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Adv. Vijay Jayshwal
Kathmandu University School of Law
Banking Law Jurisprudence
Laws Relating to Financial
Institution
Outline of Talk
 Different perspectives of banking and Financial
Institutions ( such as multilateral banking system
v. unilateral banking system, national v.
international etc.
 Bretton Woods Financial Institutions ( or
Categories of International Financial Institutions)
 Approaches of Banking and Financial Institutions
excluding Islamic Approach to Banking
Institutions.
 Core principle of Banking Supervision and its
mechansims.
 Some reference materials
Perspective on International Financial
Institutions (IFIs)
 Banking and financial institution (BFI),
International Financial Institution (IFI), Non-
Banking Financial Institution (NBFI), Global
Financial Institution (GFI), Regional Financial
Institution (RGFI), National Financial Institution
(NFI), Non- Banking Cooperative Institutions
(NBCI).
 The Bretton Woods Institutions, Washington
Consensus V Beijing Consensus, growth of
IBRD, IMF and World bank, AIIB, international
trade and banking institutions.
 The UK Approach, EC Approach, List Approach,
Formula Approach, doctrine of conditionality, non-
interference Islamic Approach.
Bretton Woods Financial
Institutions
 The Bretton Woods Institutions are the World Bank and
the International Monetary Fund (IMF). They were set up
at a meeting of 43 countries in Bretton Woods, New
Hampshire, USA in July 1944.
 Their aims were to help rebuild the shattered postwar
economy and to promote international economic
cooperation through the international banking system.
 The original Bretton Woods agreement also included plans
for an International Trade Organisation (ITO) but these lay
dormant until the World Trade Organisation (WTO) was
created in the early 1990s.
 These institutions were created out of Treaty mechanisms
in order to promote the development finances at the world
level specifically the sufferer nations.
 These institutions had set up “standards for the
international banking transaction” and non-classical role of
Washington Consensus
 It is a set of economic policy recommendations for
developing countries, and Latin America in particular,
that became popular during the 1980s.
 The term Washington Consensus usually refers to the
level of agreement between the International
Monetary Fund(IMF), World Bank, and U.S.
Department of the Treasury. This term became
popular in 1989 in order to solve the crisis of 1980’s
for debt management. (British economist John
Williamson).
10 Policies under WC
1. Fiscal policy discipline, with avoidance of large fiscal deficits
relative to GDP;
2. Redirection of public spending from subsidies
3. Tax reform, broadening the tax base and adopting moderate
marginal tax rates;
4. Interest rates that are market determined and positive (but
moderate) in real terms;
5. Competitive exchange rates;
6. Trade liberalization: liberalization of imports, with particular
emphasis on elimination of quantitative restrictions (licensing,
etc.); any trade protection to be provided by low and relatively
uniform tariffs;
7. Liberalization of inward foreign direct investment;
8. Privatization of state enterprises;
9. Deregulation: abolition of regulations that impede market
entry or restrict competition, except for those justified on
safety, environmental and consumer protection grounds, and
prudential oversight of financial institutions;
10. Legal security for property rights.
Beijing Consensus
 The Beijing Consensus is pragmatic—much
like China in the post-1979 world—and recognizes the
need for flexibility in solving multifarious problems. It
is inherently focused on innovation, while
simultaneously emphasizing ideals such as equitable
development and a “Peaceful Rise”.
 Three pillars :
1. Innovation- Innovation in its own development
since 1979
2. Pursuit of Dynamic Goals/Rejection of Per
Capita GDP- Quality-of-life and individual equity
3. Self-Determination- Refused to submit to outside
pressure and instead pursued its own priorities
International Financial Institution
International Monetary Fund – An international
organization working to maintain global financial
stability through technical assistance, training, and
loans to member states.
World Bank Group – An international organization
consisting of five agencies which provides vital
financial and technical assistance to developing
countries around the world to reduce global poverty.
World Trade Organization – An independent
international organization providing a forum to
negotiate and adjudicate the rules of trade between
its member states.
“ These IFIs were contested, redefined and structured”
Regional Multilateral Development
Bank
 African Development Bank – An institution that works to
promote both public and private investment and economic
development in Africa, as well as provide financial and
technical assistance to its member states.
 Asian Development Bank – An institution providing
financial and technical assistance to public and private
development projects in Asia and the Pacific.
 European Bank for Reconstruction and Development –
An institution that provides financial and technical
assistance primarily to private-sector businesses in Central
and Eastern Europe and Central Asia in order to promote
transition to open and democratic market economies.
 Inter-American Development Bank – An institution that
provides financial and technical assistance to public and
private development projects in Latin America.
 The Asian Infrastructure Investment Bank is a
multilateral development bank that aims to support the
building of infrastructure in the Asia-Pacific region. The bank
currently has 74 members as well as 26 prospective
members from around the world.
