Proposed Amendments to the Banking Law and the Law on the Central Bank

Proposed Amendments to the Banking Law and the Law on the Central Bank

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  Proposed Amendments tothe Banking Law and the Law on the Central Bank Anthony Woolley Hogan Lovells Mongolia 11 September 2017
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  www.hoganlovells.com Amendments to theBanking Law • Existing Banking Law was approved on 28 January 2010 and has been amended numerous times • Amendments are to be approved as part of IMF programme • Concept paper prepared by the Bank of Mongolia (?) • English draft drafted by external consultants (?) 2
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  www.hoganlovells.com Amendments to theBanking Law • Mongolian version dated 31 July 2017 • It is likely that there will be certain changes made in the amendments at the time of approval • Amendments aim to ensure the stability of the financial sector and to reduce operational risks of banks by improving the governance of banks and their supervision by the BoM • Presentation is primarily based on the English language draft 3
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  www.hoganlovells.com Amendments to theBanking Law • Draft concept paper provides that changes effect the following key areas: – improve requirements and criteria applicable to founders, shareholders, board members and executive management team; – introduce preventative and early intervention measures (as opposed to taking enforcement measures after breach of legislation); – improve the effectiveness of bank resolution measures (restructuring/re-organisation); and – resolution measures are to be enforced based on the results of supervision of banks. • Supervision is to shift from "compliance based" to "risk based" system in line with international best practice 4
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  www.hoganlovells.com Proposed Key Changes •Revision and introduction of new terms (related persons, special relationship persons, parent company, unsafe, unsound operations etc.) • Improved fit and proper test for founders, board members and executive management team (work experience, qualification in certain fields, business reputation, influence on risk management, financial standing etc.) • New restrictions on transactions with related persons: – large exposure if value of transaction is 10% or more of eligible capital and to be reported to BoM; – exposure to one person or group of related persons shall not exceed 25% of eligible capital; – uncollateralised loan to single person or group of related persons shall not exceed 5% of eligible capital; – no favorable conditions to special relationship persons or bank employee; and – prior approval of board members of such transactions. 5
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  www.hoganlovells.com Proposed Key Changes 6 •Broadens the supervisory power of BoM: – examine documents; unimpeded access to equipment and software programmes; – hold additional capital above the regulatory minimum and larger provisions, request divestment of activities, use net profits to strengthen own funds, provide additional disclosure; – review of quality of assets and require banks to participate in stress test • New section on preventive and early intervention measures: – banks to develop recovery and resolution plans – same requirement applies to parent company of conglomerate
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  www.hoganlovells.com Proposed Key Changes •Preventive and early intervention measures include: – issue written warnings, enter into agreement with board to take measures to correct breaches of law and unsafe and unsound practices; – require restoration of liquidity levels; – obtain additional capital funds; – limit variable remuneration for senior managers; – suspend/dismiss executive management team; – prevent bank from acquiring subsidiaries, opening branches or engaging in new business; – divest or liquidate subsidiaries; and – suspend voting rights of qualifying shareholders etc. 7
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  www.hoganlovells.com Proposed Key Changes •New regulation on resolution of banks: – Detailed criteria for determining the need for resolution of a bank – Resolution measures include: • transfer of business to other banks or bridge bank; • write down or conversion of instruments of ownership; • merger; • bail-in; and • capital increase. – BoM may provide financial assistance to banks under resolution by a fund managed by the Deposit Insurance Corporation and financed by banks – BoM to compensate creditors and shareholders if their financial position has become worse as a result of the resolution of the bank 8
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  www.hoganlovells.com Proposed Key Changes •Detailed procedures for liquidation of banks • Detailed provisions for the composition and operation of the Financial Stability Council • Specifies procedures for submitting complaints and claims to court in respect of BoM decision to intervene in the operation of the bank (i.e. early intervention and resolution measures) - submission of claims to court will not entail any suspension of the effects of BoM decision during court proceedings - court may only award monetary damages but not enjoin, stay, suspend, or set aside actions of BoM 9
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  www.hoganlovells.com Amendments to theLaw on the Central Bank • Early Mongolian draft - dated as of 22 March 2017 • Key proposed changes include: – minor amendment on criteria for granting loans to banks (i.e. banks that are facing temporary liquidity problems or that are under resolution measures) – exemption of BoM from all types of taxes (save for personal income tax) – minor amendment to appointment and removal of BoM management (prohibition of removal for grounds other than those specified in the law) 10
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  www.hoganlovells.com Amendments to theLaw on the Central Bank • Key proposed changes include: - salary and other benefits of BoM management to be compatible with legal entities engaged in banking and professional activities - BoM to implement appropriate macro economic policies upon consultation with Ministry of Finance and Financial Regulatory Commission - Government is not to provide any direction or recommendation to the BoM - BoM is prohibited from granting loans or acquiring securities for the Government unless specifically provided in law 11
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  www.hoganlovells.com Amendments to theLaw on the Central Bank • Key proposed changes include: • Detailed regulation on Monetary Policy Council (appointment of members, mandate) • Minor amendments to the powers and functions of the BoM (i.e. reporting to Parliament every 6 months on price and financial stability) 12
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  www.hoganlovells.com Conclusions • Banking Law –BoM is to approve detailed regulations – broadens the power of the BoM in supervising the operations of banks – promotes operational independence – focuses on improving risk management capacity of banks – early draft and therefore likely to change at the time of approval by Parliament • Law on the Central Bank – aims to clarify the powers and functions of BoM – early draft – likely to change at the time of approval by Parliament 13
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