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Liquidity, Prudential Information, and Risk Provisioning: Key Requirements for Financial Institutions

The Banking and Financial Institutions Act 1994 has introduced several key requirements to ensure the stability of the financial system. The Central Bank’s recent guidelines outline the importance of maintaining continuous liquidity, submitting prudential information, and provisioning for credit and country risks.

Liquidity Requirements

  • The Authority recognizes that maintaining continuous liquidity is a critical factor in the prudent operation of financial institutions.
  • To achieve this, the Banking Act 1994 has introduced the Liquidity Rule (BR/05), which aims to safeguard depositors’ interests by ensuring that credit institutions have sufficient assets to cover their liabilities.

Prudential Information

  • Financial institutions are required to submit timely and accurate information to the Authority for prudential and supervisory reasons.
  • The format of this information will be agreed upon with each institution as part of the licensing procedure. In certain cases, the Authority may adopt a standard format, such as that prescribed in the Statutory Financial Information Directive (BD/06).

Audited Financial Statements

  • Financial institutions are exempt from applying the Companies Act 1995 provisions regarding annual accounts, but they must follow Banking Rules and Financial Institutions Rules issued by the Authority.
  • The Rule on the Publication of Audited Financial Statements (BR/07) sets out the requirements for submitting audited financial statements to the Authority.

Credit and Country Risk Provisioning

  • The Authority has introduced the Banking Rule BR/09 on Credit and Country Risk Provisioning, which applies to certain types of financial institutions.
  • This rule requires institutions to provision for credit and country risks, including unlisted debt instruments such as securities and similar instruments.

Consolidated Supervision

  • Financial institutions that are subsidiaries of credit institutions or part of a banking group are subject to consolidated supervision in terms of the Banking Rule BR/10 on the Supervision on a Consolidated Basis of Credit Institutions.
  • The Authority will also apply these principles to non-banking financial groups and non-financial groups of companies.

In summary, the guidelines emphasize the importance of maintaining continuous liquidity, submitting prudential information, and provisioning for credit and country risks. Financial institutions must comply with these requirements to ensure the stability of the financial system and protect depositors’ interests.