## 1mdvea2024002

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---

### Institutional framework and inter-agency arrangements
- Maldives legislation includes important elements of a financial safety net and crisis management framework but has areas for streamlining and improvement.
- Key institutional features:
  - MMA derives powers from the MMA Act (1981) (Law No: 6/81).
  - Maldives Banking Act (MBA) (Law No: 24/2010, amended in 2015) covers licensing, ongoing supervision, corrective actions, and bank resolution under the conservatorship regime.
  - Deposit Insurance Scheme Regulation (DIR) issued pursuant to Section 62 and 66 of the MBA.
  - Financial safety net (FSN) participants: MMA, Ministry of Finance (MoF) and Capital Markets Development Authority (CMDA); no separate deposit insurance agency—the DIF is managed by the MMA.
- Institutional capacity and governance gaps:
  - Banks and Other Financial Institutions Division (BOFD) is responsible for bank resolution but there is no dedicated personnel or separate Resolution Unit.
  - DIF managed by BOFD with no dedicated personnel; DIF segregated and externally audited yearly but lacks governance rules.
  - MMA Board of Directors includes Government and private sector representatives; recommendation to consider removing these representatives to strengthen independence (Authority: Parliament; Timing: I).
  - Interagency cooperation limited; no regular periodic meetings among MMA, CMDA and MoF; existing MoU only between MMA and CMDA (2014).
- Recommended institutional actions (excerpted):
  - Establish a separate Resolution Unit in the MMA; if not practicable, establish an ad hoc team to be converted to a separate unit in due course (Timing: NT).
  - Amend the MMA Act to explicitly include the resolution objectives (Authority: MMA, Parliament; Timing: I).
  - Enhance domestic cooperation across FSN participants and task the Financial Stability Committee (FSC) with coordination of crisis preparedness and management, ensuring FSC does not preempt MMA’s resolution powers (Authority: MMA, MOF, CMDA; Timing: I).
  - Amend the MBA in line with the FSB KAs for cross-border cooperation; establish working relationships with resolution authorities in foreign jurisdictions while reserving discretionary national action and confidentiality (Authority: MMA, Parliament; Timing: ST / ST).

### Early intervention, recovery, and resolution planning
- Key findings on early intervention:
  - Legal framework lacks clearly defined qualitative and quantitative early intervention triggers.
  - No regulation or guidance defining "unsafe and unsound practices".
  - MMA does not use early warning indicators (EWI) and does not adjust supervisory intensiveness by risk or systemic relevance.
  - Stress testing framework limited to sensitivity analysis; results not used regularly for early detection of risks.
- Recommended operational measures for early intervention:
  - Issue regulations or guidelines to operationalize early intervention regime comprising preventative and corrective actions.
  - Define "unsafe and unsound practices" linked to qualitative and quantitative triggers, avoiding undue prescription.
  - Develop a formalized Early Warning System (EWS) comprising a range of early warning indicators (EWIs).
  - Develop contingency plans and undertake regular testing of MMA capacity to apply early intervention.
- Recovery and resolution planning (RRP) findings:
  - No RRP framework in the Maldives.
  - Legal framework does not authorize the MMA to require banks to prepare recovery plans or require the MMA to prepare resolution plans and resolvability assessments.
  - Absence of RRP increases risk of reliance on administrative take-overs and public recapitalization in systemic cases.
- RRP recommendations:
  - Authorize the MMA to require banks to prepare recovery plans and to require the MMA to prepare resolution plans and undertake resolvability assessments (Authority: MMA, Parliament; Timing: ST).
  - Start recovery planning with a pilot program focusing on the largest bank; extend proportionally to other banks.
  - Resolution plans should determine strategies to preserve financial stability while protecting critical functions and require banks to remove impediments to resolution.

