Provisions Specific to Commercial Banks and Institutional Investors

International Monetary Fund. Monetary and Capital Markets Department
Published Date:
October 2015
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This section reviews developments in provisions specific to commercial banks and institutional investors, with a focus on prudential measures that are in the nature of capital controls.19 This category covers some monetary and prudential measures in addition to foreign exchange controls.20 It includes, among other categories of financial institution transactions, borrowing abroad, lending to nonresidents, purchases of locally issued securities denominated in foreign exchange, and regulations pertaining to banks’ and institutional investors’ investments. These provisions may be similar or identical to the measures described in the respective categories of controls on accounts, capital and money market instruments, credit operations, and direct investment if the same regulations apply to commercial banks and institutional investors as to other residents. In such cases, the measure also appears in the relevant category in the sections Capital Controls and Resident and Nonresident Accounts.

Reported measures in the financial sector indicate member countries’ efforts to bolster the regulatory framework of commercial banks, other credit institutions, and institutional investors. The number of reported measures (321) introduced from January 2014 through July 2015 increased by 20 percent compared with the previous reporting period. Most of the increase involved commercial banks and other credit institutions, for which the number of reported measures increased by close to 30 percent, while the number of measures affecting institutional investors remained almost the same as before.

As in the previous reporting period, prudential measures (248) made up close to 80 percent of the reported measures. There were 73 reported changes in capital controls, 14 fewer than in the previous period. Most of the new measures affect the banking sector; close to 80 percent (253) introduced changes in the regulatory framework of commercial banks and other credit institutions, and only 68 target institutional investors.

Changes in capital controls overwhelmingly ease regulatory constraints (of the 73 measures 49 are easing) as in the previous reporting period, but prudential measures were more balanced: 98 had a tightening and 87 an easing effect. There was a noticeable increase in the number of measures considered neutral (63 compared with 38), mostly reflecting member countries’ efforts to consolidate and update financial sector regulatory and institutional arrangements and adopting relevant EU regulations and directives which incorporate the new global standards on bank capital into the EU legal framework. The summary of the changes in this category is presented in Table 11.

Table 11.Provisions Specific to the Financial Sector, January 2014–July 2015
Provisions Specific to Commercial Banks and Other Credit InstitutionsProvisions Specific to Institutional InvestorsTotal
Capital Controls3212044171202973
Prudential Measures8283442095151939248
Source: AREAER database.

Commercial banks and other credit institutions

The majority of measures affecting capital controls liberalized inflows (22) as member countries advanced their liberalization agendas and rolled back inflow controls, likely reflecting tighter external financing conditions and some weakening in capital inflows in the context of generally more volatile capital flows. There were 8 new measures easing conditions for capital outflows, while 2 affected both inflows and outflows.

  • Controls on capital inflows: Reversing the previous tightening measures introduced in the face of large capital inflows in early 2011, Israel eliminated the 10 percent reserve requirement on nonresidents’ currency swap transactions and foreign currency forwards, and Brazil reduced the financial transaction tax to zero for maturities exceeding 180 days. In the context of deteriorating balance of payments conditions, Ukraine eliminated the unremunerated reserve requirement on short-term external borrowing put in place during a previous inflow surge. With a tightening external financing environment, several measures improved the conditions for financial sector external borrowing. Indonesia exempted certain short-term debt from the daily limit, and Zimbabwe permitted banks to borrow up to US$1 million without Exchange Control approval but continues to require External Loans and Exchange Control Review Committee approval for larger amounts. As part of the financial sector development agenda, greater nonresident participation in banking institutions of some emerging market economies was allowed. The ceiling on foreign ownership in local banks was increased in the Philippines to 100 percent, to 20 percent in commercial banks and to 15 percent in credit institutions in Vietnam. Bangladesh eased conditions for foreign-owned enterprises to borrow locally.

