Strengthening Banking Governance: The Crucial Role of BCTL Approvals
In its effort to promote stability and soundness in the financial system of East Timor, the Bank of Central Timor-Leste (BCTL) has emphasized the importance of obtaining its approval for governing board and senior management appointments. This approval is a crucial step in strengthening banking governance in the country.
Remuneration Approvals
As part of the application process for a banking license, banks must submit their proposed remuneration packages for their governing boards and senior managers to BCTL. The bank will only approve these proposals if they do not compromise the bank’s future earnings prospects or financial condition. Any changes to remuneration packages must be approved by BCTL in writing before implementation.
Benefits of Strict Oversight
- Ensures that banks operate prudently
- Maintains a stable financial system
- Prevents conflicts of interest and promotes accountability
Internal Control Systems
BCTL regulates banking internal control systems through Instruction CPO/2001/5. The instruction requires banks to establish sound internal controls to:
- Prevent losses
- Maintain reliable financial reporting
- Promote stability in the financial system
Key Requirements
- Establish sound internal controls
- Prevent conflicts of interest and promote accountability
- Ensure segregation of duties in operational functions
Capital Requirements
Regarding capital requirements, Section 4 of the Banking Law grants BCTL sole competence for defining minimum capital requirements for newly licensed banks. The current minimum capital requirement is set at USD 2 million.
Capital Adequacy Ratio
The amount of allocated capital determines the financial activities a bank can engage in, with varying levels of capital permitting different ranges of activities. For example, banks with the minimum capital can only:
- Receive deposits
- Buy and sell debt securities
- Extend credit
- Provide payment services
Regulatory Capital
Instruction CPO/2000/2 on Regulatory Capital develops the capital requirements for banks operating in East Timor. The instruction defines regulatory, tier one, and tier two capital, as well as their calculation forms.
Key Requirements
- Define regulatory, tier one, and tier two capital
- Calculate capital adequacy ratio (at least 12%)
- Ensure that banks maintain adequate capital to absorb potential losses
Dividend Distribution
Banks are also subject to limitations on dividend distribution, which cannot lead to a situation where the bank fails to comply with minimum required capital or capital adequacy ratio requirements.
Conclusion
The BCTL’s strict oversight of banking governance aims to promote stability and soundness in the financial system. By ensuring that banks operate prudently and maintain adequate capital, BCTL is working towards a safer and more robust financial environment for East Timor.