Approaches of Banking Institutions
 Common Law Approach- United Dominions
Trust Ltd v.Kirkwood (1966)
1. Bank accept money from, and collect cheque
for, their customers and place them to their
credit;
2. They honour cheques or orders drawn on them
by their customers when presented for payment
and debit their customer accordingly;
3. They keep current accounts, or something of
that nature, in their books in which the credits
and debits are entered.
Lord Denning called, any institution with above
mentioned features as Banking/Financial
Institutions.
Statutory Approach
 Internationally, statutory definitions of banks and
banking institutions take a different forms.
 It defines as a bank any body recognized as such by
a governmental authority. In absence of any indication
of the criteria required for such recognition, this
approach confers too great a discretion on the state.
 This approach are strictly defined in the national
promulgation of laws relating to banking and financial
institutions.
 Statues are core concern for making differences
among the various sectors for the issues of BFIs at
the national level and similar with the international
levels.
List Approach
 This approach considers list of activities in order
to define the banking institutions.
 It must be clear on grounds that, key activities are
adequate enough to define the banking
institutions even in changing fabric of
international and national financial institutions.
 List approach is adopted in Germany Banking Act
(1998) has provided list of activities to be
considered as banking institutions.
 This approach has inherent shortcomings in the
sense that, changing global perception towards
traditional financial system may not be
accommodated in old statues.
Formulary Approach
 Banking is defined in terms of few, generalized
characteristics. There are some formulas developed
by the banking institution in order to consider the
notion of BFIs at the national level.
 The bodies of institution may act like banks yet not be
categorized in law as banks.
 If taking deposits from the public is defined as the
essential ingredient of banking then the finance house
able to fund itself from the wholesale markets, or the
co-operative taking deposits from within its
membership, would probably not be caught.
 These character of banking institutions are called as “
non-bank banks” or “ non-bank financial
intermediaries” in economist word.
The UK Approach
 Banking institutions are financial institutions
aimed to accepting deposits and home mortgage
lending.
 This has also listed the activity are range of
investment banking. The prohibition and
authorization to entity to do banking activities are
also enlisted under the Financial Service and
Markets Act 2000 (FSMA 2000).
 This has also aimed to bring bodies which will be
under the control regime as per FSMA.
 The money received by way of deposits must be
lent to others, or any other of the body’s activities
must be financed out of money so received.
The EC Approach
 Taking deposits from the public and granting credits
on its own account, is the definition of credit institution
used in Article 1 of the Credit Institutions Directive of
the European Community (2013).
 It has also encompasses the activity of the
specialized banks such as savings banks. Under the
Directive, the credit institutions are categorized as
‘financial institutions’ if they do not accept deposits or
other repayable funds form the public but do as their
principal activity, lend or carry on any of the activities.
 EC approach- public-deposit-taking and granting
credits on its won account- when it is necessary to
refer to banking in a general way.
 Core banking activities are considered as BFIs.
Core Principle of Banking Supervision
 The Core Principles for Effective Banking Supervision (Core
Principles) are the de facto minimum standard for sound
prudential regulation and supervision of banks and banking
systems.
 Originally issued by the Basel Committee on Banking
Supervision (the Committee) in 1997, they are used by
countries as a benchmark for assessing the quality of their
supervisory systems and for identifying future work to achieve
a baseline level of sound supervisory practices.
 The Core Principles are also used by the International
Monetary Fund (IMF) and the World Bank, in the context of
the Financial Sector Assessment Programme (FSAP), to
assess the effectiveness of countries’ banking supervisory
systems and practices.
 The Core Principles were last revised by the Committee in
October 2006 in cooperation with supervisors around the
world.
 In its October 2010 Report to the G20 on response to the
financial crisis, the Committee announced its plan to review
the Core Principles as part of its ongoing work to strengthen
supervisory practices worldwide.
