Mongolia Takes Steps to Decentralize Banking Sector with Amendments to Banking Law
In a move aimed at promoting financial stability and security, Mongolia has enacted amendments to its Banking Law, effective from February 25. The changes aim to decentralize the commercial banking sector by ensuring adequate balance in ownership-management-control.
Changes to Systemically Important Banks Definition
Under the new amendments, the Bank of Mongolia (BoM) will determine which banks are systemically important based on a broader range of factors, including:
- Assets: The size and complexity of a bank’s assets
- Debt ratio: A bank’s debt-to-equity ratio
- Total transaction flow holding in the payment system: A bank’s participation in the payment system
This change reflects a shift from the previous definition, which focused solely on asset size.
Limitation on Shareholders
The amendments introduce a new requirement that no individual or group can own more than 20% of a bank’s shares. This limit applies to all commercial banks except special purpose banks and state-owned banks that have been recapitalized. Banks must comply with this requirement by December 31, 2023.
Corporate Form Requirements
The amendments now require all commercial banks to operate as joint stock companies, effective June 30, 2022. This means that banks will need to reorganize their corporate structure and submit a plan for approval by the BoM and Financial Regulatory Committee (FRC) by July 1, 2021.
Claims Ranking in Event of Bank Liquidation
The amendments have also expanded the list of claims and their rankings in the event of bank liquidation. For example:
- Employee compensations: Now rank higher than those owed to the BoM receiver and his or her operational expenses
- Other creditors: Other creditors, such as depositors and bondholders, now rank below employee compensations
Collaboration and Implementation
The successful implementation of these changes will depend on collaboration between the BoM and FRC. The expanded ranking of creditors’ claims is seen as a significant step towards increasing customer confidence in banks, although there remains uncertainty around the Government’s claims ranking higher than those of other creditors.
As Mongolia continues to develop its financial sector, stakeholders are encouraged to seek advice from experts regarding the implications of these changes for their businesses and investments.