IMFCountryReportNo.24/20

MALDIVES

January2024

FINANCIALSECTORASSESSMENTPROGRAM

TECHNICALNOTEONFINANCIALSAFETYNETAND

CRISISMANAGEMENTARRANGEMENTS

ThispaperontheMaldiveswaspreparedbyastaffteamoftheInternationalMonetary

Fundasbackgrounddocumentationfortheperiodicconsultationwiththemembercountry.Itisbasedontheinformationavailableatthetimeitwascompletedon

December18,2023.

Copiesofthisreportareavailabletothepublicfrom

InternationalMonetaryFund?PublicationServices

POBox92780?Washington,D.C.20090

Telephone:(202)623-7430?Fax:(202)623-7201

E-mail:

publications@

Web:

InternationalMonetaryFund

Washington,D.C.

?2024InternationalMonetaryFund

PreparedBy

MonetaryandCapitalMarketsDepartment,International

MonetaryFund

December18,2023

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FINANCIALSECTORASSESSMENTPROGRAM

TECHNICALNOTE

FINANCIALSAFETYNETANDCRISISMANAGEMENT

ARRANGEMENTS

ThisTechnicalNotewaspreparedinthecontextofajointIMF-WorldBankFinancialSectorAssessment

Program(FSAP)missioninMaldivesduringMay

2023ledbyTorstenWezel(IMF)andNatalie

Nicolaou(WB),andoverseenbytheMonetaryand

CapitalMarketsDepartment,InternationalMonetaryFund,andtheFinanceandMarketsGlobalPractice,

WorldBank.ThenotecontainsthetechnicalanalysisanddetailedinformationunderpinningtheFSAP

assessment’sfindingsandrecommendations.FurtherinformationontheFSAPprogramcanbefoundat

/external/np/fsap/fssa.aspx.

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CONTENTS

Glossary

3

EXECUTIVESUMMARY

4

INTRODUCTION

9

INSTITUTIONALFRAMEWORKANDINTER-AGENCYARRANGEMENTS

10

A.InstitutionalArrangements

10

B.Inter-AgencyArrangements

13

C.SummaryofRecommendations

15

EARLYINTERVENTION,ANDRECOVERYANDRESOLUTIONPLANNING

15

A.EarlyIntervention

15

B.RecoveryandResolutionPlanning

17

C.SummaryofRecommendations

19

BANKRESOLUTIONANDLIQUIDATION

19

______________________________________________________

A.KeyIssues

19

B.SummaryofRecommendations

25

EMERGENCYLIQUIDITYASSISTANCEANDLIQUIDITYINRESOLUTION

26

A.KeyIssues

26

B.SummaryofRecommendations

28

DEPOSITINSURANCEANDRESOLUTIONFUNDING

29

A.DepositorProtectionandPayout

29

B.ResolutionFunding

30

C.SummaryofRecommendations

31

CONTINGENCYPLANNINGANDCRISISMANAGEMENT

32

A.KeyIssues

32

B.SummaryofRecommendations

32

BOXES

1.OverviewofMMASupervisoryToolstoAddressRisksandWeaknesses

17

2.RecoveryandResolutionPlanning

18

3.DifferentFormsofDepositorPreference

25

FIGURE

1.BankResolutionandLiquidationProcess

20

TABLE

1.RecommendationsonBankResolutionandCrisisManagement6

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Glossary

BOFD

BanksandOtherFinancialInstitutionsDivision

CMDA

CapitalMarketDevelopmentAuthority

DIF

DepositInsuranceFund

DIRDepositInsuranceRegulation

DISDepositInsuranceSystem

ELAEmergencyLiquidityAssistance

EWIEarlywarningindicator

EWSEarlywarningsystem

FSBFinancialStabilityBoard

FSCFinancialStabilityCommittee

FSNFinancialSafetyNet

FXForeignexchange

KAsKeyAttributesofEffectiveResolutionRegimesforFinancialInstitutions

M&AMergerandacquisition

MBAMaldivesBankingAct

MMAMaldivesMonetaryAuthority

MVRMaldivianRufiyaa

MOFMinistryofFinance

MOUMemorandumofUnderstanding

P&APurchaseandassumption

RRPRecoveryandResolutionPlanning

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EXECUTIVESUMMARY

1

Maldiveslegislationincludesimportantelementsofafinancialsafetynetandcrisis

managementframeworkbutthereareareasforstreamliningandimprovement.Shortcomingsintheearlyinterventionandbankresolutionframeworksneedtobeaddressed,includinginternal

arrangementsontheescalationprocessfromtheexerciseoftheMMA’spowertotakeenforcementactionsthroughtotheinitiationofresolution.Theoveralldesignoftheresolutiontoolsiscomplex-theMBAincludesdifferentmechanismsforthesameresolutiontools-andrequiresstreamlining.

