New CB presents new financial soundness indictors - Soundness not indicated. 12 things to be noted.

 

The new Central Bank of Sri Lanka (NCB) governed by a new Act effective from 14 September 2023 has released a brand new publication on 21 September 2023 titled "Financial Soundness Indicators Q2 of 2023." see the link to the publication 

https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/financial_soundness_indicators_2023_q2.pdf 

I felt to jot down few thoughts to question the meaningless and purpose of this publication of dumping a set of statistics to the general public at this juncture.

Features of the publication - 04 things

  • No message by the Governor or any high ranking official is conveyed on the level of financial soundness covered in the publication.

  • The publication covers

    • 13 short tables to highlight movements of selected financial statistics collected/computed from the balance sheet and income statement of the licensed banking sector and licensed finance company sector to compare the position in 2nd quarter 2023 with that of 2022. Relevant statistics are given only for the two quarters.

    • 52 charts to depict the trend of a set of statistics selected from the tables on a quarterly basis from 1st quarter 2020 to 2nd quarter 2023 (i.e., 14 quarters)

    • A short text/sentence of increase/decrease nature is given above each table to show the change of the key variable given in the table.

  • Nothing is mentioned why those statistics were selected as financial soundness indictors while no interpretations and respective reference ranges (from healthy to weak) are states.

  • No any form of opinion or advice is given as to whether the system covered in the publication has been strong or resilient in the reference period up to 2nd quarter 2023 or at present. 

Questionability of the publication - 04 things 

I do not see any purpose of the publication served for the general public other than the professional satisfaction to the NCB officials who compiled it from readily available data base. I like to provide 04 comments.

  • Sector aggregates used as indicators do not reveal any signs of soundness or systemic concerns. Triggers of financial instabilities and crises generally rest on dark corners of individual institutions, their concentrations and inter-connections. Systemic triggers may be pulled from a small institution and spread across the system when the trust in general is weak. Therefore, this kind of macroprudential approach based on sector aggerates used as financial soundness indicators is meaningless. However, this approach will keep relevant officials busy in the office.

  • Financial institutions system is the funding arm or financial economy behind the real economy. Therefore, both economies are inter-related and inter-dependent. In this context, nothing can be assessed of the financial soundness without information on the status of the real economy. Given Sri Lankan economy's contraction (negative growth) by 7.8% in 2022 and 11.5% and 3.1% in 1st and 2nd quarter 2023 and weak sectoral outlooks including default of government debt, nobody can visualize any message of the financial soundness from the statistics presented in the publication.

  • Everybody knows that the financial economy in domestic currency did not collapse in crisis up to 2nd quarter 2023. Therefore, the presented financial soundness indicators are meaningless for the past. Therefore, what is required from the NCB is to shed light on the financial soundness in the future from today. Everybody knows of policy actions that are exposing both financial economy and real economy to systemic risks in the near term. The NCB Governor himself sounded an alarm at the Parliament in the early month for a possible near-term default of domestic currency debt of the government. Nobody can understand why the unsustainable goverment debt bubble was not considered as a financial soundness indicator, given its systemic risks. Therefore, the systemic risks confronting the economy are discernible from other information. If the NCB is not aware of them or does not like to reveal them, it must keep quiet without just dumping of such meaningless soundness indicators.

  • The only indicator that may be useful to raise concerns over the systemic danger confronting the economy in that context is the rise of the stage 3 loans (repayment-affected or impaired loans) to the level of total capital available in institutions. However, as this is also an aggregate number not defined for the public awareness, it is necessary to resolve this concern at institutional levels, given the significantly contracted status of the economy at present.

Concluding Remarks - 04 things

  • Presentation of such financial soundness indicators of sector aggregates is a meaningless exercise to assess the system's soundness or stability going forward.

  • What is mostly required is to assess the soundness and sustainability of individual institutions (micro-prudential perspective) and the readily available system of resolution by leaving out resilient stories. For example, banking surveillance and regulatory system in the US was found dormant in March 2023 as four banks accidentally went bankrupt overnight without catching any eyes of multiple regulators including the central bank. It was funny to hear that the US regulators did not know that one bank, Silicon Valley bank, the 16th largest US bank, did not have a chief risk officer for 8 months to run the risk management committee. Parallelly, one of the two largest banks (Credit Suisse) in Switzerland confronted instability and merged with the other largest bank (UBS) to prevent the bankruptcy and systemic crisis.

  • Therefore, the NCB should try to stay away from such deceptive talks and innovate its internal bureaucracy to address systemic monetary and financial issues/imbalances confronted by the public. In both cases in the US and Switzerland mentioned above, the resolution system was quickly responsive to avert a catastrophic spread that was experienced in past financial crises.

  • The NCB has a wide data base. Therefore, what matters is not dumping of data but presenting data to convey a massage across the public, given the public mandate of the NCB.

(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 12 Economics and Banking Books and a large number of articles published. 

The author holds BA Hons in Economics from University of Colombo, MA in Economics from University of Kansas, USA, and international training exposures in economic management and financial system regulation)

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