### Bank resolution and liquidation: tools, triggers, governance
- Design and procedural findings:
  - MBA includes conservatorship, P&A, bridge bank, recapitalization by public funds, and voluntary/administrative liquidation.
  - Appointment of a conservator is a mandatory step for resolution initiation; conservator must prepare a report within 30 days following appointment.
  - Triggers for conservator appointment:
    - Mandatory triggers: (i) bank fails to pay its financial obligations; (ii) capital reduced to less than 50 percent of the minimum requirements; (iii) a petition submitted for bankruptcy of the bank; (iv) board unable or unwilling to manage affairs of the bank.
    - Discretionary triggers: (i) failure to carry out an MMA order; (ii) capital too low to support safe and sound operations; (iii) evidence of criminal activities; (iv) reasonable cause to believe board unable or unwilling to manage affairs.
  - Conservator eligibility criteria are not specified; conservator term is 12 months renewable twice for 12 months periods.
  - Requirement for delivery of conservator’s report should not be a prior requirement to implementing resolution powers—the MBA should empower MMA to trigger resolution and apply resolution powers immediately based on available information.
- Legal and operational reform recommendations:
  - Amend the MBA to provide a unified resolution framework allowing different resolution tools to be implemented sequentially or in combination, and, where feasible, without court involvement, subject to safeguards (Authority: MMA, Parliament; Timing: I).
  - Remove the requirement that delivery of a conservator’s report be a prior requirement to implementing resolution powers.
  - Include provisions to expedite Court approval for the P&A tool in section 72 of the MBA (Authority: MMA, Parliament; Timing: I).
  - Ensure bridge bank ownership and control: bridge bank preferably owned and controlled by the government; MMA should be legally empowered to provide the basis for effective control but not own and capitalize the bridge bank (Authority: MMA, Parliament; Timing: I).
  - Prepare guidelines/manuals for operationalization of resolution tools and valuation guidelines (Timing: MT).
  - Modify creditor hierarchy: provide reference to insured and uninsured depositors relative to unsecured creditors (tiered or general depositor preference); include NCWOL principle and empower MMA to deviate under exceptional circumstances from pari passu treatment, subject to no creditor worse off safeguard (Authority: MMA, Parliament; Timing: MT).
  - Recommendation to include NCWOL safeguard in legislation.

### Emergency Liquidity Assistance (ELA) and liquidity in resolution
- Current legal situation:
  - MMA Act empowers MMA to lend to financial institutions for a maximum 90-day period, extendable three times; no separate ELA framework or safeguards exists.
  - No regulation or guideline specifying solvency safeguards or recovery prospects for ELA operations.
- ELA design principles and constraints:
  - ELA should be discretionary and provided to banks with temporary liquidity shortages that are assessed to be solvent and viable.
  - ELA should be provided against adequate collateral and at a sufficiently high rate of interest.
  - Due to high dollarization and risk of reserve depletion, MMA may be vested with capacity to provide ELA in FX, but should do so in practice only if it has sufficient international reserves and if necessary to preserve financial stability.
  - FX ELA capacity limited to FX reserves freely available at the time; FX reserves typically sufficient only for idiosyncratic cases rather than systemic events.
- ELA operational recommendations:
  - Amend the MMA Act to legally empower MMA to provide ELA aligned with international best practices (Authority: MMA, Parliament; Timing: I).
  - Develop legal and procedural documentation for provision of ELA to solvent and viable banks with temporary liquidity shortages (Authority: MMA; Timing: I).
  - Empower the MMA to provide liquidity support in resolution, subject to adequate safeguards (Authority: MMA, MOF, Parliament; Timing: ST).
  - Require an internal MMA ELA management committee given large government share in banking sector and government representation on MMA Board.
  - Include indicative terms and conditions: collateral eligibility, haircuts, interest rate policy (premium over a benchmark), ELA master agreement, funding templates, contingency planning, communications and exit strategies.
  - In exceptional circumstances where insolvency or inadequate collateral is a concern, provide a government indemnity to protect the MMA balance sheet.

