Interview: L. Purevdorj
As banks enter a bullish cycle, what will be the new centres of growth in the sector?
PUREVDORJ: As of the third quarter of 2011, total banking assets stood at MNT8.1trn ($6.32bn), an increase of 54% from the previous year, whereas the total loans outstanding grew by 56% to MNT4.9trn ($3.82bn) in the same time period. Total liabilities also grew by 46.7% to MNT7.2trn ($5.62bn) as of the third quarter of 2011. This includes deposits, which grew to MNT3.8trn ($2.96bn), an increase of MNT1.5trn ($1.17bn) or 65.5%, and current accounts, which grew from MNT637bn ($497.7m) to MNT2.1trn ($1.6bn).
With the substantial growth in capital inflows and funding for banks, there is a positive outlook for further growth in the economy. There is a concern the recent trend of excessive lending might result in economic overheating and lead to systemic risks in the industry. Therefore, as a way of curbing the inflation rate, the central bank has been taking measures such as increasing the policy rate and reserve requirements.
What are some plans to strengthen the regulatory environment to contain exposure to risk?
PUREVDORJ: The evidence from the recent global financial crisis showed that banks need to be more resilient. Subsequent to this necessity, the Basel Committee on Banking Supervision has set out the new regulatory standard on capital requirements for its member countries to implement. The BOM without exception is to follow suit and is planning to implement Basel III international standards to mitigate systemic risks of banking and strengthen the legal environment. Proper measures on raising minimum levels of banking capital and requirements to retain adequate liquidity are being taken to improve the banks’ resilience to future risks. Moreover, it is essential to implement a sufficient deposit insurance scheme to sustain financial stability and enhance the public’s confidence in the banking sector. Hence the BOM, in collaboration with other institutions, has prepared a draft law regarding deposit insurance and is planning for a smooth transition from unlimited coverage of deposits to the new system with adequate limited coverage.
What changes have been made to the Banking Law, and how have they affected sector credibility?
PUREVDORJ: The newly amended Banking Law was approved by the parliament on January 28, 2010 and came into effect from March 31, 2010. The law contains provisions for regulatory measures to solve the issues the banking system encounters and ensure the sector’s stability moving forward. For instance, the law includes more granular specifications for enforcing supervisory authority by tying it to banks’ capital adequacy requirements. It also establishes stricter fit-and-proper criteria for shareholders, thereby requiring them to invest with funding derived solely from legitimate and credible endeavours. Finally, the legislation provides for heightened supervision of members of financial conglomerates that operate banks, focusing on those entities whose actions would threaten the fiscal soundness and stability of the banks.
What is stimulating consolidation in the market ?
PUREVDORJ: The BOM has announced its decision to increase the minimum amount of paid-in capital twice from its current requirement and required banks to meet this limit by May 2013. The concentration level for the banking sector is also high, with 69.2% of total banking assets held by the system’s three largest banks. The capital adequacy and other key financial soundness indicators are consistently met by the larger banks.
Alongside counter-cyclical measures such as imposing higher capital adequacy ratio requirements in times of economic expansion, efforts are being made to mitigate systemic risks and ensure the financial system’s stability by employing international approaches to macro-prudential policy. Further analysis and research regarding the most efficient macro-prudential policy implementation techniques is still being conducted.
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