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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Sri Lanka's central bank says no conflict in bank regulation

Sri Lanka's central bank says no conflict in bank regulation

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notme

notme
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
June
21, 2012 (LBO) - Sri Lanka's Central Bank has denied that there was a
regulatory conflict where a fund under its control bought bank stocks it
regulated, following concerns raised by Standard and Poor's, a rating
agency.



S & P said
there were regulatory conflicts because the Monetary Board or the
governing body of the Central Bank was in charge of the Employees
Provident Fund, a retirement fund of private citizens which bought into
banks, while also regulating them.
"In this regard, the EPF wishes to state that different departments in
the Central Bank deal in exclusive fields of different operations with
high confidentiality and professionalism," the Central Bank said in a
statement.

"Within the Central Bank, the EPF Department functions independently from all other departments of the Central Bank, with stringent firewalls that have been established for this purpose.
"These are adhered to at all times and the integrity of the Central Bank or the EPF is not compromised in any way."

The EPF said it would be prejudicial to the fund's beneficiaries if it
did not invest in banks which were among the fastest growing and most
profitable sector in the country's stock exchange.




The EPF had also
attracted criticism for engaging in financial repression and keeping
down interest rates in government securities to the benefit of the state
and to the detriment of its members.
EPF said S & P's concerns appeared to be based on allegations made to "discrediting the EPF". Harsha de Silva, an opposition legislator
has been among the foremost critics of the practice of the EPF
investing in bank stocks, which he said amounted to 'insider dealing'
Critics have also raised other conflicts related to the funds.

They have pointed out that the fiduciary duty the EPF's managers had to
its members to get the highest interest rates was in conflict with the
role of the Central Bank's public debt department, which was expected to
get the lowest rate for the state.

It is widely recognized that the interests of its members are subjugated
to that of the state as in financial markets the EPF is routinely
referred to as a 'captive source' of the state.

The overall financial repression, analysts have said, keeps interest
rates down, sends wrong price signals and contributes to high inflation,
currency depreciation and general economic collapses following
excessive credit booms.

There have been calls earlier including from the International Monetary Fund, that the EPF should be independently managed.

The full EPF statement is reproduced below:

Response of Employees’ Provident Fund (EPF) regarding Statement made by Standard and Poors’ on 19th June 2012

Our attention is drawn to a statement made by Standard and Poors’ that
was issued yesterday, in which they seem to have drawn attention to a
possible conflict of interest as a result of the EPF investing in shares
of banks.

In this regard, the EPF wishes to state that different departments in
the Central Bank deal in exclusive fields of different operations with
high confidentiality and professionalism. Within the Central Bank, the
EPF Department functions independently from all other departments of the
Central Bank, with stringent firewalls that have been established for
this purpose.

These are adhered to at all times and the integrity of the Central Bank or the EPF is not compromised in any way.

Based on the above, the EPF wishes to affirm that there has been no
conflict of interest and that the EPF believes that this statement by
Standard and Poors’ seems to be based on certain recent allegations that
have obviously been designed to achieve the objective of discrediting
the EPF.

Further, the EPF wishes to state that the banking sector is one of the fastest growing and most profitable sectors
in the CSE. In that context, being the country’s biggest Fund, it would
be highly prejudicial to the local EPF members, if the EPF were to
refrain from investing in such a sector
.

http://www.lankabusinessonline.com/fullstory.php?nid=1427227653

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