MMAshoulddevelopaneffectiveemergencyliquidityassistanceframework.Depositinsurancesystemshouldbeenhanced.

InstitutionalandinteragencyarrangementsinMaldivesneedstobeenhanced.Thecooperationacrossfinancialsafetynetparticipantsneedstobestrengthened,includingtaskingtheFinancial

StabilityCommittee,withresponsibilitiesforcrisispreparednessandmanagement.Inaddition,MMAshouldestablishworkingrelationshipswithresolutionauthoritiesinforeignjurisdictions,reserving

therightofdiscretionarynationalactionandsubjecttoappropriateconfidentialityrequirements.

TheMaldivesBankingAct(MBA)providestoolsfortheMMAtoimplementearlyinterventionandresolutionmeasures.However,thereareshortcomingsthatneedtobeaddressedtoenhancebothframeworksandalignthemwithinternationalgoodpractices.

.MMAneedstoestablishaclearerandforward-lookingsetofearlyinterventiontriggersandt.Inaddition,theMMAshouldissuerelevantregulationsorguidelinesforoperationalizingtheearlyinterventionregimecomprisingpreventativeandcorrectiveactions.

.MMAshouldbeauthorizedtorequirebankstohavearecoveryplanthatcomplieswith

requirementstobespecifiedbytheMMA.Recoveryplanningshouldstartwithapilotprogramfocusingonthelargestbank.

.Similarly,theMMAshouldpreparearesolutionplanforsystemicallyimportantbanksandperformaccompanyingresolvabilityassessments.Undertheresolutionplan,theMMAshoulddeterminetheresolutionstrategiesforthebankbasedontheassessmentofhowtopreservefinancial

stabilitywhileprotectingitscriticalfunctions.

.Thetriggersforinitiatingresolutionshouldbestrengthenedincludingaforwardlooking

perspective.Thegovernancetriggershouldbeenhancedbyprovidinglinkstobank’scapacitytomaintainadequatesystemsandcontrolsandtoeffectivelymanageitsrisks.

.TheMBAshouldbeamendedtoprovidearesolutionframeworkincorporatingaunified

mechanism.Underthismechanism,theMMAshouldbeempoweredtoimplementdifferent

1ThisTechnicalNotewaspreparedbyYesimAydin(MCM).TheanalysisbenefitedfromdiscussionswiththestaffoftheMMAandreviewersattheIMF.

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resolutiontoolssequentiallyorincombination,andiffeasibleunderthelegalframework,

withoutcourtinvolvement,subjecttorelevantsafeguardstoprotectinterestsofshareholdersandcreditors.

.Therequirementforthedeliveryofaconservator’sreportshouldnotbeapriorrequirementto

implementingresolutionpowers,asthismayjeopardizethetimelyimplementationofeffective

resolutionactions.TheMBAshouldbeamendedtoempowertheMMAtotriggerresolutionandforresolutionpowerstobeappliedimmediatelyforabankdeemednon-viableorlikelynon-

viable.

.Thebridgebankpreferablyshouldbeownedandcontrolledbythegovernment.ThebridgebankwillbeoperatingunderthesupervisionoftheMMA,andintheMaldivescontext,conflictof

interestissueswouldbebestaddressedbythegovernment,ratherthantheMMAowningandcapitalizingthebridgebank.

.TheMBAshoulddifferentiatethecreditorhierarchybyprovidingreferencetoinsuredand

uninsureddepositorsrelativetounsecuredcreditors.Thiscouldtaketheformofatieredor

generaldepositorpreference.Inaddition,thelegislationshouldauthorizetheMMA,under

exceptionalcircumstances(i.e.,whennecessarytocontainthepotentialsystemicimpactofa

bank’sfailureortomaximizeitsvalueforthebenefitofallcreditorsasawhole)todeviatefromtheparipassutreatmentofcreditorsofthesameclass,subjecttoanocreditorworseoff

safeguard.