### Deposit insurance, DIF governance, funding, and payouts
- Current DIF features:
  - DIF introduced in 2015 and managed by the MMA (BOFD); DIR issued in 2015 and unchanged since.
  - DIF guarantees current, time and savings deposits up to MVR 30.000 or its equivalent in foreign currency per depositor in each member bank; coverage paid out in MVR equivalent.
  - MVR 30.000 covers about 90 percent of total insurable deposit accounts.
  - Membership mandatory for deposit-taking banks, including branches and subsidiaries of foreign banks.
- Funding and premium structure:
  - Initial contribution corresponding to 0.5 percent of total insurable deposits.
  - Annual premiums correspond to 0.1 percent of total insurable deposits, raised to 0.125 percent for banks with a CAR below 15 percent.
  - The fund currently covers 2.5 percent of total insurable deposits as of end-2022.
  - Recommendation: adopt a flat premium structure to build the fund; determine a target fund size based on clear, consistent, transparent criteria and timeframe; conduct top down and bottom-up stress tests.
- Governance and operational readiness recommendations:
  - Establish a separate, dedicated unit responsible for management of the DIF with independent management, sufficient human resources, and an operational budget (IADI CP3).
  - Enhance MMA’s IT capacity to access online depositor accounts and secure more frequent deposit-data submission (currently by end of each January).
  - Prepare an operational handbook for insured deposit payouts and reduce reimbursement period from the current legal deadline of thirty days to seven working days (IADI CP 15).
  - Conduct regular tests of technical preparedness with the DGS and banks.
  - Adopt a long-term public-awareness strategy for the DIS (IADI CP10).
- Resolution funding and public backstops:
  - DIF currently has a paybox mandate only; recommendation to expand to a paybox plus mandate enabling DIF contributions to bank resolution subject to safeguards and emergency backup funding from the MOF.
  - Recommend pre-arranged assured sources of liquidity funding, preferably a credit line from the government (IADI CP 9); note that DIR counts borrowings and contributions from MMA or Government among Fund sources but legislation should not allow borrowings and contributions from MMA in case of a DIF shortfall.
  - Safeguards on public recapitalization:
    - Recapitalization by public funds should remain exceptional and only where significant risk of destabilization exists and no other options.
    - Public funds should be used only after estimated losses allocated to shareholders and, to the extent possible, unsecured creditors.
    - Public solvency support should be combined with deep restructuring and management reforms and include pre-defined loss-recovery mechanisms such as ex-post levies (Authority: MMA, MOF, Parliament; Timing: I).
  - MOF should have a clear exit strategy to extricate government from funding support and shareholdings as soon as market conditions permit.

### Contingency planning and crisis management
- Current preparedness gaps:
  - Crisis preparedness low; FSN participants do not have contingency plans or business continuity plans.
  - No crisis simulation exercises conducted by FSN participants.
  - MMA has not operationalized resolution authority functions, does not prepare resolution plans or resolvability assessments, and has limited experience applying enforcement actions (last action more than a decade ago).
- Recommended actions:
  - Enhance MMA’s role by developing an overarching crisis-management plan and conducting regular domestic crisis exercises (Authority: MMA; Timing: ST).
  - Task the FSC with crisis preparedness and management while preserving MMA’s initiative as resolution authority; FSC composition: MMA, MoF and CMDA.
  - Ensure FSN participants regularly update contingency plans and conduct joint simulation exercises.

### Banking sector structure and key statistics
- Banking sector key statistics (exact figures preserved):
  - Banking sector assets correspond to 59 percent of GDP in 2022.
  - Sector consists of 8 banks.
  - Domestic state-owned bank accounts for 51 percent of total assets.
  - Total share of state-owned banks rises to 75 percent when including two foreign-controlled state-owned banks operating in Maldives.
  - Five out of eight banks are branches or subsidiaries of foreign banks, corresponding to 40 percent of total banking system assets.
  - Total deposits correspond to 87 percent of total liabilities.
  - High dollarization: 53 percent of total deposits and 44 percent of loans denominated in foreign exchange (FX).
  - Dollarization of loans to nonfinancial corporates is 75 percent.
  - Two banks breach the upper limit to the NOP (noted as relatively loose in international comparison).
  - Significant maturity mismatch between longer-term loans and a high share of callable deposits with tourism-related seasonality poses FX liquidity risk.

