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Financial Institution Risk Management in Seychelles: New Regulations Aim to Enhance Liquidity and Stability
The Seychelles Financial Services Authority (FSA) has introduced new regulations aimed at enhancing liquidity risk management practices among financial institutions operating in the country. The Financial Institutions (Liquidity Risk Management) Regulations, 2009, set out guidelines for banks licensed by the Central Bank of Seychelles to manage their liquidity risk and maintain adequate liquid assets.
What is Liquidity Risk?
According to the regulations, a bank’s liquidity refers to its ability to fund asset growth and meet contractual obligations, including collateral needs and obligations to fund loan and investment commitments, deposit withdrawals, and other maturing liabilities. The regulations define liquidity risk as the risk that a bank will not be able to efficiently meet expected and unexpected cash flow and collateral needs without affecting either the daily operations or the financial condition of the bank.
New Regulations
Under the new regulations, banks are required to maintain liquid assets in an amount that shall not be less than 20% of their total liabilities on a daily average basis each month. If a bank fails to meet this requirement, it will be liable for a charge payable to the Central Bank at an annual rate not exceeding twice the highest effective lending rate of the bank.
Requirements for Banks
The regulations also require banks to:
- Develop and implement a liquidity risk management policy that includes:
- A strategy for day-to-day liquidity management
- A liquidity management plan
- A process for monitoring, controlling, and limiting liquidity risk
- Set limits on their liquidity position over a particular time frame
- Establish requirements and parameters within which senior officers operate when managing liquidity
- Develop processes to implement their liquidity strategy and ensure adherence to established controls and limits
- Establish a crisis plan in case of a liquidity crisis
Reporting Requirements
In addition, the regulations require banks to report on their liquidity position to the Central Bank on a regular basis and in emergencies. The reports must include information on the bank’s daily compliance with the minimum requirement for liquid assets during the previous week.
Goals of the Regulations
The new regulations aim to enhance the stability of the financial system by ensuring that banks have adequate liquidity buffers to meet unexpected demands and maintain confidence among depositors, creditors, and other stakeholders. The regulations also promote good governance practices by requiring banks to implement effective risk management frameworks and establish robust internal control systems.
Compliance
The Seychelles Financial Services Authority has emphasized the importance of compliance with these new regulations, stating that non-compliance may result in regulatory action, including fines and penalties. Banks operating in Seychelles are advised to familiarize themselves with the new regulations and implement the necessary changes to ensure compliance.