MMAshoulddevelopaneffectiveemergencyliquidityassistance(ELA)framework.This

requiresamendmentstotheMMAActthattoincludeELAprovisionsandsafeguards,andtoclarifythattheELAcanbeprovidedbytheMMAonadiscretionarybasistobanksthathavetemporary

liquidityshortagesbutareassessedtobesolventandviable.ELAshouldbeprovidedagainst

adequatecollateralandatasufficientlyhighrateofinterest.Ahighlevelofdollarizationandtheriskofofficialreservesbeingdepletedposesignificantchallenges.WhiletheMMAshouldbevestedwiththecapacitytoprovideELAinFX,itshouldonlydosoinpracticeifithassufficientinternational

reservesandifnecessarytopreservefinancialstability.

ThedepositinsurancesystemshouldbeenhancedandalignedwiththeInternational

AssociationofDepositInsurers(IADI)CorePrinciplesforEffectiveDepositInsuranceSystems.

Thiswouldinclude:

a.Enhancingthegovernancebyestablishingastronginternalcontrolframework,

b.Decidingontargetfundsizesufficienttomeettheexpectedfutureobligationsandcovertheoperationalandrelatedcosts,

c.TheDIFhavingapayboxplusmandate,enablingittoprovidecontributionstobankresolutionsubjecttosufficientsafeguardsandonaleast-costbasis,andallowforex-postrecoveryfromthe

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bankingsystemoftemporarypublicfinancingusedtofacilitatetheorderlyresolutionofafailedbank.

d.Providingforemergencyfundingarrangementsforthedepositinsurancesystem,includingpre-arrangedandassuredsourcesofliquidityfunding(preferablyacreditlinefromthegovernment)inlaworregulation(IADICP9).

Safeguardsagainstrecapitalizationbypublicfundsneedtobestrengthened.Thisshouldbeanexceptionalmechanismusedasalastresort,onlyforcaseswherethereisasignificantriskof

destabilizationofthefinancialsystemandnootheroptionsavailable.Publicfundsshouldbeusedonlyafterallestimatedlossesinthefailedbankhavebeenallocatedtoshareholdersand,tothe

extentpossible,tounsecuredcreditors.Anypublicsolvencysupportshouldbecombinedwithdeeprestructuringandmanagementreforms,toenhancelongtermviability.Thereshouldalsobepre-

definedmechanismsforlossrecoverysuchasex-postleviesfromthebankingsector.

Table1.Maldives:RecommendationsonBankResolutionandCrisisManagement

No.

Recommendation

Authority

Time1

Institutionalandinter-agencyarrangements

1.

EstablishaseparateResolutionUnitintheMMA;ifnotpracticable,establishandadhocteamtobeconvertedtoaseparateunitinduecourse,withappropriatesafeguardstoensureitsautonomyand

minimizeconflictsofinterest(?10).

MMA

NT

2.

AmendtheMBAtoexplicitlyincludetheresolutionobjectives(?12).

MMA,

Parliament

I

3.

ConsiderstrengtheningtheindependenceofMMA’sboardof

directorsbyremovingGovernmentandprivatesectorrepresentativesfromit(?14).

Parliament

I

4.

EnhancethedomesticcooperationandcoordinationacrossfinancialsafetynetparticipantsandtasktheFinancialStabilityCommittee

(FSC)recommendedformacroprudentialpolicywiththecoordinationofactivitiespertainingtocrisispreparednessandmanagement,

ensuringthatthecoordinationroleoftheFSCdoesnotpreemptthepowersandinitiativeoftheMMAasresolutionauthority(?16,18).

MMA,

MOF,

CMDA

I

5.

AmendtheMBAinlinewiththeFSBKAsinrelationtoestablishmentoflegalframeworkconditionsforcrossbordercooperation(?21).

MMA,

Parliament

ST

6.

Establishworkingrelationshipswithresolutionauthoritiesinforeignjurisdictions,reservingtherightofdiscretionarynationalactionandsubjecttoappropriateconfidentialityrequirements;identifythe

mattersforwhichlegalrecognitioninMaldivesmightbeneededinordertofacilitatetheimplementationofthehomeresolution

authority’sresolutionplanforaDSIBwithasubsidiaryorbranchintheMaldives(?20,21,22).