*Source: EXECUTIVE SUMMARY and selected sections (1mdvea2024002).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### 1mdvea2024002 - EXECUTIVE SUMMARY __________________________________________________________________________ 4

### Institutional framework and inter-agency arrangements
- Maldives legislation includes important elements of a financial safety net and crisis management framework but has areas for streamlining and improvement.
- Shortcomings identified in escalation arrangements from the MMA’s exercise of enforcement powers through to initiation of resolution.
- Overall design of resolution tools is complex; the MBA includes different mechanisms for the same resolution tools and requires streamlining.
- Recommendations (excerpted from Table 1):
  - Establish a separate Resolution Unit in the MMA; if not practicable, establish an ad hoc team to be converted to a separate unit in due course (Timing: NT).
  - Amend the MBA to explicitly include the resolution objectives (Authority: MMA, Parliament; Timing: I).
  - Consider strengthening the independence of MMA’s board of directors by removing Government and private sector representatives from it (Authority: Parliament; Timing: I).
  - Enhance domestic cooperation across financial safety net participants and task the Financial Stability Committee (FSC) with coordination of crisis preparedness and management, ensuring FSC does not preempt MMA’s resolution powers (Authority: MMA, MOF, CMDA; Timing: I).
  - Amend the MBA in line with the FSB KAs for cross-border cooperation; establish working relationships with resolution authorities in foreign jurisdictions while reserving discretionary national action and confidentiality (Authority: MMA, Parliament; Timing: ST / ST).

### Early intervention, recovery, and resolution planning
- The MBA provides tools for MMA to implement early intervention and resolution, but shortcomings reduce alignment with international good practice.
- Early intervention:
  - MMA needs a clearer and forward-looking set of early intervention triggers.
  - MMA should issue regulations or guidelines to operationalize the early intervention regime comprising preventative and corrective actions.
  - Develop a formalized Early Warning System (EWS) and contingency plans; undertake regular testing of MMA capacity to apply early intervention.
- Recovery and resolution planning:
  - MMA should be authorized to require banks to have recovery plans complying with MMA-specified requirements; start recovery planning with a pilot program focusing on the largest bank.
  - MMA should prepare resolution plans for systemically important banks and perform resolvability assessments; resolution plans should determine strategies to preserve financial stability while protecting critical functions.
  - Recommendation: Authorize the MMA to require banks to prepare recovery plans and require the MMA to prepare resolution plans and undertake resolvability assessments (Authority: MMA, Parliament; Timing: ST).

### Bank resolution and liquidation
- Triggers and governance for initiating resolution need strengthening, including forward-looking perspectives and links to a bank’s capacity to maintain adequate systems and controls.
- Legal and operational reforms recommended:
  - Amend the MBA to provide a unified resolution framework allowing different resolution tools to be implemented sequentially or in combination, and, where feasible, without court involvement, subject to safeguards (Authority: MMA, Parliament; Timing: I).
  - Remove the requirement that delivery of a conservator’s report be a prior requirement to implementing resolution powers; empower MMA to trigger resolution and apply resolution powers immediately for a bank deemed non-viable or likely non-viable.
  - Include provisions to expedite Court approval for the P&A tool in section 72 of the MBA (Authority: MMA, Parliament; Timing: I).
  - Ensure bridge bank ownership and control: bridge bank preferably owned and controlled by the government; MMA should be legally empowered to provide the basis for effective control but not own and capitalize the bridge bank (Authority: MMA, Parliament; Timing: I).
  - Enhance MMA operational preparedness: prepare guidelines/manuals for operationalization of resolution tools and valuation guidelines (Timing: MT).
  - Modify creditor hierarchy: provide reference to insured and uninsured depositors relative to unsecured creditors (tiered or general depositor preference); include NCWOL principle and empower MMA to deviate under exceptional circumstances from pari passu treatment, subject to no creditor worse off safeguard (Authority: MMA, Parliament; Timing: MT).