  • Controls on capital outflows: Against the backdrop of improved macroeconomic and financial sector conditions, Cyprus relaxed and ultimately removed the deposit withdrawal and transfer limits introduced in March 2013. Colombia authorized local banks to grant sureties and guarantees in domestic currency to nonresidents to ensure the fulfillment of obligations within the country. Indonesia further liberalized banks’ capital transactions by providing an exemption for banks to lend to foreign parties for investment or trade operations in Indonesia. It also enhanced the international use of its currency by removing the prohibition against rupiah transfers to accounts at an overseas bank. South Africa advanced its liberalization agenda, exempting “foreign member funds” from the macroprudential limits on investment abroad and permitted banks to participate in foreign syndicated loans within their macroprudential exposure limit. Uzbekistan permitted commercial banks to hold correspondent and other bank accounts with foreign banks without Central Bank of Uzbekistan approval.

As in the previous reporting period, only a few measures (12) tightened capital controls, slightly more affecting outflows than inflows. With the general return of capital inflows to emerging market economies in the second quarter of 2014, India rolled back the exceptional measures introduced in August 2013 to attract foreign exchange deposits. During this period, banks were exempt from the cash reserve and statutory liquidity ratios on incremental deposits to such accounts with maturities of three years or more, and the interest rate ceiling was increased. In a bid to reduce exchange rate pressure, Argentina limited banks’ forward positions to 10 percent of regulatory capital in February 2014. Jamaica tightened the surrender requirement under its foreign exchange management framework for public sector entities, which consolidates the foreign exchange demand of public sector entities and coordinates foreign currency payments to minimize volatility in the market. To halt the rapid depreciation of the exchange rate in the context of a balance of payments crisis Ukraine reduced the limit on banks’ long foreign exchange positions from 5 to 1 percent and imposed a tight limit on banks’ net foreign exchange purchases in the foreign exchange market. Serbia extended the period during which banks must assign more favorable credit risk weight to central governments and central banks of EU members. Liberia lowered the ceiling for banks’ liquid assets abroad from 50 percent to 40 percent of their foreign currency deposits.

The 209 reported prudential measures indicate continued strengthening of the prudential framework of banks’ operations to advance the global financial sector reform agenda. These measures were almost equally divided between tightening (83) and easing (82) measures. A notable development compared with the previous reporting period is the increase in measures with a neutral effect (44 compared with 12).

  • Measures that relaxed the regulatory framework for banks’ operations include the deregulation of interest and profit rates on residential property loans and other financing products in Brunei Darussalam and lower lending rates in Vietnam for specific purpose loans. India lowered the liquidity requirement on demand and time liabilities. In Venezuela, banks were permitted to receive foreign exchange deposits but were required to hold these with the central bank. To support lending in local currency, Peru implemented a new type of repo operation to inject local currency; this operation allows the Central Reserve Bank of Peru to provide nuevos soles to financial institutions in exchange for foreign currency reserve funds, which reduces the banks’ dollar reserve requirements up to 10 percent of their liabilities, subject to foreign currency reserve requirements.

  • The measures that tightened the regulatory framework for commercial banks and other credit institutions mostly affected liquidity and funding ratios, interest rates, and the capital of banks. Prudential requirements were revised to enhance the liquidity, solvency, and risk management of commercial banks and other credit institutions in Germany, Malaysia, Mexico, Oman, Singapore, and Vietnam. Bolivia set minimum interest rates for deposits and loans for the production sector. Vietnam reduced the interest rate cap on individuals’ dollar deposits. Portugal introduced a prudential minimum own funds requirement, and Hungary increased the foreign exchange funding adequacy ratio to enhance the stability of the domestic financial system and intends to further increase the ratio to 100 percent by January 1, 2017. Mauritania now requires that the term of consumer loans not exceed the depreciation period of the goods and that the monthly payments not exceed one-third of the customer’s stable regular income, taking into account the client’s other liabilities as well. As a measure to control liquidity, El Salvador imposed a new 0.25 percent tax on cash deposits, payments, and withdrawals exceeding US$5,000 through checks and electronic payments.

  • Prudential requirements for the acquisition of shares in banks and related procedural rules were tightened in Korea. The threshold for acquisition by nonfinancial business operators subject to Financial Supervisory Commission approval was returned to 4 percent from 9 percent, reversing a change made in 2009. In Russia, procedures and criteria have been established to assess the financial standing of entities and individuals who acquire shares in a bank exceeding 10 percent. Moldova continued strengthening prudential requirements for bank owners, reduced the qualifying holding to 1 percent, and implemented tools for assessment and ongoing monitoring of the ownership process. Minimum capital requirements were increased in Djibouti and Kazakhstan.