MMA

ST

Earlyintervention,recoveryandresolutionplanning

7.

Includeclearlydefinedandforward-lookingearlyinterventiontriggersintheMBA(?25,26).

MMA,

Parliament

I

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Table1.Maldives:RecommendationsonBankResolutionandCrisisManagement

(Continued)

8.

Issuerelevantregulationsorguidelinesforoperationalizingtheearlyinterventionregimecomprisingpreventativeandcorrectiveactions,

MMA

ST

includingtheguidanceforsettingouttheparametersandgovernanceanddevelopaformalizedEWS(?27)

9.

DevelopcontingencyplansforhowtheMMAwouldrespondtoemergingstressandweaknessinabankandnoncompliancewithregulatoryrequirementsandundertakeregulartestingofMMA

capacitytoapplyearlyintervention(?27).

MMA

MT

10.

AuthorizetheMMAtorequirebankstopreparerecoveryplansand

requiretheMMAtoprepareresolutionplansandundertakeresolvabilityassessments.(?29,30).

MMA,

Parliament

ST

Bankresolutionandliquidation

11.

AmendtheMMAto:

.enhanceresolutiontriggersandempowertheMMAtotrigger

resolutionandforresolutionpowerstobeappliedimmediatelyforabankdeemednon-viableorlikelynon-viable(?33,36).

.providearesolutionframeworkincorporatingaunifiedmechanismunderwhichdifferentresolutiontoolscanbeimplemented

sequentiallyorincombination,andwherefeasibleunderthelegalframework,withoutcourtinvolvement,subjecttorelevant

safeguardstoprotectinterestsofshareholdersandcreditors(?42).

MMA,

Parliament

I

12.

IncludenecessaryprovisionsintheMBAtoexpeditetheCourtapprovalfortheP&Atoolinsection72oftheMBA(?37).

MMA,

Parliament

I

13.

AmendtheMBAtoensurethatthebridgebankisnotownedand

controlledbytheMMA,ensurethattheMMAislegallyempowered

toprovidethebasisforaneffectivecontroloverthebridgebank(?38,44).

MMA,

Parliament

I

14.

EnhancetheoperationalpreparednessoftheMMAforbank

resolution;prepareguidelinesormanualsfortheoperationalizationoftheresolutiontools;preparevaluationguidelines(?43,44,45).

MMA

MT

15.

ProvidetearedorgeneraldepositorpreferenceintheMBA;include

theNCWOLprincipleinthelegislation;empowertheMMAtodeviate,underexceptionalcircumstances,fromtheparipassutreatmentof

creditorsofthesameclass(?48,49).

MMA,

Parliament

MT

EmergencyLiquidityAssistance

16.

AmendtheMMAActtolegallyempowertheMMAtoprovideELAwithinawell-designedframework,alignedwithinternationalbestpractices.(?50,51,53).

MMA,

Parliament

I

17.

Developthelegalandproceduraldocumentationregardingthe

provisionofELAtosolventandviablebankswithtemporaryliquidityshortages(?52).

MMA

I

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Table1.Maldives:RecommendationsonBankResolutionandCrisisManagement

(Concluded)

18.

EmpowertheMMAtoprovideliquiditysupportinresolution,subjecttoadequatesafeguards(?54).

MMA,

MOF,

Parliament

ST

DepositInsuranceandResolutionFunding

19.

Establishaseparate,dedicatedunitresponsibleforthemanagement

oftheDIF,ensuringoperationalindependenceandsoundgovernancearrangements(?56).

MMA

MT

20.

Increasethesubmissionfrequencyofdepositdata(?59).

MMA

I

21.

Determineatargetfundsizeonthebasisofclear,consistentandtransparentcriteriaandareasonabletimeframetoreachthetargetfundsize(?58).

MMA

MT

22.

EnhanceMMA’sITcapacitytohaveaccesstoonlinedepositor

accountsandadoptaplantoreducethereimbursementperiodforinsureddepositstosevenworkingdays(?59).

MMA

MT

23.

Adoptalong-termstrategytopromotepublicawarenessoftheDIS(?60).

