Amendments to Banking Laws

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Certain amendments to banking legislation raise grave concerns, on two counts, namely, the protection of bank confidentiality and the control of investment banking risks.

BANK CONFIDENTIALITY

The amendments to section 52 of the Bank of Mauritius Act, in relation to the Credit Information Bureau (CIB), aim to (i) enlarge the scope of information required by the Bank of Mauritius (BOM) for the CIB, from credit information to “such other information as may reasonably assist in ensuring the soundness of the credit information system”, and (ii) provide the BOM with powers to impart this information to “any public sector agency or law enforcement agency to enable the agency to discharge, or assist it in discharging, any of its functions”, “on such terms and conditions as it thinks fit”.

The CIB was set up in 2004 to collect and store credit information from lending institutions at the BOM. By accessing credit information at the CIB, lending institutions can take better decisions on granting credit to individual borrowers. The CIB thus contributes to mitigate risks to the banking system arising from the improper conduct of bank borrowers. Currently, CIB credit information can also be disclosed by the BOM to other bodies solely for credit rating purposes. Individual credit information is protected by bank confidentiality provisions under Section 64 of the Banking Act.

As in the case of the FIU, the effect of the proposed amendment will have the effect of casting the BOM as an arm of law enforcement (ICAC, Police) and of public agencies (MRA) by giving them access to confi dential bank information, but without observing the legal confidentiality safeguards. The least that the amended legislation should ensure is that CIB information should not be disseminated by the BOM to any law enforcement or public sector bodies without a Judge’s order. Other information required for the CIB should also be restricted to “other credit related information”.

INVESTMENT BANKING RISKS

The proposed amendment to Section 30 of the Banking Act relaxes the limitation on investments and non banking operations, to allow fi nancial institutions to buy, sell, hold or manage pools of assets, with the prior approval and under the terms and conditions, guidelines and instructions of the BOM. The authorisation for banks and other credit institutions to conduct investment or quasi investment banking transactions only under strict BOM controls is welcome, especially since such transactions can take place between related parties and at artificial prices to circumvent banking and credit regulations. However, it still exposes bank depositors to the higher risks inherent in such transactions.

The advent of the sub prime crisis in the US is not unrelated to fi nancial sector liberalisation, including the abolition of the Glass Steagall Act, which clearly demarcated banking from investment banking business. The Volcker rule, now being introduced in the US to separate proprietary from non proprietary trading by banks, also highlights the need to insulate depositors from the risks of such trading and investment activities carried out by banks for their own account with depositors’ money.

Besides the question of whether the BOM is equipped with the skills and knowledge needed to vet investment and non banking transactions in such detail and complexity, there is a more important moral hazard issue. Banks are likely to assume higher risks with the stamp of BOM approval, and any bank failing as a result of a negative outfall from such BOM-approved transactions will expect to be rescued by the BOM.

Better protection for depositors from ‘‘the buying and selling of pools of assets’’ by a bank would be assured by requiring such activities to be conducted in a separate non banking arm, not funded by depositors but by the bank group’s own capital, and guided more by market terms than the BOM’s heavy oversight. The bank group’s shareholders will thus be assuming the investment risks with their own money, and not that of depositors.

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