Bank had not followed the due procedure given in the Banking Act. Finally, the Government as a part of political decision in the interest of depositors bailed out the bank by vesting the bank with a new state bank set up for the purpose. If the Central Bank was conscious of its responsibilities, it could have resorted to a different path to resolve the bank at the very early stage. World over, central banks are blamed for delayed action, not effective to resolve problems. World over, regulators fall behind the market although they are expected to correct the market. Regulators are burdened with laws, procedures and bureaucracy and lack of latest market information. They work for office hours. However, market participants work 24 hours and are innovative for regulatory arbitrage. The human greed supported with moral hazard of regulation creates bubbles cyclically leading to financial and economic crises from time to time. The regulators and politicians create new laws, but they fail to prevent the next bubble. As a person being in both regulator and markets, I will do a lot of work to address this 6  BIS central bankers’ speeches  universal issue hopefully. However, as financial regulators cannot control the greed, financial bubbles and crises are to happen. Finally, the Central Bank independence is the confusing and very technical subject. No Central Bank is divine.
For example, the Central Bank is a respondent in all court cases recently filed in connection with unauthorized and failed investment schemes as the petitioners are of the view that the Central Bank is responsible for the loss of investors’ money. Let me therefore elaborate on Central Bank functions. First, the issue of currency Central banking is a concept originated from the issue of currency. In the evolution of money, private banks started issuing their own bank notes, initially based on their gold holding and later as their own liabilities. The bank in which the public placed the highest trust started operating as a central bank in the market. Later in the history, legislation was brought to empower the Central Bank to print bank notes or currency which function as the intermediary between all economic transactions. Currency in issue at present in Sri Lanka is about  2  BIS central bankers’ speeches  Rs. 422 billion and is a liability of the Central Bank, even as it is an asset to the rest of us. The Central Bank is prepared to pay against any currency note in any other value of legal tender preferred by the public. The Central Bank maintains a cash counter for this. In order to protect the public trust in currency, the Central Bank primarily undertakes two actions. First, it attempts to issue currency notes with intrinsic material security making it difficult for counterfeiting and designs are chosen to facilitate easy recognition of different currency notes by people including the blind.