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Dominican Republic’s Central Bank to Ensure Financial Stability

Maintaining Financial Stability through Compulsory Reserves

The central bank of the Dominican Republic has introduced new regulations requiring banks to maintain a compulsory reserve to prevent undercapitalization, which can lead to insolvency and even liquidation.

What Happens When a Bank Becomes Undercapitalized?

Failure to comply with the current regulation may result in fines or, in extreme cases, intervention, dissolution, or liquidation by order of the Superintendency of Banks (SIB). The Systemic Risk Law provides for special financial assistance to troubled banks in exceptional situations of liquidity or insolvency crisis that pose a threat to the market.

Legal and Regulatory Processes for Insolvent Banks

Special Financial Assistance

In the event of insolvency, the central bank may grant special financial assistance to troubled banks. This assistance is subject to specific conditions regarding low-risk collateral and correct valuation of assets provided as collateral. The authority of the Monetary Board and implementation of a special program are also required.

Jurisdiction and Bankruptcy Laws

The Dominican courts will have jurisdiction in any insolvency proceedings, applying the laws of the Dominican Republic. Other than in connection with an amicable settlement process, the country’s bankruptcy law does not provide for reorganization similar to that provided for in Chapter 11 of the US Bankruptcy Code or automatic stay on collection or foreclosure efforts by secured creditors.

Changes in Capital Adequacy Guidelines

The capital adequacy guidelines have changed as outlined above. No changes are expected in the near future.

Ownership Restrictions and Implications

Relevant Participation

A 30% shareholding interest is considered a “relevant participation,” subject to scrutiny from the SIB and the Monetary Board. The law does not refer to the term “control” when addressing ownership requirements.

Restrictions on Foreign Ownership of Banks

Article 39 of the Monetary and Financial Law (MFL)

Article 39 of the MFL establishes certain restrictions on foreign direct investment in the banking system and on a foreign bank establishing a branch or subsidiary in the Dominican Republic. A foreign investor may not acquire more than 30% of the outstanding shares of a Dominican financial institution without prior approval from the Monetary Board.

Legal and Regulatory Implications for Entities that Control Banks

Transfer of Controlling Interest

The transfer of a controlling interest is subject to the approval of the Monetary Board. Entities and individuals are subject to the same tax treatment as other individuals not related to financial institutions at a controlling level would be.

Implications for Controlling Entity or Individual in Event of Bank Insolvency

Liability Determination

The extent of the controlling entity’s liability will be determined during the process for declaring insolvency, carried out by the monetary and financial authorities. Shareholders are the last to recover their investment if the recovered amount suffices.

Changes in Control

Approval Required

The approval of the Monetary Board is required to acquire significant participation, defined as 30% or more of the shareholding interest of a financial institution.

Receptivity to Foreign Acquirers

Yes, the regulatory authorities are receptive to foreign acquirers. The process may take longer depending on whether foreign individuals or entities are involved, requiring translations, certifications of good conduct, and further documentation evidencing the origin of capital invested in the local entity and the identity of the acquirers.

Factors Considered by Regulatory Authorities

Compliance with the provisions set out by the law to the full satisfaction of the SIB for subsequent approval by the Monetary Board is considered.

Required Filings for Acquisition of Control of a Bank

Official Documentation

Individuals must file official documentation indicating name and legal domicile, as well as proof of identity and good standing.