BANK SUPERVISION DEPARTMENT

The Banking Supervision Department (BSD) carries out the Reserve Bank’s responsibility for the soundness and stability of the financial system. There is no difference to the techniques applied to supervise domestic and offshore banks. Monitoring is conducted through both on-site inspections and off site analysis of data submitted to the Reserve Bank.

Domestic and offshore banks are required to submit monthly and quarterly data on assets and liabilities, profitability, large credit exposures and deposits, maturity profile of assets and liabilities, country exposures, exposure to related entities, capital adequacy, loan (asset quality) classification, and equity investments. In addition, domestic banks are also required to comply with compulsory public disclosure requirements designed to facilitate monitoring of the financial condition and to enhance market discipline. All banks must submit audited copies of their annual accounts to the RBV, and in the case of domestic banks published in the press, and made available to members of the public. The Reserve Bank also conducts on-site reviews of banks. Typically these are held at least every two years and are largely confined to reviews of credit exposures and policies, and anti money laundering practices and policies. In addition, the RBV conducts annual prudential consultations with the senior management of banks to discuss issues arising from on- and off-site analysis.

In carrying out its responsibilities, the BSD has issued a number of prudential guidelines, which the banks licensed under both the Financial Institutions Act and the International Banking Act are required to comply with. These include:

1) Minimum capital requirement. The Reserve Bank has introduced a capital adequacy framework that is consistent with the international standard set by the Basel Committee on Banking Supervision. The Reserve Bank has the power to require a bank to maintain a higher capital ratio if it considers this appropriate when considering factors such as the bank’s risk appetite and profile. Domestic banks are required to maintain a minimum capital amount of Vt200 million and offshore must have a minimum of USD0.5 million.

2) Maximum exposure limits. The maximum exposure limit to single client or group of related clients is 25 per cent of capital in relation to exposures to non bank, non government counterparties. This limit also applies to banks’ subsidiaries and associates. The Reserve Bank has the discretion, in exceptional circumstances, to approve exposures above this level.

3) Restrictions on shareholdings. Banks require the approval of the Reserve Bank to have aggregate shareholdings in non financial business in excess of 25 per cent of their capital. Amounts in excess of this amount are deducted from a bank’s capital base. The approval of the RBV is required prior to the establishment of a subsidiary either in Vanuatu or abroad.

4) Customer Due Diligence. The objective of this guideline is to ensure that banks have in place know-your-customer (KYC) policies. KYC is most closely associated with the fight against money laundering. The Reserve Bank’s approach to KYC is from a wider prudential, not just anti-money laundering or financing of terrorism, perspective. Sound KYC procedures must be seen as a critical element in the effective management of banking risks.

5) Credit Risk Management and Guidelines for Loan Classification and Provisioning for impaired assets. These guidelines set out the Reserve Bank’s minimum requirements for the classification of assets and provisions for losses.

6) Supervision of the Adequacy of Liquidity of Banks. This guideline sets out the Reserve Bank’s approach to the supervision of the liquidity of banks. Under this guideline, banks are required to maintain at all times a minimum proportion of its balance sheet in specified liquid assets. At present the ratio is set at 12 per cent for domestic banks. Offshore banks are expected to have appropriate liquidity management policies to ensure that they can meet depositors’ demands.

7) Relationship between banks, their external auditors and the Reserve Bank. This guideline requires banks to provide, on an annual basis, a statement from their external auditors that data provided to the Reserve Bank can be relied upon and that the bank complied with all prudential standards and requirements. Under these arrangements, the Reserve Bank may also request the bank’s external auditor to conduct a specific review of an aspect of a bank’s risk management systems or operations.

8) Management of Financial Institutions. This Guideline aims to ensure that a financial institution licensed by the Reserve Bank is well managed and that persons occupying key positions within the institution must have the degree of probity and competence commensurate with their responsibilities. The Reserve Bank may direct that a financial institution remove persons from key positions where they no longer meet the criteria for fitness and propriety.

In addition to the these prudential guidelines, both the Financial Institutions Act and the International Banking Act contain a number of other provisions designed to ensure that bank’s are prudentially managed and depositors’ interests are protected.

Both Acts outline the criteria the Reserve Bank considers when assessing an application to conduct banking business. Prior to issuing a banking license the Reserve Bank is required to conduct a due diligence and assessment process covering ownership, management, proposed capital (source and structure), risk management, and accounting and internal control systems.