Financial Crime World

Title: Maldives’ Compliance Challenge: Enhancing Bank Resolution and Crisis Management

Executive Summary

The Maldives has made important strides in developing a legislative framework for finance that includes essential elements of a safety net and crisis management system. However, improvements are needed in the early intervention and bank resolution processes to ensure clarity, alignment with international best practices, and forward-looking triggers.

Shortcomings in the Maldives’ Regulatory Regime

Clearer Early Intervention Triggers

  • MMA should establish clearer and forward-looking early intervention triggers in the Maldives Banking Act (MBA) to prevent financial instability.

Operationalizing Early Intervention

  • MMA should issue relevant regulations and guidelines for operationalizing the early intervention regime.
  • Preventative and corrective actions should be defined to address potential issues before they escalate.

Recovery Plans

  • Banks should prepare recovery plans as required by the MMA.
  • MMA should prepare resolution plans for systemically important banks, determining resolution strategies based on preserving financial stability and protecting critical functions.

Resolution Triggers

  • Governance triggers need enhancing to consider a bank’s ability to maintain adequate systems and effectively manage risks.
  • MBA should be amended to provide a unified resolution framework for the MMA to implement various resolution tools with minimum court intervention and safeguards for shareholders and creditors.

Effective Emergency Liquidity Assistance Framework

  • An effective emergency liquidity assistance (ELA) framework is crucial for addressing temporary liquidity shortages in solvent and viable banks.
  • MMA should amend the MMA Act to include ELA provisions.

Deposit Insurance System Enhancement

  • Align the deposit insurance system with the IADI Core Principles for Effective Deposit Insurance Systems, including enhancements to governance, target fund sizes, and emergency funding arrangements.

Interagency Cooperation and Coordination

  • Establishing working relationships with foreign resolution authorities is essential.
  • Institutional and interagency arrangements within the Maldives need enhancement for effective crisis management and resolution frameworks.

Clearer Early Intervention Triggers

The MMA should define clear and forward-looking early intervention triggers in the MBA to prevent financial instability. These triggers might include:

1.Significant deterioration in a bank’s capital adequacy ratio. 2.A large and increasing number of non-performing loans. 3.Liquidity problems that can’t be resolved through normal market channels. 4.Governance concerns that may threaten the stability of a bank.

When these triggers are met, the MMA should be able to take actions to prevent the situation from becoming more severe, such as:

1.Issuing a warning to the bank. 2.Requesting the bank to submit a recovery plan. 3.Requiring the bank to bring in additional capital. 4.Initiating formal resolution proceedings.

Operationalizing Early Intervention

The MMA should provide clear guidelines and regulations for operationalizing the early intervention regime. This might include:

1.Defining the process for determining when early intervention is necessary. 2.Providing examples of preventative and corrective actions. 3.Establishing a clear communication process between the MMA and the bank.

Recovery Plans and Resolution Plans

Banks should prepare recovery plans as required by the MMA. These plans should outline the steps the bank will take to address its financial problems and return to stability. The MMA should also prepare resolution plans for systemically important banks, which will outline strategies for preserving financial stability and protecting critical functions during the resolution process.

Enhancing Governance Triggers

The MMA should consider a bank’s ability to maintain adequate systems and effectively manage risks when considering early intervention and resolution. This might include:

1.Upgrading a bank’s internal control systems. 2.Improving risk management practices and procedures. 3.Taking action against senior management if necessary.

The MBA should be amended to provide a unified resolution framework for the MMA to implement various resolution tools, including ELA. This would minimize the need for court intervention and provide greater protection for shareholders and creditors during the resolution process.

Interagency Cooperation and Coordination

The Maldives should establish working relationships with foreign resolution authorities while respecting national discretion and confidentiality requirements. Enhancing institutional and interagency arrangements is essential for effective crisis management and resolution frameworks. This might include:

1.Establishing a national resolution authority with the ability to work with foreign authorities and international organizations. 2.Creating clear communication channels between key stakeholders and regulators. 3.Defining and implementing information and data sharing agreements. 4.Developing contingency plans and joint crisis response strategies for systemic risks.