### Emergency Liquidity Assistance (ELA) and liquidity in resolution
- MMA should develop an effective ELA framework requiring amendments to the MMA Act to include ELA provisions and safeguards.
- ELA design principles:
  - ELA to be provided on a discretionary basis to banks with temporary liquidity shortages that are assessed to be solvent and viable.
  - ELA should be provided against adequate collateral and at a sufficiently high rate of interest.
  - Due to high dollarization and risk of reserve depletion, the MMA may be vested with capacity to provide ELA in FX, but should do so in practice only if it has sufficient international reserves and if necessary to preserve financial stability.
- Recommendations (excerpt):
  - Amend the MMA Act to legally empower MMA to provide ELA aligned with international best practices (Authority: MMA, Parliament; Timing: I).
  - Develop legal and procedural documentation for provision of ELA to solvent and viable banks with temporary liquidity shortages (Authority: MMA; Timing: I).
  - Empower the MMA to provide liquidity support in resolution, subject to adequate safeguards (Authority: MMA, MOF, Parliament; Timing: ST).

### Deposit insurance and resolution funding
- Deposit insurance system should be enhanced and aligned with IADI Core Principles for Effective Deposit Insurance Systems.
- Suggested enhancements:
  - Strengthen governance by establishing a strong internal control framework and a separate, dedicated unit responsible for management of the DIF, ensuring operational independence (Authority: MMA; Timing: MT).
  - Determine a target fund size based on clear, consistent, transparent criteria and a reasonable timeframe to reach the target fund size (Authority: MMA; Timing: MT).
  - Increase submission frequency of deposit data (Authority: MMA; Timing: I).
  - Enhance MMA’s IT capacity for access to online depositor accounts and adopt a plan to reduce insured deposit reimbursement period to seven working days (Authority: MMA; Timing: MT).
  - Adopt a long-term strategy to promote public awareness of the DIS (Authority: MMA; Timing: MT).
  - Give DIF a paybox plus mandate to provide contributions to bank resolution subject to safeguards and on a least-cost basis; allow for ex-post recovery from the banking system of temporary public financing used to facilitate orderly resolution (Authority: MMA, Parliament; Timing: MT).
  - Provide emergency funding arrangements for the DIF, including pre-arranged and assured sources of liquidity funding (preferably a credit line from the government) in law or regulation (IADI CP 9).
- Safeguards against recapitalization by public funds:
  - Recapitalization by public funds should remain exceptional, used only where there is a significant risk of destabilization and no other options.
  - Public funds should be used only after estimated losses in the failed bank are allocated to shareholders and, to the extent possible, to unsecured creditors.
  - Any public solvency support should be combined with deep restructuring and management reforms and include pre-defined mechanisms for loss recovery such as ex-post levies from the banking sector (Authority: MMA, MOF, Parliament; Timing: I).

### Contingency planning and crisis management
- Strengthen coordination and preparedness:
  - Enhance MMA’s role in contingency planning and crisis preparedness by developing an overarching crisis-management plan and conducting regular domestic crisis exercises (Authority: MMA; Timing: ST).
  - Ensure Financial Safety Net (FSN) participants have regularly updated contingency plans (Authority: MMA, MOF, CMDA; Timing: MT).
  - Task the FSC with responsibilities for crisis preparedness and management while preserving MMA’s initiative as resolution authority.

### Banking sector structure and key statistics
- Banking sector features:
  - Banking sector assets correspond to 59 percent of GDP in 2022.
  - Sector consists of 8 banks.
  - Domestic state-owned bank accounts for 51 percent of total assets.
  - Total share of state-owned banks rises to 75 percent when including two foreign-controlled state-owned banks operating in Maldives.
  - Five out of eight banks are branches or subsidiaries of foreign banks, corresponding to 40 percent of total banking system assets.
  - Total deposits correspond to 87 percent of total liabilities.
  - High dollarization: 53 percent of total deposits and 44 percent of loans denominated in foreign exchange (FX).
  - Dollarization of loans to nonfinancial corporates is 75 percent.
  - Two banks breach the upper limit to the NOP (noted as relatively loose in international comparison).
  - Significant maturity mismatch between longer-term loans and a high share of callable deposits with tourism-related seasonality poses FX liquidity risk.

