This paper was written while Dawn Chew was on secondment with the IMF. It has benefitted from the comments of Nikita Aggarwal, Jean Pierre Deguee, Barend Jansen, Ross Leckow, Nicolas Staner, and Virginia Rutledge. Colleagues from the IMF’s Monetary and Capital Markets Department have also provided invaluable comments. While the views expressed in this paper are to some extent based upon the authors’ experience as Fund counsels, the views expressed herein are their own and should not necessarily be attributed to the Fund.
These country examples are chosen for illustrative reasons only; the references do not imply that those countries have received technical assistance of the Fund with respect to their banking law.
For an overview of legislative drafting in the context of tax laws: see Chapter III of IMF (Ed. V. Thuronyi), Tax Law Design and Drafting, 1996. http://www.imf.org/external/pubs/nft/1998/tlaw/eng/
An example of this problem can be found in Article 54 of the Law 32/1968 concerning Currency, the Central Bank of Kuwait, and the Organization of Banking Business (hereafter the “Kuwaiti banking law”). The Articles 3 and 4 of the Turkish banking law (2011) are a good example of how this conceptual distinction can be appropriately reflected in legislation.
Some banking laws also include a list of activities banks are prohibited to undertake.
BCP 4 requires the permissible activities of institutions that are licensed and subject to supervision as banks to be clearly defined. From a legal perspective, this appears to require too many definitions than may be necessary.
Section 7A (f) of the Bangladeshi Bank Order highlights this issue.
See for instance Article 56.1 of the Kuwaiti banking law, Article 7 a) of the Turkish banking law, and Article 5.2.d of the Rwandan banking law of 2008.
The prescriptions of the BCP with regard to the legal establishment of definitions could be stricter. For instance, the Essential Criteria (“EC”) 1 of BCP 4 requires the term “bank” to be clearly defined in laws or regulations. We would, however, advise that in the interest of legal certainty such a fundamental definition be clearly set out in the law, as a primary legal instrument.
Section 978(d) of the Canadian Banking Act for instance authorizes the Governor in Council to issue regulations to “to define words and expressions to be defined for the purposes of this Act.”
See for instance Article 3 of the Belgian banking law of 25 April 2014.
A good example of the latter point is Section 2 of the Reserve Bank of New Zealand Act 1989, which includes references to the Companies Act 1993, the Insurance (Prudential Supervision) Act 2010, and the Financial Markets Authority Act 2011.
A good example of circular definitions are the Financial Institutions Act 1998 of Solomon Islands, which includes in Section 2(1) definitions for banks and financial institutions, with the latter being defined as a “body corporate doing banking business,” and Egypt, where “banking business” is defined in the Law Nr. 88/2003 on the Central Bank, the Banking Sector and Money as “all that is considered by banking tradition as banking business.”
The authors accept that there may be instances where the same term is appropriately defined differently in different laws. This will particularly be the case when the more specific law serves a narrow and specific purpose that is not directly connected with the main purpose of the more general law.
Another way is to amend multiple laws in a single amending act or instrument (e.g. a statutes miscellaneous amendment or consequential amendments to various pieces of legislation), rather than amending each law individually by way of a distinct piece of legislation.
Article 2 of the Mexican banking law (Ley de Instituciones de Credito) is a good example of this problem.
As illustrated by Article 1 of the Iraqi banking law of 2003.
See Article 3.30 of the Belgian banking law, which authorizes the supervisory authority to exempt certain banks from the qualification as “significant” even though the balance sheet threshold established in the primary law is met.
The BCP require that the responsibilities and objectives are clearly set out in the law. EC 1 of BCP 1 requires that the responsibilities and objectives of the authority involved in banking supervision are clearly defined in legislation and publicly disclosed. BCP 1 also requires that there is a legal framework in place for the authority to be provided with the necessary legal powers to authorize banks, conduct ongoing supervision, address compliance with laws and undertake timely corrective actions to address safety and soundness concerns.
See for example Article 1.2 of the Belgian banking law.
