Market Risk Policy of the Banks in Sri Lanka

Abstract

An effective internal control system requires that the material risks that could adversely affect the achievement of the bank’s goals are being recognized and continually assessed. This assessment should cover all risks facing the bank and the consolidated banking organization (that is, credit risk, country and transfer risk, market risk, interest rate risk, liquidity risk, operational risk, legal risk and reputational risk). Internal controls may need to be revised to appropriately address any new or previously uncontrolled risks. Sri Lanka’s banking sector remained stable despite a global crisis due to early regulatory action taken to safeguard the banking system. The central bank has issued a format for the publication of audited accounts and for the quarterly and annual publication of financial statements. The total risk-weighted ratio required is 10% and the core capital ratio is 5%. However, the Sri Lankan version of capital adequacy takes into account only the credit risk and there is no explicit charge for market risk. The 1996 amendment to the Basel Capital Accord with regard to market risk has not yet been incorporated in Sri Lanka and this is an area that needs attention. Nevertheless the banking system has public confidence and has been profitable despite a non-performing asset ratio of 15.3%. There were some highly publicized failures among the less regulated finance companies. Regulations permit 100% foreign control of banks, insurance companies, and stock brokerages. Currently there are 26 commercial banks in operation in the country. Ten of these are locally incorporated and the rest are branches of foreign banks. Two of the local commercial banks are state-owned and they hold about 30% of banking sector assets. Many of the Sri Lankan banks are small and the practice of the state of borrowing from state banks has restricted their flexibility. There are ten merchant/investment banks and seven venture capital companies.