  • Reporting and disclosure requirements were tightened to increase transparency and boost confidence in the banking system in Italy, Moldova, and San Marino. To enhance the effectiveness of the prudential framework, Brunei Darussalam tightened sanctions for banks’ noncompliance with prudential standards. Austria instituted a requirement that financial institutions prepare and submit restructuring and liquidation plans to the Austrian Financial Market Authority to shore up the framework for early intervention in preventing banking crises.

Close to half of the measures not considered capital controls were related to reserve requirements, reflecting the importance of this tool to monetary policy and financial stability objectives and as part of the policy responses to increased capital flow volatility. As in the previous reporting period, easing outnumbered tightening during 2014 and early 2015. The large number of measures also reflects a few countries’ adjustment of their reserve requirements in several steps over the reporting period.21

  • Reserve requirements were tightened for monetary purposes and to bolster the macroprudential liquidity buffer against external shocks in Armenia, Brazil, the Dominican Republic, Ghana, Moldova, the Philippines, and Turkey by increasing the rate of required reserves on local and/or foreign-currency-denominated liabilities.22 All of these countries apply different reserve ratios to domestic and foreign currency liabilities. The Kyrgyz Republic tightened its required reserves framework by changing the amount of funds to be held as a daily minimum on correspondent accounts with the central bank.

  • Reserve requirements were lowered in Angola, Belarus, Botswana, Maldives, Romania, and Serbia. Tajikistan lowered the reserve requirement on domestic currency liabilities and increased it on foreign-currency-denominated denominated deposits. The Central Bank of the Republic of Turkey increased the remuneration of banks’ and financing companies’ lira component of required reserves and allowed more choice in the denomination of required reserves. It also increased the remuneration of the required reserves and changed the maturity-dependent required reserves on foreign exchange liabilities to encourage the maturity extension of noncore foreign exchange liabilities by increasing the ratio on shorter maturities. Peru gradually decreased all reserve requirements, including on external borrowing, in several steps in the first half of 2014 and in 2015—except the marginal reserve requirement rate in foreign currency.23

  • Reserve requirements occasionally target other objectives. Higher rates of required reserves on foreign currency liabilities were implemented to facilitate dedollarization of the economy (Armenia, Kyrgyz Republic, Peru). To reduce the financial stability risks of excessive foreign exchange volatility, Peru increased required reserves for financial institutions whose daily operations with foreign exchange derivatives exceed specific thresholds. Tunisia eliminated the additional reserve requirement of 30 percent of the increase in consumer credit balances compared with the level on September 30, 2012.24

Reported measures on commercial banks’ exchange rate risk management indicate adoption of new regulatory standards and adjustments to increased exchange rate volatility. EU countries aligned their domestic regulations with the new EU financial sector regulatory framework and set own funds requirements for banks whose foreign exchange exposure exceeds 2 percent of their own funds. On adoption of the new EU framework, the Croatian National Bank eliminated banks’ obligation to maintain open foreign exchange positions at 30 percent of a bank’s regulatory capital. Under the new regulation banks must report daily on open foreign exchange positions in relation to regulatory capital. The Czech Republic also requires credit institutions to report to the Czech National Bank if the net foreign exchange position exceeds a certain percentage of the credit institution’s capital (15 percent for a single currency and 20 percent for all currencies). Foreign exchange exposure limits were reduced by half in Ghana, to lower banks’ exchange rate risk and their ability to take a position against the currency. In contrast, with the stabilization of financial markets, Rwanda and Sri Lanka have significantly increased banks’ net open position limits. Lebanon implemented an asymmetric open foreign exchange position limit for nonbank financial institutions, which may hold a long net position up to 100 percent and a short net position up to 5 percent of their equity.25 Kazakhstan imposed a separate open position limit on derivatives, which may not exceed 30 percent of the bank’s equity. Argentina also raised the overall net positive foreign exchange position limit from 15 percent to 30 percent of capital.

