Proposed Amendments to the Banking Law and the Law on the Central Bank

Proposed Amendments to the Banking
Law and the Law on the Central Bank
Anthony Woolley
Hogan Lovells Mongolia
11 September 2017

www.hoganlovells.com
Amendments to the Banking Law
• Existing Banking Law was approved on 28 January
2010 and has been amended numerous times
• Amendments are to be approved as part of IMF
programme
• Concept paper prepared by the Bank of Mongolia (?)
• English draft drafted by external consultants (?)
2

• Mongolian version dated 31 July 2017
• It is likely that there will be certain changes made in the
amendments at the time of approval
• Amendments aim to ensure the stability of the financial
sector and to reduce operational risks of banks by
improving the governance of banks and their
supervision by the BoM
• Presentation is primarily based on the English language
draft
3

• Draft concept paper provides that changes effect the
following key areas:
– improve requirements and criteria applicable to founders,
shareholders, board members and executive management
team;
– introduce preventative and early intervention measures (as
opposed to taking enforcement measures after breach of
legislation);
– improve the effectiveness of bank resolution measures
(restructuring/re-organisation); and
– resolution measures are to be enforced based on the results of
supervision of banks.
• Supervision is to shift from "compliance based" to "risk
based" system in line with international best practice
4

Proposed Key Changes
• Revision and introduction of new terms (related persons, special
relationship persons, parent company, unsafe, unsound operations etc.)
• Improved fit and proper test for founders, board members and executive
management team (work experience, qualification in certain fields,
business reputation, influence on risk management, financial standing
etc.)
• New restrictions on transactions with related persons:
– large exposure if value of transaction is 10% or more of eligible capital and to be
reported to BoM;
– exposure to one person or group of related persons shall not exceed 25% of eligible
capital;
– uncollateralised loan to single person or group of related persons shall not exceed 5%
of eligible capital;
– no favorable conditions to special relationship persons or bank employee; and
– prior approval of board members of such transactions.
5

6
• Broadens the supervisory power of BoM:
– examine documents; unimpeded access to equipment and
software programmes;
– hold additional capital above the regulatory minimum and larger
provisions, request divestment of activities, use net profits to
strengthen own funds, provide additional disclosure;
– review of quality of assets and require banks to participate in
stress test
• New section on preventive and early intervention
measures:
– banks to develop recovery and resolution plans
– same requirement applies to parent company of conglomerate

• Preventive and early intervention measures include:
– issue written warnings, enter into agreement with board to take
measures to correct breaches of law and unsafe and unsound
practices;
– require restoration of liquidity levels;
– obtain additional capital funds;
– limit variable remuneration for senior managers;
– suspend/dismiss executive management team;
– prevent bank from acquiring subsidiaries, opening branches or
engaging in new business;
– divest or liquidate subsidiaries; and
– suspend voting rights of qualifying shareholders etc.
7

• New regulation on resolution of banks:
– Detailed criteria for determining the need for resolution of a
bank
– Resolution measures include:
• transfer of business to other banks or bridge bank;
• write down or conversion of instruments of ownership;
• merger;
• bail-in; and
• capital increase.
– BoM may provide financial assistance to banks under
resolution by a fund managed by the Deposit Insurance
Corporation and financed by banks
– BoM to compensate creditors and shareholders if their financial
position has become worse as a result of the resolution of the
bank
8

• Detailed procedures for liquidation of banks
• Detailed provisions for the composition and operation of
the Financial Stability Council
• Specifies procedures for submitting complaints and
claims to court in respect of BoM decision to intervene
in the operation of the bank (i.e. early intervention and
resolution measures)
- submission of claims to court will not entail any suspension of the
effects of BoM decision during court proceedings
- court may only award monetary damages but not enjoin, stay,
suspend, or set aside actions of BoM
9

Amendments to the Law on the Central Bank
• Early Mongolian draft - dated as of 22 March 2017
• Key proposed changes include:
– minor amendment on criteria for granting loans to banks
(i.e. banks that are facing temporary liquidity problems or
that are under resolution measures)
– exemption of BoM from all types of taxes (save for
personal income tax)
– minor amendment to appointment and removal of BoM
management (prohibition of removal for grounds other
than those specified in the law)
10

- salary and other benefits of BoM management to be
compatible with legal entities engaged in banking and
professional activities
- BoM to implement appropriate macro economic
policies upon consultation with Ministry of Finance
and Financial Regulatory Commission
- Government is not to provide any direction or
recommendation to the BoM
- BoM is prohibited from granting loans or acquiring
securities for the Government unless specifically
provided in law
11

• Detailed regulation on Monetary Policy Council
(appointment of members, mandate)
• Minor amendments to the powers and functions of the
BoM (i.e. reporting to Parliament every 6 months on price
and financial stability)
12

Conclusions
• Banking Law
– BoM is to approve detailed regulations
– broadens the power of the BoM in supervising the operations of
banks
– promotes operational independence
– focuses on improving risk management capacity of banks
– early draft and therefore likely to change at the time of approval by
Parliament
• Law on the Central Bank
– aims to clarify the powers and functions of BoM
– early draft – likely to change at the time of approval by
Parliament
13

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