See for instance Article 1 of the Turkish banking law and Article 56, second paragraph, of the Central Bank of Russia Act. Section 6 of the 2013 Malaysia Financial Services Act also offers an interesting approach: the Act first sets out the promotion of financial stability as the “primary regulatory objective of the Act,” and then sets out some intermediate objectives, such as the safety and soundness of financial institutions and the protection of rights of consumers of financial services.
See for instance Article 3 of the Central Bank of Russia Act, which entrusts the Central Bank of Russia with the objective to “develop and strengthen the banking system of the Russian Federation.”
See BCP 1, EC 2
E.g. a depositor protection objective does not imply that no depositor, whatever is the size of his deposit, should ever suffer a loss due to a banking failure. Coverage under the deposit guarantee scheme up to a certain amount gives an indication of the amounts up to which deposits are socially “worthy” of protection.
A good example of this can be found in the Law 1/34 of 2 December 2008 on the Statute of the Central Bank of Burundi: Article 6 states that the central bank has a secondary objective to contribute to the stability of the financial system, while Article 7 establishes the function of regulation and supervision of banks and other financial institutions.
See for instance Article 4 (5), (7) and (9) of the Central Bank of Russia Act.
The Netherlands is an example of where the central bank is the prudential supervisor, but the supervisory objective and function is established in the banking law rather than in the central bank law: see next footnote.
A good example of how this can be achieved can be found in the Netherland’s Law on Financial Supervision. Article 1:24.1 provides that the objective of financial supervision is the solidity of financial firms and the stability of the financial system. Article 1:24.2 charges the Dutch central bank with the function of supervision over financial firms and their access to financial markets.
There are still countries where the supervisory authority is not the licensing authority. For instance, in Malaysia and Kuwait, the central bank is the supervisor, but banks are licensed by the Minister of Finance. In Italy, the Ministry of Economy and Finance decides on license revocations, upon proposal by the Bank of Italy.
In some countries (e.g. USA, Lebanon and Singapore), regulatory agencies have the legal power to promulgate secondary regulation in their fields of competence. In other countries (e.g. the UK, Netherlands, Belgium), constitutional principles require that secondary regulation be approved by political bodies (Parliament, the Government, or Ministry of Finance).
The Egyptian banking law is an example of a law referring to a multiplicity of secondary instruments without defining with precision the legal nature and effect of those instruments.
Article 8 of the above-mentioned Law 1/34 of 2 December 2008 on the Statute of the Central Bank of Burundi gives a good example of how the legal nature of the various secondary legal instruments can be established. Article 57 of the Central Bank of Russia Act also clearly and unequivocally established the binding nature vis-a-vis banks of the CBR’s “rules.”
For instance, in the Solomon Islands’ Financial Institutions Act 1998, some secondary rules are not enshrined in regulations foreseen by the banking law, but rather in so-called “prudential guidelines,” the legal nature of which is not particularly clear. A similar problem arises in Indonesia, where Article 16.3 of the Act 7/1992 concerning Banking requires Bank Indonesia to “stipulate” licensing criteria and procedures, without clarifying the nature of such stipulations, whereas Article 20.3 utilizes the clearer category of “Government Regulation.”
The “legality principle” only requires an explicit legislative basis for the issuance of binding legal instruments. This issue is, however, jurisdiction-specific, and different jurisdictions may have different approaches, also in function of their legal and political traditions.
We note that this is a stylized representation of the concept, and that most jurisdictions will have hierarchies that differ from it due to, among other factors, their administrative organization (including federal or regionalist models) and mechanisms for judicial review (some ancient parliamentary traditions do not have judicial review of the constitutionality of acts of parliament).
A good example of this can be found in the banking law of the DRC: the law only requires applicants for a license to include a list of prospective shareholders in the license application, but lacks any requirements or standards regarding significant shareholders in the context of licensing a bank.
For instance, Article 16.2 of the Indonesian Banking Law grants Bank Indonesia the power to specify the licensing criteria.
Article 31 of the Bangladeshi Bank Companies Act is an example of too limited criteria being provided in statute, thus obliging the licensing authority to rely excessively on secondary guidelines.
Some banking laws go beyond this criterion, and prohibit for instance, certain types of entities to be shareholders of banks (e.g. industrial or commercial enterprises), or require banks to have a significant shareholder of a certain type (e.g. a bank holding company). This raises other specific policy issues, namely who can own and control a bank.
