Palau’s Banking Supervision and Prudential Regulation: Technical Shortcomings Highlighted

A recent assessment by an international team has identified several technical shortcomings in Palau’s prudential requirements under the Financial Institutions Act (FIA), raising concerns about the effectiveness of banking regulation and supervision in the country.

Compliance with International Standards

The report noted that while some provisions of the FIA are compliant with international standards, others require significant improvement. The assessment found that Palau’s overall degree of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs) is modest, with many areas requiring attention.

Composition of the Financial Institutions Commission’s Governing Board

One of the major concerns highlighted by the report is the composition of the Financial Institutions Commission’s (FIC) Governing Board. While appreciating the challenges faced by the government in finding suitable candidates, the team recommended that the board be comprised of members from outside the banking industry to ensure independence and impartiality.

Legal Protection for the FIC’s Governing Board and Staff

The report also noted that the FIA does not provide adequate legal protection for the FIC’s governing board and staff, which is hindering the commission’s ability to take decisive action. The team urged the government to amend the law to include a provision granting legal protection to the board and staff when acting in good faith within their authority.

Regulatory Powers of the FIC

Furthermore, the assessment found that sections of the FIA limit the regulatory and supervisory powers of the FIC, making it difficult for the commission to exercise timely oversight over financial institutions. The team recommended that the government revise these provisions to ensure that the FIC has autonomy and authority to issue and enforce prudential regulations without external interference.

Recommendations

To address the identified shortcomings, the report recommends:

• Amending Section 16 of the FIA to remove the ineligibility of government employees to serve on the FIC’s Governing Board.
• Including a provision granting legal protection to the FIC’s governing board and staff when acting in good faith within their authority.
• Revising sections of the FIA that limit the regulatory and supervisory powers of the FIC, ensuring that the commission has autonomy and authority to issue and enforce prudential regulations.

Conclusion

The assessment highlights the need for Palau to strengthen its banking supervision and prudential regulation framework to ensure stability and confidence in the financial system. The government is urged to take prompt action to address the identified shortcomings and provide a clear regulatory environment for financial institutions operating in the country.