MMA

MT

24.

GiveDIFapayboxplusmandate(?61).

MMA,

Parliament

MT

25.

EnsurethattheDIFhasaclearback-upemergencyfundingfromthegovernmentincaseswheretheresourcesareinsufficienttocoveritsresponsibilities;ensurethatthelegislation(MMAActandDIR)doesnotallowforanyborrowingsandcontributionsfromtheMMAin

caseofashortfalloffundingfromtheDIF(?62).

MOF,

MMA,

Parliament

I

26.

Strengthenthesafeguardsagainstrecapitalizationbypublicfundsneedtobestrengthenedtominimizetheriskofmoralhazard(?63).

MMA,

MOF,

Parliament

I

ContingencyPlanningandCrisisManagement

27.

EnhanceMMA’sroleincontingencyplanningandcrisis

preparednessbydevelopinganoverarchingcrisis-managementplanandconductingregulardomesticcrisisexercises(?64).

MMA

ST

28.

EnsurethatFSNparticipantshaveregularlyupdatedcontingencyplans(?64).

MMA,

MOF,

CMDA

MT

1Timing:I–Immediate:within1year;ST–shortterm:1to2years;MT–mediumterm:3–5years.

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INTRODUCTION

2

1.ThistechnicalnotepresentsfindingsandrecommendationsregardingMaldives’financialsafetynetandcrisismanagementarrangements.Itcoversanassessmentofthe

institutionalframework,earlyinterventionandrecoveryandresolutionplanning,bankresolutionandliquidationregimes,arrangementsforemergencyliquidityassistance(ELA),depositinsuranceand

resolutionfundingaswellascontingencyplanningandcrisismanagementarrangements.Sincethe

legalframeworkdoesnotdifferentiatebetweenpublicandprivatebanks,theanalysisand

recommendationsapplytobothtypesofbanks.Inaddition,theyareequallyapplicableto

institutionsprovidingIslamicbankingservices.Thetechnicalnotedoesnotcoverotherfinancialinstitutionsorfinancialmarketinfrastructures.Thefindingsandrecommendationsarebasedonanalysisofrelevantlegislationandpolicy,theauthorities’responsestoaquestionnaire,and

discussionswithauthoritiesandtheprivatesectorduringthemainFSAPmission(May8–23,2023).Thenoteisguidedbyinternationalstandards,notablytheKeyAttributesofEffectiveResolution

RegimesforFinancialInstitutions(KAs)andtheCorePrinciplesforEffectiveDepositInsuranceSystems,butitdoesnotconstituteacomplianceassessmentofthesestandards

3

.

2.ThebankingsectorinMaldivesishighlyconcentrated,dominatedbystate-owned

banks.Thesizeofthebankingsector’sassetscorrespondsto59percentoftheGDPin2022.The

sectorconsistsof8banks,andthedomesticstate-ownedbankplaysadominantrole,accountingfor51percentoftotalassets.Thetotalshareofstate-ownedbanksrisesto75percentwhenincluding

thetwoforeigncontrolledstate-ownedbanksoperatinginMaldives.Fiveoutofeightbanksarebranchesorsubsidiariesofforeignbanks,correspondingto40percentoftotalbankingsystem

assets.TheMMAhasthepowertorequireabanktomaintainhighercapitalratiosifthebankisasystemicallyimportantbankasdeterminedbytheMMA.Currently,nobankissubjecttoahighercapitalrequirementduetoitssystemicimportance.

3.Banks’deposit-basedfundingstructureandhighdollarizationhaveimportant

implicationsforthesafetynetframework.Thebankingsystemhasasimple,traditionalbalancesheetstructureandbanksdonothavecomplexfinancialinstrumentsorexposures.Banksare

principallydepositfunded,withtotaldepositscorrespondingto87percentoftotalliabilities.Asa

result,theshareofunsecuredcreditors,seniororsubordinated,tobearlossesbeforedepositors,islow.Thereisahighlevelofdollarizationinthebankingsystem,with53percentoftotaldepositsand44percentofloansdenominatedinforeignexchange(FX).Thedollarizationofloanstononfinancialcorporatesisparticularlyhighat75percent

4

.TwobanksbreachtheupperlimittotheNOPwhichisrelativelylooseininternationalcomparison,andthesignificantmaturitymismatchbetweenlonger

2ThisTechnicalNotewaspreparedbyHanifeYesimAydin(MCM).TheauthorwouldliketothanktheMaldivianauthoritiesfortheirexcellentengagementandconstructivedialoguethroughouttheFSAPprocess.