IMF members continued revising their regulatory frameworks for foreign currency lending to mitigate systemic risk from banks’ unhedged foreign currency lending to residents. Several countries adjusted their framework for foreign exchange lending by domestic banks to residents, introducing slightly more measures that tightened than eased conditions. Angola banned foreign exchange lending in early 2015, except for credit to exporters. Following a significant tightening of the regulations, in early 2014, Belarus gradually relaxed the framework for foreign exchange lending to businesses. Facing pressure in the foreign exchange market, the relaxation was partially reversed later in the year and eased again in January–February 2015. A number of measures aimed to mitigate the financial stability risks involved in lending in foreign exchange. Risk assessment requirements related to foreign exchange loans were strengthened in Costa Rica and Ghana, while Indonesia required that finance companies fully hedge their foreign exchange loans and meet financial soundness requirements. Ghana relaxed the previous ban on foreign exchange lending to customers who do not earn foreign exchange by allowing such lending for international-trade-related transactions. Hungary, similarly to Lebanon, tightened loan-to-value and payment-to-income prudential limits for foreign-exchange-denominated loans before eliminating the limit on foreign exchange mortgage lending to individuals. Poland continued strengthening the regulatory framework for foreign currency lending started in 2012 by requiring banks to extend foreign-exchange-denominated mortgage loans only in the currency of the borrower’s income and to apply stricter creditworthiness standards to foreign exchange credit exposure. In Colombia, loans funded from external financing must be in the same currency, may not have a longer maturity than the financing, and must be fully covered with a derivative transaction. Both Sri Lanka and Vietnam expanded the scope of foreign exchange lending without central bank permission. To deal with the financial stability consequences of foreign exchange loans to unhedged borrowers and to reduce the exposure of domestic private households to foreign currency loans, Croatia and Serbia introduced measures to ease the repayment of foreign exchange loans for individuals, and Peru implemented a repo operation to support the conversion of foreign exchange loans to local currency.

Forty-four reported measures (33 more than in the previous period) continued modernization and harmonization of financial sector regulatory norms, with a neutral effect. Several EU countries reported implementation of the new EU legal framework governing access to the activity, supervisory framework, and prudential rules for credit institutions and investment and incorporating the new global standards on bank capital (Austria, Czech Republic, Estonia, Germany, Italy, Norway, Portugal, Romania, Slovak Republic).26 Austria further updated its financial sector regulations related to the single euro payments area project, which aims to replace current national payment services with a common EU-wide payment service implementing the changes originating from the division of tasks between the European Central Bank and the national supervisors under the auspices of the Single Supervisory Mechanism. WAEMU countries integrated into their domestic legal framework the Uniform Act on the Treatment of Dormant Accounts on the Books of Financial Agencies of the Member States of the West African Monetary Union. Bolivia authorized the Productive Development Bank (Banco Desarrollo Productivo) to implement and manage a system that provides registry and valuation services for unconventional guarantees in the financial system. Mexico amended several laws on financial institutions and activities with the objective of promoting growth in credit and investment, more competition and transparency among financial sector participants, and consumer protection. Kazakhstan now requires banks’ financial statements to be based on International Financial Reporting Standards, and Argentina unified the definition in the foreign exchange and tax laws of countries not considered cooperating countries for the purposes of fiscal transparency. San Marino adopted regulations on payment and electronic money issuing services that implement European laws on purchases of electronic money and payment services. It also introduced several revisions to the financial sector regulatory framework, including on administrative sanctions applied by the Central Bank of San Marino and the Financial Intelligence Unit; the On-line Register of Parent Companies, which records the composition of banking and financial groups operating in San Marino and principal information about the parent and components (financial and nonfinancial); and reports banks must submit to the central bank.

Institutional investors

Thirty members reported a total of 68 measures, almost exactly the same number as in the previous reporting period (69). Of these, 39 changes were of a prudential nature and 29 capital controls. The changes tightening constraints on the operations of institutional investors (27) during January 2014–July 2015 exceeded the number that eased constraints (22). As in the previous reporting period, prudential measures were mostly tightened, and capital controls were mostly relaxed, indicating the continued efforts to strengthen the prudential regulatory framework while gradually moving ahead with capital flow liberalization.

