In September 2009, at the request of the Bank of Mongolia (BoM), and with assistance from international expert Mr. Roberto Toso, the project completed a review of the current Banking Law, Central Bank Law and proposed draft amendments in the context of international best practices. The review of the Banking Law was based on the basic elements of the Basel Core Principles for Effective Banking Supervision (September 1997) and the country’s performance relative to these standards.
A well conceived regulatory framework should primarily allow bank supervisors to distinguish between symptoms and causes of bank problems. Moreover, a banking law should also guide bank supervisors to identify and tackle problems at an early stage before they become severe. Banking laws should unequivocally mandate that supervisors take prompt actions based on the principles of speed, cost efficiency, flexibility, consistency, transparency, cooperation, and avoidance of moral hazard.
Recommendations to strengthen and improve Mongolia’s Banking Law within this context include provisions for:
• Adoption of a more comprehensive definition of “related parties transactions” and more stringent regulations on related-party’s transactions to reduce the risks of abuses and conflicts of interests that arise from banks’ exposure to related parties
• Enforcement of regulatory compliance
• Raising of minimum capital requirements
• Regulation of banks’ mergers and acquisitions
• Greater transparency and information disclosure
• Strengthened consolidated supervision
• Clarification of extrajudicial and judicial insolvency regime as applied to bank receivership
• Requirement of an independent professional in the boards of directors of banks.
The review of the Central Bank of Mongolia Law was based on the principle that the Law should primarily support BoM’s autonomy and accountability aimed at strengthening monetary policy and securing price and financial sector stability. In order to achieve these objectives, the recommendations included:
• Restrictions of granting credit to banks
• Prohibition or severe restriction of granting credit to the government in order to strengthen BoM’s autonomy to conduct monetary policy
• Institutionalization of a “Work-Out Unit” in the BoM and at the highest level of authority
• More explicit provisions regarding coordination of fiscal and monetary policy
• Provisions for improved transparency, communication and accountability.
Beyond reforming and enacting the Banking and BoM Law amendments, a stronger banking system in Mongolia will require a proper market infrastructure. Recommendations for improving the supporting market and legal infrastructure included:
• Continued support for the establishment of a private sector-led credit information bureau for which EPRC has been providing technical assistance on the legal and institutional framework
• Developing and proposing enabling legislation and regulations to establish a well-defined deposit insurance system to maintain confidence in the banking system while avoiding moral hazard
• Continue work to achieve standardization of loan underwriting and loan documentation practices throughout the banking system to reduce transaction costs, information asymmetries and the “agency problem”-or conflicts of interest.
The BoM is currently reviewing the recommendations and draft amendments and it is expected that proposed amendments will be up for discussion in the fall 2009 Parliamentary session.
A well conceived regulatory framework should primarily allow bank supervisors to distinguish between symptoms and causes of bank problems. Moreover, a banking law should also guide bank supervisors to identify and tackle problems at an early stage before they become severe. Banking laws should unequivocally mandate that supervisors take prompt actions based on the principles of speed, cost efficiency, flexibility, consistency, transparency, cooperation, and avoidance of moral hazard. Recommendations to strengthen and improve Mongolia’s Banking Law within this context include provisions for:
• Adoption of a more comprehensive definition of “related parties transactions” and more stringent regulations on related-party’s transactions to reduce the risks of abuses and conflicts of interests that arise from banks’ exposure to related parties
• Enforcement of regulatory compliance
• Raising of minimum capital requirements
• Regulation of banks’ mergers and acquisitions
• Greater transparency and information disclosure
• Strengthened consolidated supervision
• Clarification of extrajudicial and judicial insolvency regime as applied to bank receivership
• Requirement of an independent professional in the boards of directors of banks.
The review of the Central Bank of Mongolia Law was based on the principle that the Law should primarily support BoM’s autonomy and accountability aimed at strengthening monetary policy and securing price and financial sector stability. In order to achieve these objectives, the recommendations included:
• Restrictions of granting credit to banks
• Prohibition or severe restriction of granting credit to the government in order to strengthen BoM’s autonomy to conduct monetary policy
• Institutionalization of a “Work-Out Unit” in the BoM and at the highest level of authority
• More explicit provisions regarding coordination of fiscal and monetary policy
• Provisions for improved transparency, communication and accountability.
Beyond reforming and enacting the Banking and BoM Law amendments, a stronger banking system in Mongolia will require a proper market infrastructure. Recommendations for improving the supporting market and legal infrastructure included:
• Continued support for the establishment of a private sector-led credit information bureau for which EPRC has been providing technical assistance on the legal and institutional framework
• Developing and proposing enabling legislation and regulations to establish a well-defined deposit insurance system to maintain confidence in the banking system while avoiding moral hazard
• Continue work to achieve standardization of loan underwriting and loan documentation practices throughout the banking system to reduce transaction costs, information asymmetries and the “agency problem”-or conflicts of interest.
The BoM is currently reviewing the recommendations and draft amendments and it is expected that proposed amendments will be up for discussion in the fall 2009 Parliamentary session.