*Source: EXECUTIVE SUMMARY (1mdvea2024002).*

### 4.      The legal framework on bank resolution and crisis management is primarily contained

### 4.      The legal framework on bank resolution and crisis management is primarily contained

### Legal framework and primary laws
- The Maldives Monetary Authority (MMA) derives its scope, regulatory powers, and mandate from the MMA Act (1981) (Law No: 6/81).
- The Maldives Banking Act (MBA) (Law No: 24/2010, amended in 2015) covers licensing, ongoing supervision, corrective actions, and bank resolution under the conservatorship regime.
- The MMA is authorized to issue regulations for the implementation and enforcement of the MBA.
- The Deposit Insurance Scheme Regulation (DIR) (issued pursuant to Section 62 and 66 of the Maldives Banking Act) includes provisions on insured deposits, management of the Deposit Insurance Fund (DIF), investment of the Fund’s money, deposit coverage and payouts.

### Institutional framework and mandates
- The Maldivian financial safety net (FSN) comprises the MMA, Ministry of Finance (MoF) and Capital Markets Development Authority (CMDA), with the MMA playing the key role.
- The MBA defines objectives: maintaining financial stability and public confidence in the banking system, protecting the rights of depositors and creditors of banks and managing systemic risks.
- The MMA Act authorizes the MMA to regulate and supervise the financial market excluding the securities market (Law no: 2/2006 (Maldives Securities Act)), which is regulated by the CMDA.
- MMA’s jurisdiction covers banks, insurance companies, non-bank financial institutions and payments institutions; MMA also regulates the payment system and houses the credit information bureau.
- There is no separate deposit insurance agency; the DIF is managed by the MMA.

### MMA powers, resolution authority, and lender of last resort
- The MBA confers on MMA powers to address banks’ problems through enforcement measures and sanctions, including:
  - relatively mild actions (e.g., warnings and entering into voluntary agreements with the MMA),
  - cease and desist orders and specific requirements,
  - removal or replacement of individual board members and managers or the full board of directors,
  - placing a bank into conservatorship,
  - revoking a bank’s license and placing the bank into receivership during a liquidation process.
- As the resolution authority, the MMA may need to coordinate with CMDA, the Ministry of Finance, and foreign authorities.
- The MMA Act empowers the MMA to lend to financial institutions for a maximum 90-day period, which can be extended three times; there is no separate emergency liquidity assistance (ELA) framework.
- State owned banks as well as the branches and subsidiaries of foreign banks are subject to the same early intervention and bank resolution regime.
- All banks, including state owned and foreign owned banks, are members of the deposit insurance scheme (DIS), subject to the same coverage level and deposit insurance levies.

### Institutional capacity, staffing, and governance of resolution-related functions
- The Banks and Other Financial Institutions Division (BOFD) is responsible for bank resolution, licensing, monitoring compliance, and assessing financial soundness and performance.
- There is no dedicated personnel for bank resolution within the BOFD.
- The DIF is managed by the same division in the MMA; the DIF is segregated from other funds within the MMA and subject to external audit yearly, but there are no governance rules specified for the Fund and no dedicated personnel for DIF management.
- The mission recommends establishing a separate Resolution Unit under the BOFD, operationally separate with distinct responsibilities and separate reporting lines to different Deputy Governors; if not practicable, establish an ad hoc team convertible to a separate unit with safeguards for autonomy and conflict-of-interest minimization (¶10).

### Resolution objectives, legal protections, and independence
- The MBA does not include explicit resolution objectives; current MBA objectives include maintaining financial stability and public confidence, protecting rights of depositors and creditors, and managing systemic risks.
- Recommendation: Resolution objectives should be explicitly stated in the MBA and include:
  - ensuring continuity of systemically important financial services and avoiding unnecessary destruction of value,
  - seeking to minimize the overall costs of resolution and losses to creditors (KA 2.3).
- The legal framework provides legal immunity to MMA Board of Directors and staff, including the conservator and receiver appointed by the MMA, unless decisions were made in bad faith or constitute a criminal offense; related provisions include Section 9 of the MMA Act and Section 54 of the MBA.
- MMA independence needs strengthening: the Board of Directors includes representatives from the Government and the private sector, which may expose MMA to potential political interference and compromise operational independence to implement resolution measures (KA 2.5).

