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Palau’s Banking Regulation Lacks Teeth, Supervision in Jeopardy

A recent assessment has revealed that Palau is struggling to implement effective banking regulation and supervision, with many critical issues left unaddressed. The country’s Financial Institutions Commission (FIC) was established in 2002, but despite its existence, the commission lacks meaningful implementation capabilities.

Composition of FIC’s Governing Board

One of the most significant concerns is the composition of the FIC’s governing board (GB). With four voting members chosen from the banking industry, there are fears of excessive influence and potential conflicts of interest. The mission recommends that a fifth member be added, representing an outside entity to ensure balance and objectivity.

Another critical issue is the lack of legal protection for the FIC’s GB and staff. Without such protection, the commission is hesitant to take action on banking applications, creating uncertainty in the industry. The report urges the amendment of Palau’s Financial Institutions Act (FIA) to include a provision granting legal protection to the FIC’s GB and staff.

Regulatory and Supervisory Powers

The assessment also highlights concerns over the regulatory and supervisory powers of the FIC. Sections of the FIA impose unnecessary external oversight, limiting the commission’s ability to exercise timely regulatory oversight and enforcement. The mission believes that the FIC should have the power to issue and enforce prudential regulations without interference, operating within the scope of the FIA.

Recommendations

To address these critical issues, the report recommends:

  • Amendments to the Financial Institutions Act (FIA) to include a provision granting legal protection to the FIC’s GB and staff
  • The establishment of an intensive technical assistance program to develop adequate implementation capabilities for the FIC
  • Addition of a fifth member to the FIC’s governing board representing an outside entity to ensure balance and objectivity

Conclusion

The report concludes that Palau’s banking regulation and supervision are at risk due to these critical issues. The future of Palau’s banking industry hangs in the balance, pending swift action to address these outstanding issues.