As a way of encouraging debate on the Banking Amendment Bill 2015, which seeks to amend the Banking Act (Chapter 24: 20) and is currently before Parliament, this installment features selected views of the Deposit Protection Corporation (DPC), a key financial sector stakeholder, whose opinion we recently sought on the ongoing regulatory reform process.
Financial Sector Spotlight by Omen Muza Consultations with DPC Several provisions in the draft Bill seek to remove the requirement for the Registrar of Banking Institutions to consult the DPC before taking supervisory action. Guided by international best practice, as espoused by the International Association of Deposit Insurers’ (IADI) core principles for effective deposit insurance systems, the DPC proposes that the consultation provisions in the Banking Act be maintained as consultation among safety net players prior to taking supervisory action is a well-established principle in the supervisory fraternity. The DPC also contends that consultations are necessary as the corporation needs enough time to prepare for the consequences since any such supervisory action will have an impact on the Deposit Protection Fund and the financial sector at large. In any case, there should be close co-ordination and information sharing between the safety net players to facilitate early identification of sources of risk in the banking sector.
DPC also considers consultation before registration as critical, since there is a need to understand the risk profiles of prospective institutions and establish whether they will be able to meet their membership requirements in terms of the DPC Act. Consultation before cancellation of a licence on the other hand enables DPC to access key information such as the depositor database, which lessens the risk of manipulation of records, shortens the time for completing the reimbursement process, expedites the liquidation process and helps preserve public confidence.
Special examinations The Banking Amendment Bill seeks to completely remove sections of the DPC Act requiring the DPC to conduct special examinations, which, however, are important in protecting the Deposit Protection Fund by ensuring that banks are operating in a safe and sound manner, they are paying appropriate premium contributions and are complying with the terms and conditions of membership. Furthermore, the envisaged empowerment of the chief executive officer of the DPC and the Registrar of Banking Institutions to facilitate eventual prosecution of offending parties is a welcome development, which was missing in Zimbabwean law. This, according to the DPC, could, however, be more effective if it is allowed to conduct special examinations, which enable it to access information in a timely manner before it is distorted. DPC contends that if they are to deal with the parties to blame, they need access to bank records to avoid approaching the courts with evidence based on hearsay.
“The effectiveness of liquidations and depositor payouts or any resolution methods rests on intimate knowledge of the condition, structures and systems of the bank. Securing and inventorying assets of the failed bank helps to minimise asset stripping and preserve the value of the bank,” says the DPC.
Resolution authority Although the Banking Amendment Bill is silent on the issue of who the resolution authority of failing banks is, the DPC says the reality on the ground is that it has already been dealing with resolution of failing banks and has, therefore, been the de facto resolution authority. This, the corporation argues, is in line with international best practice, where there is a movement towards making the deposit insurer the resolution authority. “It is, therefore, DPC’s proposal that the draft bill explicitly state and appoint DPC as the resolution authority,” the DPC says.
According to DPC, there is need for checks and balances in the system. The Reserve Bank of Zimbabwe (RBZ) already licenses banks, supervises them and also cancels licences. They cannot go on to resolve failing banks as well. From an operational risk or internal control system perspective, there is need for division of labour and proper checks and balances. Resolution of banks should, therefore, continue under the DPC, an independent body.
The European Union regulatory framework recommends separation of prudential supervision from resolution activities due to perceived potential conflict between the two mandates.
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Issuance of prudential requirements The draft bill also seeks to do away with provisions of the DPC Act, which require the corporation to issue prudential regulations but the DPC submits that the prudential requirements it may issue are different from those that may be issued by the RBZ in that they are specific to deposit insurance matters only.
“The provisions of section 26 of the DPC Act require DPC to issue such in consultation with the appropriate registering authority, which takes away the issue of potential conflict,” the DPC says, suggesting that a Memorandum of Understanding (MoU) providing for supervision, co-operation, information sharing and consultation would minimise chances of the issuance of conflicting prudential requirements.
Office of financial public protector Another important new provision, which the Banking Amendment Bill seeks to introduce is the Office of the Financial Public Protector. It is proposed that this office be able to deal with complaints raised by banks and members of the public against the RBZ. In order for this office it to be effective, the DPC proposes that it should be housed under the Finance and Economic Development ministry and accordingly, the board should be appointed by the responsible minister.
Evidence-based amendments The DPC contends that building confidence in, and maintaining the stability of the financial sector requires consistency in making economic policy. “We recommend that any amendments to the law should be evidence-based, informed and underpinned by relevant international best practice and guidance. In this regard, amendments should take a holistic long term perspective,” says the deposit insurer, which is a member of the International Association of Deposit Insurers.
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