3MaldivesFSAPDetailedAssessmentReportincludesassessmentsontheframeworkforcrisismanagement,recoveryandresolutionandpublicsafetynet.

4Althoughinpracticebanksdonotextendforeigncurrencycredittofirmswithoutforeignexchangeearnings,currentbankingregulationsdonotprovideanyguidanceonforeignexchangeloans.

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termloansandahighshareofcallabledepositsthatalsoexhibittourism-relatedseasonalityposesFXliquidityrisk

5

.

4.Thelegalframeworkonbankresolutionandcrisismanagementisprimarilycontained

intwolaws.Establishedin1981,theMaldivesMonetaryAuthority(MMA)derivesitsscope,

regulatorypowers,andmandatefromtheMMAAct(1981)

6

.TheMaldivesBankingAct(MBA)

7

coverstheprovisionsonthelegalpowersoftheMMAtolicensebanks,conductongoingsupervision,

undertakecorrectiveactionsandaddressthebankresolutionundertheconservatorshipregime.TheMMAisauthorizedtoissueregulationsfortheimplementationandenforcementoftheMBA.In

additiontothesetwolaws,theDepositInsuranceSchemeRegulation(DIR)

8

includesprovisionsoninsureddeposits,managementoftheDepositInsuranceFund(DIF),investmentoftheFund’smoney,depositcoverageandpayouts.

5.ThisisthefirstfullFSAPforMaldives,asthepreviousexercisein2016wasasoloWorldBankDevelopmentModule.Thepreviousassessmenttookplaceinaradicallydifferentenvironment,withmuchlowerpublicdebtandafavorableexternalenvironment.TheModule

highlightedrisksrelatedtoshortcomingsinregulatoryandlegalprovisionsaswellaslimited

supervisorycapacityandstuntedfinancialdevelopment;anddoesnotcoverfinancialsafetynetand

crisismanagementarrangements.RecentArticleIVmissions(2021and2022)recommend

introducingacomprehensivecrisismanagementframeworkbyoperationalizingabankresolutionframeworkandaligningitwiththeMMAlenderoflastresortfunction.TherehasnotbeenprogressinfinancialsafetynetandcrisismanagementarrangementsowingtothedualshocksofCOVID-19andtheramificationsofRussia’swarinUkraine.

INSTITUTIONALFRAMEWORKANDINTER-AGENCY

ARRANGEMENTS

A.InstitutionalArrangements

6.TheMaldivianfinancialsafetynet(FSN)comprisestheMMA,MinistryofFinance(MoF)andCapitalMarketsDevelopmentAuthority(CMDA),withtheMMAplayingthekeyrole.TheMBAdefinesasobjectivesmaintainingfinancialstabilityandpublicconfidenceinthebanking

system,protectingtherightsofdepositorsandcreditorsofbanksandmanagingsystemicrisks.TheMMAActauthorizestheMMAtoregulateandsupervisethefinancialmarketexcludingthesecurities

5AccordingtoMMA’sPrudentialRegulationonForeignCurrencyExposureLimits,theforeigncurrencyopenpositionexposureforallcurrenciesshallnotexceed40percentofabank’scapitalbase,andthesinglecurrencyopenpositionexposureshallnotexceed25percentofabank’scapitalbaseforalongposition,and15percentforashortposition.

6

7

LawNo:6/81.

LawNo:24/2010,amendedin2015.

8ThisRegulationisissuedpursuanttoSection62and66oftheMaldivesBankingAct.

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marketwhichisregulatedbytheCapitalMarketDevelopmentAuthority(CMDA)

9

.TheCMDAis

responsibleforthesupervisionofthePensionFundandcompaniesthathavetheirshareslistedonthecapitalmarket,includingtwobanksandoneinsurancecompany.MMA’sareaofjurisdiction

coversbanks,insurancecompanies,non-bankfinancialinstitutionsandpaymentsinstitutions.

Additionally,MMAregulatesthepaymentsystemandhouses