Central Bank permits banks to invest in dollar-denominated bonds

The Central Bank of Sri Lanka (CBSL) yesterday (5) noted that it has allowed Licensed Commercial Banks (LCBs) as well as National Savings Bank (NSB) to invest funds sourced externally in US dollar-denominated International Sovereign Bonds (ISBs) and Sri Lanka Development Bonds (SLDBs), equally splitting such investments into both ISBs and SLDBs, having considered all relevant risks. 

It added that to mitigate the risk arising to the Government from the foreign currency exposure, CBSL has specified a capital charge under the Basel III framework for such credit risks, and has also specified a general capital charge for market risk under the Basel III framework for trading book investments in Government securities.

“With a view to mitigating the risk arising from their foreign currency borrowings, licensed banks are required to make such borrowings subject to a limit computed based on external credit rating and the capital adequacy ratios of the bank. The limit is expressed as a percentage of total assets, ranging between 5% and 10%, as per the latest available audited accounts,” it noted. 

According to the Central Bank, foreign currency liquidity positions are monitored through Basel III liquidity coverage ratio (LCR) and LCR monitoring tools to ensure that licensed banks keep adequate foreign currency liquid stocks to meet their foreign currency obligations.

Licensed banks are required to put in place IRM techniques for monitoring and managing their risks, including maturity mismatch, and to ensure that adequate capital is available to meet various risks to which they are exposed. The IRM framework covers various potential risks, possible sources of such risks, and the mechanism to identify, monitor, and control such risks at prudent levels.

Further, licensed banks are required to strengthen the market risk management, foreign exchange trading activities, market conduct and treasury operations, to mitigate any foreign exchange risks in licensed banks. The Central Bank noted that the sourcing of resources externally by LCBs and NSB is on account of investment opportunities available for such institutions in the market, but it will purely be based on the strength of their balance sheets, and after having adopted prudent risk mitigation practices.

The Government of Sri Lanka has reiterated its stance of ensuring that all its debt service obligations will be met on time, thus maintaining Sri Lanka’s unblemished record of servicing all its debt-related obligations. Accordingly, arrangements are already in place to settle $ 1 billion worth of ISBs maturing on 27 July 2021.

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