Principle 1 – Responsibilities, objectives and powers
Principle 2 – Independence, accountability, resourcing and legal
protection for supervisors
Principle 3 – Cooperation and collaboration
Principle 4 – Permissible activities
Principle 5 – Licensing criteria
Principle 6 – Transfer of significant ownership
Principle 7 – Major acquisitions
Principle 8 – Supervisory approach
Principle 9 – Supervisory techniques and tools
Principle 10 – Supervisory reporting
Principle 11 – Corrective and sanctioning powers of supervisors
Principle 12 – Consolidated supervision
Principle 13 – Home-host relationships
Principle 14 – Corporate governance
Principle 15 – Risk management process
Principle 16 – Capital adequacy
Principle 17 – Credit risk
Principle 18 – Problem assets, provisions and reserves
Principle 19 – Concentration risk and large exposure
limits
Principle 20 – Transactions with related parties
Principle 21 – Country and transfer risks
Principle 22 – Market risks
Principle 23 – Interest rate risk in the banking book
Principle 24 – Liquidity risk
Principle 25 – Operational risk
Principle 26 – Internal control and audit
Principle 27: Financial reporting and external audit
Principle 28 – Disclosure and transparency
Principle 29 – Abuse of financial services
Best of Luck

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Banking Law Jurisprudence

  • 1. Adv. Vijay Jayshwal Kathmandu University School of Law Banking Law Jurisprudence Laws Relating to Financial Institution
  • 2. Outline of Talk  Different perspectives of banking and Financial Institutions ( such as multilateral banking system v. unilateral banking system, national v. international etc.  Bretton Woods Financial Institutions ( or Categories of International Financial Institutions)  Approaches of Banking and Financial Institutions excluding Islamic Approach to Banking Institutions.  Core principle of Banking Supervision and its mechansims.  Some reference materials
  • 3. Perspective on International Financial Institutions (IFIs)  Banking and financial institution (BFI), International Financial Institution (IFI), Non- Banking Financial Institution (NBFI), Global Financial Institution (GFI), Regional Financial Institution (RGFI), National Financial Institution (NFI), Non- Banking Cooperative Institutions (NBCI).  The Bretton Woods Institutions, Washington Consensus V Beijing Consensus, growth of IBRD, IMF and World bank, AIIB, international trade and banking institutions.  The UK Approach, EC Approach, List Approach, Formula Approach, doctrine of conditionality, non- interference Islamic Approach.
  • 4. Bretton Woods Financial Institutions  The Bretton Woods Institutions are the World Bank and the International Monetary Fund (IMF). They were set up at a meeting of 43 countries in Bretton Woods, New Hampshire, USA in July 1944.  Their aims were to help rebuild the shattered postwar economy and to promote international economic cooperation through the international banking system.  The original Bretton Woods agreement also included plans for an International Trade Organisation (ITO) but these lay dormant until the World Trade Organisation (WTO) was created in the early 1990s.  These institutions were created out of Treaty mechanisms in order to promote the development finances at the world level specifically the sufferer nations.  These institutions had set up “standards for the international banking transaction” and non-classical role of
  • 5. Washington Consensus  It is a set of economic policy recommendations for developing countries, and Latin America in particular, that became popular during the 1980s.  The term Washington Consensus usually refers to the level of agreement between the International Monetary Fund(IMF), World Bank, and U.S. Department of the Treasury. This term became popular in 1989 in order to solve the crisis of 1980’s for debt management. (British economist John Williamson).
  • 6. 10 Policies under WC 1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP; 2. Redirection of public spending from subsidies 3. Tax reform, broadening the tax base and adopting moderate marginal tax rates; 4. Interest rates that are market determined and positive (but moderate) in real terms; 5. Competitive exchange rates; 6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs; 7. Liberalization of inward foreign direct investment; 8. Privatization of state enterprises; 9. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions; 10. Legal security for property rights.
  • 7. Beijing Consensus  The Beijing Consensus is pragmatic—much like China in the post-1979 world—and recognizes the need for flexibility in solving multifarious problems. It is inherently focused on innovation, while simultaneously emphasizing ideals such as equitable development and a “Peaceful Rise”.  Three pillars : 1. Innovation- Innovation in its own development since 1979 2. Pursuit of Dynamic Goals/Rejection of Per Capita GDP- Quality-of-life and individual equity 3. Self-Determination- Refused to submit to outside pressure and instead pursued its own priorities
  • 8. International Financial Institution International Monetary Fund – An international organization working to maintain global financial stability through technical assistance, training, and loans to member states. World Bank Group – An international organization consisting of five agencies which provides vital financial and technical assistance to developing countries around the world to reduce global poverty. World Trade Organization – An independent international organization providing a forum to negotiate and adjudicate the rules of trade between its member states. “ These IFIs were contested, redefined and structured”
  • 9. Regional Multilateral Development Bank  African Development Bank – An institution that works to promote both public and private investment and economic development in Africa, as well as provide financial and technical assistance to its member states.  Asian Development Bank – An institution providing financial and technical assistance to public and private development projects in Asia and the Pacific.  European Bank for Reconstruction and Development – An institution that provides financial and technical assistance primarily to private-sector businesses in Central and Eastern Europe and Central Asia in order to promote transition to open and democratic market economies.  Inter-American Development Bank – An institution that provides financial and technical assistance to public and private development projects in Latin America.  The Asian Infrastructure Investment Bank is a multilateral development bank that aims to support the building of infrastructure in the Asia-Pacific region. The bank currently has 74 members as well as 26 prospective members from around the world.
