Exposure Limits

Mar 25, 2011 (LBO) – Sri Lanka’s banking regulator plans to limit exposure of banks to the stock market to prevent the risk of a downturn in equities affecting the financial sector, a senior central bank official said. Samarasiri, who spoke at a public forum on how the central bank revived finance companies that collapsed two years ago, did not give details of the proposed restrictions on bank lending to the stock market.

But the central bank is believed to be considering imposing a cap on the use of bank guarantees by investors to apply for initial public offers.

Recent IPOs have been heavily oversubscribed mainly with bank guarantees, raising concern that small investors were being edged out and of the risks of bank exposure to the stock market.

The island’s capital markets watchdog, the Securities and Exchange Commission, has imposed limits on IPO allocation of shares for those applying with bank guarantees, asking companies to reserve a proportion of shares for small investors and mutual funds.

One of the first triggers of the Great Depression was a collapse of a stock bubble fired by earlier loose Federal Reserve monetary policy.

Excess Liquidity

Fed’s excessively printed