### Inter-agency arrangements and crisis preparedness
- Interagency cooperation is limited: there are no regular periodic meetings among MMA, CMDA and MoF; cooperation currently occurs on an “as needed” basis.
- MMA signed an MoU with the CMDA in 2014 for mutual assistance and exchange of information; there is no tripartite MoU among MMA, CMDA and MoF, nor an MoU between MoF and the MMA.
- The framework for financial stability has not been operationalized:
  - MMA has prepared a draft for selected macroprudential tools but has not been significatively active in macroprudential policy making.
  - MMA does not prepare a financial stability report.
  - MMA does not adjust supervisory intensiveness based on banks’ risk profile or systemic relevance.
  - MMA does not use a system of early warning indicators (EWI).
  - Stress testing framework consists of a sensitivity analysis exercise; results are not used regularly for early detection of risks.
  - MMA has not developed internal contingency plans for responding to bank stress and weakness.
- There is no high-level committee that brings together MMA, CMDA and MoF for system-wide risk discussion and contingency planning; the Macroeconomic Policy Coordinating Committee (MPCC) exists but has no direct role in financial-stability crisis preparedness.

### Recommended Financial Stability Committee (FSC) role
- A new Financial Stability Committee (FSC) recommended for macroprudential policy should also be tasked with crisis preparedness and management.
- FSC composition: MMA, MoF and CMDA.
- FSC functions:
  - forum for authorities to work together on crisis preparedness and management while each safeguards its responsibility and autonomy,
  - formalized coordination role in relation to bank resolution, with MMA participating as supervisor, lender of last resort and resolution authority,
  - coordination role should not preempt MMA’s powers and initiative as resolution authority,
  - each member agency should have clear roles and responsibilities under stress and in crises,
  - FSC should be charged with preparing a communication strategy.

### Cross-border cooperation and MOUs with foreign authorities
- MMA has MoUs with Bank of Mauritius (2011), Reserve Bank of India (RBI) (2015), and Central Bank of Sri Lanka (CBSL) (2020); negotiating MoUs with the Hong Kong Monetary Authority and the State Bank of Pakistan.
- The MoUs do not explicitly cover resolution matters except those with RBI and CBSL, which include provisions to:
  - share contingency arrangements for crisis management (systemic impact, liquidity, solvency and contingency funding plans, or contingency liquidation arrangements),
  - provide information on deposit protection arrangements,
  - provide support from home to host in requiring the head office of the branch to provide initiatives and solutions for liquidity assistance and other measures.
- Recommendation: MBA should empower the MMA to establish working relationships with resolution authorities in foreign jurisdictions, including signing MOUs allowing exchange of information on recovery and resolution matters on a reciprocal basis, reserving the right of discretionary national action if necessary, and subject to appropriate confidentiality requirements.
- For foreign-owned D-SIBs, MMA should work closely with home resolution authorities to understand home resolution plans and identify matters requiring legal recognition in Maldives to facilitate implementation of home resolution plans for a D-SIB subsidiary or branch.
- While seeking cooperative solutions with foreign resolution authorities, MMA should be able to take discretionary national actions if action or inaction by home jurisdictions jeopardizes financial stability in the Maldives (e.g., cancellation of parent bank license or resolution action in home country indicating nonviability).

### Early intervention, recovery and resolution planning — key supervisory findings
- Supervisory approach combines off-site examination and on-site monitoring using CAMELS; ratings are updated after on-site inspection and during quarterly monitoring.
- MMA does not adjust supervisory intensiveness or allocation of supervisory resources based on banks’ risk profile or systemic relevance.
- MMA does not currently use early warning indicators (EWI).
- Stress testing is limited to sensitivity analysis and is not used regularly for early detection of risks or vulnerability assessment.
- Section 55 of the MBA provides enforcement powers and corrective actions for breaches of laws, regulations, licensing conditions, instructions or unsafe and unsound practices; measures range from written warnings and voluntary agreements to conservatorship and license revocation (Box 1).