  • 10. Approaches of Banking Institutions  Common Law Approach- United Dominions Trust Ltd v.Kirkwood (1966) 1. Bank accept money from, and collect cheque for, their customers and place them to their credit; 2. They honour cheques or orders drawn on them by their customers when presented for payment and debit their customer accordingly; 3. They keep current accounts, or something of that nature, in their books in which the credits and debits are entered. Lord Denning called, any institution with above mentioned features as Banking/Financial Institutions.
  • 11. Statutory Approach  Internationally, statutory definitions of banks and banking institutions take a different forms.  It defines as a bank any body recognized as such by a governmental authority. In absence of any indication of the criteria required for such recognition, this approach confers too great a discretion on the state.  This approach are strictly defined in the national promulgation of laws relating to banking and financial institutions.  Statues are core concern for making differences among the various sectors for the issues of BFIs at the national level and similar with the international levels.
  • 12. List Approach  This approach considers list of activities in order to define the banking institutions.  It must be clear on grounds that, key activities are adequate enough to define the banking institutions even in changing fabric of international and national financial institutions.  List approach is adopted in Germany Banking Act (1998) has provided list of activities to be considered as banking institutions.  This approach has inherent shortcomings in the sense that, changing global perception towards traditional financial system may not be accommodated in old statues.
  • 13. Formulary Approach  Banking is defined in terms of few, generalized characteristics. There are some formulas developed by the banking institution in order to consider the notion of BFIs at the national level.  The bodies of institution may act like banks yet not be categorized in law as banks.  If taking deposits from the public is defined as the essential ingredient of banking then the finance house able to fund itself from the wholesale markets, or the co-operative taking deposits from within its membership, would probably not be caught.  These character of banking institutions are called as “ non-bank banks” or “ non-bank financial intermediaries” in economist word.
  • 14. The UK Approach  Banking institutions are financial institutions aimed to accepting deposits and home mortgage lending.  This has also listed the activity are range of investment banking. The prohibition and authorization to entity to do banking activities are also enlisted under the Financial Service and Markets Act 2000 (FSMA 2000).  This has also aimed to bring bodies which will be under the control regime as per FSMA.  The money received by way of deposits must be lent to others, or any other of the body’s activities must be financed out of money so received.
  • 15. The EC Approach  Taking deposits from the public and granting credits on its own account, is the definition of credit institution used in Article 1 of the Credit Institutions Directive of the European Community (2013).  It has also encompasses the activity of the specialized banks such as savings banks. Under the Directive, the credit institutions are categorized as ‘financial institutions’ if they do not accept deposits or other repayable funds form the public but do as their principal activity, lend or carry on any of the activities.  EC approach- public-deposit-taking and granting credits on its won account- when it is necessary to refer to banking in a general way.  Core banking activities are considered as BFIs.
  • 16. Core Principle of Banking Supervision  The Core Principles for Effective Banking Supervision (Core Principles) are the de facto minimum standard for sound prudential regulation and supervision of banks and banking systems.  Originally issued by the Basel Committee on Banking Supervision (the Committee) in 1997, they are used by countries as a benchmark for assessing the quality of their supervisory systems and for identifying future work to achieve a baseline level of sound supervisory practices.  The Core Principles are also used by the International Monetary Fund (IMF) and the World Bank, in the context of the Financial Sector Assessment Programme (FSAP), to assess the effectiveness of countries’ banking supervisory systems and practices.  The Core Principles were last revised by the Committee in October 2006 in cooperation with supervisors around the world.  In its October 2010 Report to the G20 on response to the financial crisis, the Committee announced its plan to review the Core Principles as part of its ongoing work to strengthen supervisory practices worldwide.
  • 17. Principle 1 – Responsibilities, objectives and powers Principle 2 – Independence, accountability, resourcing and legal protection for supervisors Principle 3 – Cooperation and collaboration Principle 4 – Permissible activities Principle 5 – Licensing criteria Principle 6 – Transfer of significant ownership Principle 7 – Major acquisitions Principle 8 – Supervisory approach Principle 9 – Supervisory techniques and tools Principle 10 – Supervisory reporting Principle 11 – Corrective and sanctioning powers of supervisors Principle 12 – Consolidated supervision Principle 13 – Home-host relationships
  • 18. Principle 14 – Corporate governance Principle 15 – Risk management process Principle 16 – Capital adequacy Principle 17 – Credit risk Principle 18 – Problem assets, provisions and reserves Principle 19 – Concentration risk and large exposure limits Principle 20 – Transactions with related parties Principle 21 – Country and transfer risks Principle 22 – Market risks Principle 23 – Interest rate risk in the banking book Principle 24 – Liquidity risk Principle 25 – Operational risk
  • 19. Principle 26 – Internal control and audit Principle 27: Financial reporting and external audit Principle 28 – Disclosure and transparency Principle 29 – Abuse of financial services