The overwhelming majority of the reported changes with respect to capital controls relaxed constraints on capital outflows (14 of 17). Regulatory limits on institutional investors’ investments abroad were increased in Armenia, Brazil, Indonesia, Jamaica, and Turkey. These changes reflect ongoing capital flow liberalization efforts, relaxation of outflows in the context of large capital inflows, and deepening of the financial markets. Cyprus gradually increased and ultimately removed the limits on external transfers introduced in March 2013, removing the constraints on institutional investors’ international operations. Only three measures eased controls on capital inflows: Australia allowed Japanese and Korean life insurers to operate through branches in Australia. Foreign life insurers must generally operate through Australian-incorporated subsidiaries, and only New Zealand and U.S. life insurers were previously exempt from this requirement. Conditions for external borrowing were eased in Vietnam; these loans now must be registered only with the State Bank of Vietnam.

Reported measures that tightened capital controls on the operations of institutional investors affected only outflows. The 12 measures generally imposed stricter conditions or limits on the investments of pension funds and insurance companies abroad in Albania, Armenia, Croatia, Kazakhstan, Liberia, Romania, and Uruguay. These measures are considered capital controls because they discriminate against investment in foreign assets by forbidding, or setting lower limits on, institutional investors’ investments abroad compared with similar investments locally or requiring a minimum holding of local assets. Regulations on insurance companies’ real-estate-related operations were strengthened in the Czech Republic.

Fifteen reported measures (four more than in the previous reporting period) tightened the prudential framework for institutional investors’ operations to boost the stability of the financial system. More stringent prudential limits on institutional investors’ investments in foreign exchange transactions were introduced in Albania and Moldova with respect to insurance companies and investment funds, respectively. Following the alignment of the domestic regulations with the new EU financial sector regulatory framework, investment firms became subject to risk requirements comprising foreign exchange components and own funds requirements relating to foreign exchange in France, Romania, and the United Kingdom. Armenia tightened the foreign exchange risk management framework for pension funds. To bolster the resilience of investment firms, the minimum equity capital requirement was gradually increased in Belarus. Costa Rica, Kazakhstan, and Switzerland strengthened disclosure and reporting requirements for pension funds to enhance transparency and oversight of operations. Croatia tightened the currency matching requirements for pension funds, and Romania revised the solvency rate calculation for insurance companies.

Five reported measures eased the prudential rules for investment by institutional investors. Albania removed the limit on investment portfolios held locally for insurance companies. China raised the limit on insurance companies’ equity and real estate investments, and Costa Rica excluded special-purpose vehicles from the limit on investments in economic or financial interest groups under certain conditions. Poland started gradually increasing the limit on open pension funds’ investments in assets denominated in a currency other than zlotys and will continue until January 1, 2016, when the limit reaches 30 percent of total assets.

Close to half of the reported changes in prudential measures specific to institutional investors were recorded as neutral (19). These changes cannot be linked directly to the easing or tightening of rules and reflect mainly institutional or procedural changes. Austria updated the framework for investments in corporate loans, subordinated bonds, and alternative investment funds. Several countries revised their basic legal framework for institutional investors. New legislation went into effect in Croatia and El Salvador on mandatory and voluntary pension funds and investment funds, respectively, and Serbia introduced a new insurance law. Hungary, Italy, and Romania aligned domestic regulations on insurance operations and asset management with the respective new EU framework. Since Belarus repealed the law on investment funds in July 2015, there is no regulation governing the operation of investment funds. Kazakhstan overhauled its pension system through establishment of the single pension fund and the transfer to this fund of the pension assets of all existing pension funds. The existing pension funds may retain their own assets, and, following the transfer of the pension assets, may continue operations as pension portfolio managers or voluntary pension funds. Several regulations on institutional investors were updated in Turkey to ensure consistency with other domestic legislation and to further diversify the types of institutional investors operating there. Relatedly, a new electronic platform, which provides investors access to all funds registered by the Capital Market Board, began operations.

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