FIA Reform: A Call for Strengthening Banking Regulation

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The Financial Institutions Act (FIA) is in need of reform to address its shortcomings and ensure a stable banking sector. The current framework has been ineffective in addressing financial distress, leaving regulators with limited options.

A Recipe for Disaster: Current FIA Shortcomings

• The court-supervised management approach is uncertain and inefficient, placing the regulator in a weak position.
• Lack of clear regulatory powers to issue timely preventive and corrective actions leads to a reactive rather than proactive approach.

Key Resolution Tools: A Must-Have for Effective Regulation

The FIA should include specific legal basis for key modern resolution tools:

• Transferring selected assets and liabilities of a distressed entity to a sound FI.
• Establishing a bridge institution to preserve critical operations.
• Empowering regulators to override shareholder rights:
  • Recapitalize
  • Restructure
  • Dispose of distressed banks’ business or assets

Strengthening Regulation: A Path Forward

To address the shortcomings, we propose that the FIA be revised to:

Key Reforms

1. Empower regulators: Issue timely preventive and corrective actions.
2. Recovery and resolution plans: Require licensed commercial banks to develop recovery and resolution plans.
3. Regulatory powers: Give regulators clear legal powers to:
   • Remove and replace senior managers and directors.
4. Transfer of assets and liabilities: Allow for the transfer of selected assets and liabilities of a distressed bank to a sound entity.

By implementing these reforms, we can ensure that Samoa’s banking sector is better equipped to withstand financial shocks and maintain stability in the long term.