The concept of financial structure is different from the one of minimum paid up capital mentioned under (i). The latter merely seeks to require from all banks a capital beyond a fixed quantitative limit. The former goes beyond this minimum threshold, and requires that any bank has a starting capital that is adequate in light of its projected activities. Thus, except for the smaller banks, it is to be expected that the former amount will in most cases be higher than the latter amount.
See EC 10 of BCP 5.
See for instance Article 6 of the Turkish banking law.
As an example of where that is not the case, Section 5.5 of the banking law of the Solomon Islands states a list of “matters” that must merely “be regarded” by the licensing authority while licensing banks.
A good example of a comprehensive regulatory approach is Article 5 of the Sudanese Licensing Regulation.
See for instance Article 10 VI of the Mexican banking law.
We accept that in jurisdictions with sophisticated administrative law regimes, the latter will include general principles for dealing with those questions, thus making detailed rules in the banking law superfluous. In all other jurisdictions, which include many emerging and most developing countries, lawmakers shall find it useful to elaborate on these issues in the banking law itself.
See EC 2 of BCP 5.
Some banking laws may not provide for such a time frame, so as not to tie the hands of the authorities. However, including a time frame would provide for certainty to applicants and discourage authorities from taking too long to process a license application.
BCP 5, EC 8
See also Basel Committee’s Principles for Enhancing Corporate Governance, October 2010
As nicely illustrated by Article 6 of the Mexican banking law.
See, for instance, Article 21 of the Mexican banking law, which states that the “management of (banks) is entrusted to the board of directors and a director-general.” The provision also requires the board of directors to establish an audit committee. Article 23 of the Turkish banking law requires that “the board of directors of any bank have at least five members including the general manager.”
In some countries, a two-tier structure exists where the supervisory function of the board is performed by a separate entity known as a supervisory board, which has no executive functions. It is outside the scope of this paper to discuss different board structures and the principles discussed in this paper are intended to be of general application to different structures.
BCP 14, EC 9
BCP 14, EC 3
Again, the conceptual guidance offered by BCP is not as clear as it could be. BCP 6 states that “the supervisor has the power to review, reject and impose prudential conditions on any proposals to transfer significant ownership or controlling interests held directly or indirectly in existing banks to other parties.” The wording of EC 2 suggest that countries have a choice between requiring supervisory approval and providing immediate notification of proposed changes that would result in a change in ownership. (DRC and Indonesia (Article 27 of banking law) are examples of countries where current law only foresees a notification requirement.) EC 3, in contrast, requires that the supervisor has the power to reject any proposal for a change in significant ownership, which suggests notification will not suffice. At any rate, we are of the opinion that supervisors should indeed have the power of prior approval, and that notification requirements serve to enforce such mechanisms, rather than being an alternative to it.
In Kuwait, any increase of an equity stake in a bank beyond the 5% is subject to supervisory approval: see Article 57.2 of the banking law.
See for instance Section 87(3)(b) of the Malaysian Financial Services Act 2013.
This duty to inform the supervisor should be distinguished from the one to notify the supervisor as soon as the bank becomes aware of any material information which may negatively affect the suitability of a major shareholder or a party that has a controlling interest: see BCP 6 EC 6.
We must however recognize that this principle is modified when, in case of insolvency, the host jurisdiction of the branch “ring-fences” local assets to satisfy local claims.
Country practices differ in this regard but the table sets out what is commonly seen in many jurisdictions.
This tendency is reflected in the BCP. For instance, Additional Criterion 1 of BCP 12 requires under the heading of consolidated supervision that banking laws apply fit and proper requirements to managers of parent companies of banks. Another example is how it mentions group structure as a subject matter of consolidated supervision. As a legal-technical matter, it is perfectly possible to maintain such requirements without consolidated supervision, e.g. the latter point through the licensing and continuous requirement that group structures of bank should be conducive to sound management and effective supervision. This being said, the supervisory aspect is increasingly considered as part of broader consolidated supervision.
See for instance Section 115(3) of the Malaysian Financial Services Act 2013.
