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What is bank supervision? Is NDB Bank fraud a supervisory lapse? Is the present supervision prepared to deal with future banking crises?

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  Article's background and purpose During last few months, an extensive debate has taken place whether the central bank's bank supervision function has failed in early detection of the NDB bank fraud and resolution of the same. In contrast, the central bank management has been firmly responding that bank supervision is a prudential supervisory model and, therefore, not responsible for bank fraud risks for which bank management is responsible under Corporate Governance Directions. By listening to this never resolvable debate, given my long standing involvement in the bank supervision function of the previous central bank under the Monetary Law Act (MLA), I feel that the present central bank talks about a revised or lightly touched bank supervision model operating under the Central Bank of Sri Lanka Act of 2023 certified on 14 September 2023. The reason for my impression is that the previous bank supervision officers definitely would have early detected a bank fraud of  such a m...
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Exchange rate politics. Why Sri Lanka falls behind India? Will the currency board be a better cure?

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  Article's background and purpose I saw an interesting presentation on how the value of Indian Rupee based on the exchange rate for the US dollar has fallen from Rs. 3 in 1947 to Rs. 94 in March 2026 which has now surpassed 95 (See the video here.  India Rupee Slide )  and a brief economic story behind this long-term falling trend of the Rupee as shown in the following chart. Similar presentations and concerns are seen for almost all currencies across the developping world consequent to the present war tensions in the Middle East and underlying disruptions of global supply chains. The economic story highlighted in the presentation is almost same for almost all developing countries who manage the economies and live on the dollar although there can be country specific instances that have caused changes in the exchange rate from time to time. Therefore, Indian exchange rate story is useful to benchmark the long-term trend of Sri Lanka Rupee to understand successes and failu...
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Fed's independence & credibility headache. Is Kevin Warsh a cure or a crisis trigger?

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  Article's Significance The US dollar is the major currency that drives the global monetary and economic system. Therefore, the governance of the US central bank, the Fed, being the guardian of the dollar through its monetary policy is of prime importance to the global economy because any change in the flow of the dollar supply and prices caused by the Fed has the potential of shocking all corners of the global economy.  Therefore, it is the standard practice of financial dealers and investors around the globe to speculate on Fed's monetary policy and carry on deals on the dollar. As Kevin Warsh is expected to assume duties as the new Fed Chair for a new term of four years beginning 15th this week, such speculations have become a global event. Therefore, this article will help formation of strategies to deal with the dollar and Fed policies under the Fed Chair Kevin Warsh. Article's background and purpose The non-stop headache suffered by central banks world over is how th...
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Monetary misbalances. Another rate hiking cycle is ahead for a new round of misbalances? Saving the world economy from Iranian war or sinking it?

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  The monetary policy rhetoric of central banks around the world is that they balance interest rates, exchange rates and liquidity to ensure the price stability within a target of inflation. Its underlying story is that the price stability provides the certainty and impetus beneficial to growth, employment and living standards. However, the general experience is that none of such balances is enjoyed by the general public whereas economic crises hit from time to time due to grave misbalances. Therefore, this short article is to show how misbalances prevail  among interest rate, exchange rate, liquidity and inflation,  taking Sri Lankan economy as the example. However, the article does not highlight any specific reasons and events underlying such misbalances. The target audience of the article is the readers who are familiar with the central bank monetary operations and policy communications. Key indicators of monetary misbalancing Inconsistencies of policy outcomes and pol...
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