Statement

The banking sector remains strong with total capital adequacy ratio above 16 per cent, net stable funding ratio above 130 per cent, liquidity coverage ratio above 175 per cent and statutory liquid asset ratio above 32 per cent. With these performance indicators, I do not think anyone needs an additional assurance on the current strength of the banking system.

Fact check

Governor’s claim on strength of the banking system can be banked on

To evaluate Governor of the Central Bank of Sri Lanka (CBSL) W.D. Lakshman’s claim, FactCheck consulted the set of principles developed by the Bank for International Settlements (BIS)—an international organization that serves and supports central banks in their pursuit of monetary and financial stability—to assess the risk taken on by global and domestic banks. Sri Lankan domestic banks are regulated by the CBSL in accordance with BIS guidelines.

The ratios cited by the Governor are the relevant indicators based on the above standards. The numbers quoted by him were those that are reported by the CBSL.

The Governor reports the average ratios for the whole of the sector. However, the strength of the sector would depend also on how individual banks performed on these indicators. The appropriate benchmarks for each indicator for each bank vary based on the CBSL’s classification of the bank’s systemic importance.

As of 31 March 2020, Sri Lanka’s top 10 banks all meet their regulatory requirements, indicating their regulatory strength. (Exhibit 1)

Therefore, we assess this statement to be TRUE.

*FactCheck's verdict is based on the most recent information that is   publicly accessible. As with every fact check, if new information   becomes available, FactCheck will revisit the assessment.

In his statement, the Governor identifies the correct ratios that need to be considered to evaluate the strength of the financial system.

However, taking the average of the overall banking sector is inadequate, as it can obscure underlying problems faced by specific banks. Consequently, the strength of the Sri Lankan banking system is dependent on whether individual banks meet the rules made by CBSL.

These rules vary based on banks’ size, interconnectedness, substitutability in the financial system and complexity. The CBSL has categorised domestic banks to reflect these variations. Bank of Ceylon and Commercial Bank have been categorised under “D-SIB: bucket 2” and Hatton National Bank and People’s Bank under “D-SIB: bucket 1”. These banks are considered systemically important and will need to meet higher prudential performance indicators—relative to other “Non D-SIB” banks—to ensure stability of the financial system. (Exhibit 2)

Note:

Despite meeting regulatory requirements there are some indications of potential vulnerabilities developing in the banking sector.

Fitch Ratings also revised down the operating environment score for Sri Lankan banks to 'b-' from 'b' in May 2020, driven by downward pressure on the sovereign credit rating and vulnerabilities in the Sri Lankan economy.

Additionally, non-performing assets (NPAs) have increased by 4.2% between the first quarter of 2019 and the first quarter of 2020, indicating a potential fall in people’s abilities to service their loans. While there is no specific threshold of NPAs in evaluating the stability of the sector, the overall upwards trend would be a cause for concern. Prevailing NPAs are the highest NPA since third quarter 2014.

Exhibit 1: Performance indicators of Sri Lankan banks, as of 31 March 2020

Exhibit 2: Minimum regulatory requirements for Sri Lankan banks as of 2020