An example of this approach can be found in the EU, where the principle of consolidated supervision enshrined in the legal framework for banking supervision (directive 2013/36/EU and regulation 575/2013/EU) cross-refers to the accounting consolidation concepts established in directive 83/349/EEC on consolidated accounts. EU regulation however foresees conditions under which entities that are consolidated under accounting law can be excluded from the scope of prudential consolidation.
See R. Mc Donald, Supervision consolidada de bancos, Ensayo Nr. 67, Centro de Estudios Monetarios Latinoamericanos, p. 4. A good example is Peru where, for the purpose of consolidated supervision over financial conglomerates, a regulation issued by the supervisory authority pursuant to the banking law establishes the concepts of conglomerate and control: see Articles 8-10 of the Resolucion No. 445-2000 of the Superintendente de Banca y Seguros.
This does not imply that the bank must be the controlling entity of the group. Nor does it, secondly, in and of itself imply that the controlling entity of a bank (sometimes labeled a “bank holding company or financial holding company”) must be regulated and supervised on a solo basis. Several jurisdictions impose prudential standards on bank holding companies or financial holding companies, but this is achieved through other legal mechanisms than consolidated supervision.
These triggers include shareholdings of a certain percentage—to hold 50%+1 of the equity in a company certainly amounts to control—but control can also be deduced from the ability to appoint the majority in the board of directors with a lower percentage of shareholding. In fact, the law or secondary regulation could even cater for control exercised by contractual, as opposed to corporate, techniques. Sometimes, accounting law will ensure that the control is assessed on grounds of dominant direct and indirect influence.
See R. Mc Donald, o.c., p. 10.
The scope of information sharing in the BCP could be widened. While the scope of BCP 3 in relation to domestic information sharing extends to all domestic authorities with responsibility for the safety and soundness of banks, other financial institutions and the stability of the financial system, the scope of sharing with foreign authorities relates only to “relevant foreign supervisors of banks and banking groups” (EC 2). Further, EC 4 states that the supervisor receiving confidential information from other supervisors shall use the information only for bank-specific or system-wide supervisory purposes only. This begs the question as to whether information sharing can be extended to other non-bank supervisors or other agencies such as resolution authorities in the financial safety net, particularly for resolution (as opposed to supervisory) purposes. Increasingly, jurisdictions broaden their legal information sharing provisions in that sense, and this is a good development.
BCP 13, EC 2
See the FSB Key Attributes for Effective Resolution Regimes for Financial Institutions and Key Attribute 12 in particular.
See for instance Article 1.4 of the Rwandan banking law of 2008.
See Article 1.14 of the Rwandan banking law of 2008.
Article 39.1 of the Rwandan banking law 2008 is a good example.
BCP 1, EC 6 provides that where, in the supervisor’s judgment, a bank is not complying with laws or regulations or is or is likely to be engaging in unsafe or unsound practices or actions that have the potential to jeopardize the bank or the banking system, the supervisor have the power to take (and/or require a bank to take) timely corrective action, impose a range of sanctions, revoke the bank’s license; and cooperate and collaborate with relevant authorities to achieve an orderly resolution of the bank, including triggering resolution where appropriate. BCP 11, which deals with the corrective and sanctioning powers of supervisors, requires the supervisor to act at an early stage to address unsafe and unsound practices or activities that could pose risks to banks or to the banking system and the supervisor has at its disposal an adequate range of supervisory tools (including the ability to revoke the banking license) to bring about timely corrective action.
Article 85 of the Kuwaiti banking law is a good example.
There are however banking laws pursuant to which an entities whose banking license is withdrawn remains under prudential supervision until the liquidation is completed. See for instance section 30AAM of the Monetary Authority of Singapore Act which allows the authority to issue directions to any person who has ceased to be a regulated entity when necessary to achieve certain objects.
See for instance Article 65 of the Kuwaiti banking law.
Some countries may provide for such provisions in the banking law while in others, provisions relating to due process and opportunity to be heard may be found in administrative law instruments.
In Nigeria for example, the court allowed a bank’s license to be reinstated after 6 years. The bank was however not able to resume its business from where it left off as the infrastructure and bank records were not maintained and capital requirements have since increased.