Bank Watch

Dec 08, 2009 (LBO) – Sri Lanka’s Central Bank is to introduce a mandatory deposit insurance scheme, strengthen bank supervision and launch an internal rating system for banks, governor Nivard Cabraal said. These were some of the new measures the banking regulator is taking to strengthen the island’s financial system to ensure its future stability and health, he told a seminar for directors of banks.

“We will bring in a mandatory deposit insurance scheme,” Cabraal said. “We’re on the verge of setting it up. It will be done in the next few months.”

Deposit insurance have however attracted criticism as being a ‘moral hazard’ where customers are no longer required to look into the merits of individual banks and bank managers will also take risks happy in the knowledge that deposit insurance will bail them out.

In many countries deposit insurance has limits. In the US the Federal Deposit Insurance Corporation underwrites deposits upto a 100,000 US dollars and has extensive powers to take over, close and liquidate banks.

The FDIC could move into a bank with depleted capital on Friday and re-open it on Monday under a different name.

Modern banking systems have an implicit understanding th