Regulation on Limits on Inter-Bank Exposures

REGULATION ON LIMITS ON INTER-BANK EXPOSURES

PRUDENTIAL REGULATION

NUMBER: 165R2015/ VOLUME: 44 NUMBER: 251 DATE: 10 Zulhijjah 1436 - 25 August 2015 Tuesday

PART I: PRELIMINARY

Paragraph 1. Introduction This Regulation is issued pursuant to Section 66 of the Banking Act (24/2010) of the Maldives.

Paragraph 2. Title This Regulation shall be cited as the "Regulation on Limits on Inter-Bank Exposures".

Paragraph 3. Application This Regulation applies to all banks licensed under the Banking Act of the Maldives (24/2010).

Paragraph 4. Commencement This Regulation shall come into effect on 25 August 2015.

Paragraph 5. Definitions Unless the context otherwise requires, the expressions and terms used in this Regulation shall have the same respective meanings as defined below in the Banking Act of the Maldives (24/2010):

1. "Act" means the Banking Act of the Maldives (24/2010).
2. "Bank" means a holding party licensed or permitted under the Act to engage in banking business, or all or part of the activities listed in Section 25 of the Act.
3. "Base Capital" means Base Capital as defined in the Prudential Regulation on Capital Adequacy (MMA).
4. "Exposure" includes for the purposes of this regulation: a) all deposits in another bank; b) all advances or loans to another bank; c) all purchases of securities or other assets from another bank that are subject to a repurchase agreement; d) all acceptances, guarantees, or letters of credit issued on behalf of another bank; e) all purchases of investments in securities issued by another institution or bank; f) all securities issued by another institution or bank accepted as collateral.
5. "Inter-Bank Exposure" means any exposure between a bank and any other bank in the Maldives; it may also be referred to as inter-bank placements; includes operating branches of foreign or domestic banks in the Maldives.
6. "MMA" means the Monetary Authority of the Maldives established under the Monetary Authority of the Maldives Act.

PART II: POLICY OF STATEMENT

Paragraph 1. Purpose The purpose of this regulation is to limit the potential risk contagion when one bank in the Maldives fails or is unable to repay its obligations, and as they become due, to other banks in the Maldives.

Paragraph 2. Responsibility It is the responsibility of the board of directors of each bank to adopt policies and procedures to: a) ensure that all inter-bank placements resulting in exposures comply fully with the limitations set forth in this regulation; b) administer and make inter-bank exposures according to prudent lending and investment practices, giving highest priority to the soundness and safety of the bank making the placement; c) at a minimum, comply fully with the limitations set forth in this regulation; conditions and terms for all inter-bank placements may be equivalent to or more stringent than those specified in this regulation, including any internal limitations; d) establish criteria for selecting banks acceptable for inter-bank placements.

PART III: REQUIREMENTS SPECIFIC AND IMPLEMENTATION

Paragraph 1. Requirements and Limits The following requirements and limits shall apply: a) Any inter-bank exposure having a settlement or term period of more than 7 calendar days shall not exceed 30% of the base capital of the bank to which the exposure is made. Furthermore, any amount of such exposure exceeding 15% of the base capital of the bank must be fully secured at all times as defined in paragraph 2 below. b) For any inter-bank exposure having a settlement or term period of less than 7 calendar days, the security and limitation requirement stated in (a) above shall not apply. However, if such exposure is renewed, extended, or over-rolled, and the MMA determines that such renewal determines the substance of a settlement period, or if an extension or over-roll results in a settlement period of more than 7 calendar days in substance, then the exposure will be treated as provided in (a) above and the requirements therein shall apply. c) No bank shall hold, at any time, bankers' acceptances issued by another bank (i.e., 'accepted'). The aggregate of such acceptances held by the bank shall not exceed 200% of the base capital of the bank.

Paragraph 2. Security For the purposes of paragraph 1 above, eligible security shall include bonds, notes, bills, or similar evidences of indebtedness issued by the Government of the Republic of the Maldives, or by an agency or instrumentality of the Republic of the Maldives which has unconditionally guaranteed the payment of both principal and interest, or to which purchase has been unconditionally agreed.

Paragraph 3. Nonconforming Exposures If an inter-bank exposure complies with the limits in paragraph 1: a) The exposure will be treated as 'nonconforming' if: (i) the bank to which the exposure is made later fails to comply with its obligations; (ii) the bank to which the exposure is made merges with another bank to which this bank is also exposed; (iii) the collateral securing the exposure fails to qualify; (iv) rules or limits on base capital change. b) If an inter-bank exposure becomes 'nonconforming' for the reasons stated in (a)(i-iii) above, the bank must promptly take all reasonable actions to bring the exposure into compliance, unless doing so would be inconsistent with safe and sound banking practices. c) If an exposure becomes 'nonconforming' for the reason stated in (a)(iv), the bank is required to promptly act to bring the exposure into compliance within 10 calendar days, unless other circumstances or judicial proceedings require the bank to take action to prevent control.

Paragraph 4. Reporting Requirements Each bank shall submit returns in the form prescribed by the MMA regarding exposures, at the frequency prescribed by the MMA.

PART IV: MEASURES CORRECTIVE

Paragraph 1. Sanctions and Remedial Measures If a bank violates any provision of this regulation or fails to comply with any associated administrators or other persons: The MMA may take one or more of the following corrective measures and impose any administrative penalties as provided in the Act. Such penalties and measures may include all or any of the following: a) Issue a warning to the bank; b) Enter into an informal agreement with the bank to correct violations and any unsafe and unsound conditions and practices; c) Issue an order requiring the bank to cease and desist from particular actions and to take affirmative actions to correct any violations and unsafe and unsound conditions and practices; d) Require the board of directors to inject additional capital funds; e) Restrict the scope of the bank's activities, including imposing limitations on any foreign activities, such as granting credit, making investments, accepting deposits, borrowing, or exchange activities, or other activities as the MMA may deem appropriate; f) Suspend the bank's access to credit facilities of the MMA; g) Require the removal or suspension of any directors or executive officers; h) Appoint an advisor or conservator; i) Impose an administrative penalty on the bank or any of its directors or executive officers; j) Hold personally liable, as allowed by law, any directors, executive officers, or major shareholders of the bank for seeking restitution; k) Suspend or revoke the bank's license.

Questions relating to this regulation should be addressed to the Head of Financial Stability, Monetary Authority of the Maldives.

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