### Summary of recommendations (extracted)
- Establish a separate Resolution Unit in the MMA; if not practicable, establish an ad hoc team to be converted to a separate unit in due course, with appropriate safeguards to ensure its autonomy and minimize conflicts of interest (¶10).
- Amend the MMA Act to explicitly include the resolution objectives, including ensuring continuity of systemically important financial services and avoiding unnecessary destruction of value and seeking to minimize the overall costs of resolution and losses to creditors (KA 2.2).
- Consider strengthening the independence of MMA’s board of directors by removing Government and private sector representatives from it.
- Enhance the domestic cooperation and coordination across financial safety net participants.
- Task a new Financial Stability Committee (FSC) recommended for macroprudential policy with the coordination of activities pertaining to crisis preparedness and management; ensure the coordination role does not preempt MMA’s powers as resolution authority.
- Amend the MBA in line with the FSB KAs in relation to establishment of legal framework conditions for cross border cooperation.
- Empower the MMA to establish working relationships with resolution authorities in foreign jurisdictions, including the signing of MOUs with those authorities allowing for exchange of information on recovery and resolution matters on a reciprocal basis reserving the right of discretionary national action and subject to appropriate confidentiality requirements.
- Identify the matters for which legal recognition in Maldives might be needed to facilitate implementation of the home resolution authority’s resolution plan for a D-SIB with a subsidiary or branch in the Maldives.
- Ensure that the MMA is able to take discretionary national actions if action or inaction by home jurisdictions jeopardizes financial stability in the Maldives.

*Source: 1mdvea2024002 - 4.      The legal framework on bank resolution and crisis management is primarily contained*

### 25.      The legal framework lacks clearly defined qualitative and quantitative early

### 25.      The legal framework lacks clearly defined qualitative and quantitative early intervention triggers

### Early intervention: key findings
- Despite reference to the unsafe and unsound practices of banks, there is no regulation or guidance including the definitions of those practices.
- The powers conferred onto the MMA do not follow an escalated structure by reference to the severity of the situation.
- The lack of the definition of unsafe and unsound practices in the MBA or in any other regulation or guidance may preclude MMA from taking action against an institution or its administrators.
- The legal framework for handling troubled banks includes a broad range of enforcement measures, but the MBA should be strengthened to allow for an escalated structure of early intervention in response to specified triggers.
- MMA lacks experience in implementation of early intervention measures and needs operational guidance and governance parameters.

### Early intervention: recommended operational measures
- Issue relevant regulations or guidelines for operationalizing the early intervention regime comprising preventative and corrective actions, including guidance setting out the parameters and governance under which early intervention decisions are made.
- Define "unsafe and unsound practices" linked to both qualitative and quantitative triggers for early intervention, while avoiding being unduly prescriptive.
- Develop a formalized early warning system (EWS) comprising a range of early warning indicators (EWIs) that can be used to inform about incipient stress in individual banks and in the banking system as a whole.
- Enhance the stress testing framework and use it as an effective tool for early detection of risks and assessment of potential bank vulnerability to economic and financial shocks.
- Develop contingency plans for how the MMA would respond to emerging stress and weakness in a bank and noncompliance with regulatory requirements, and undertake regular testing of MMA capacity to apply early intervention.

### Overview of MMA supervisory tools to address risks and weaknesses (Box 1)
- Tools supported by section 55 of the MBA; section 55(a) identifies two conditions for use: (1) breaching any laws, regulations, conditions for licensing, instructions or orders imposed by the MMA and (2) engaging in unsafe and unsound practices.
- Selected enforcement and early intervention measures include:
  - giving banks cease and desist orders or requiring affirmative corrective action;
  - requiring the bank to submit a detailed description of remedial measures;
  - requiring the board of directors to inject additional capital within a time period acceptable to the MMA, or to submit a plan acceptable to the MMA for increasing capital to a level specified by the MMA;
  - prohibition of declaration or payment of any cash dividends or profit distribution;
  - imposing restrictions on loan extensions or allowing for extensions under certain conditions;
  - appointment of one or more representatives of the MMA to bank’s board of directors;
  - requiring the bank to hire an advisor with authority to make or disapprove certain decisions regarding assets, loans, investments, liabilities, and dividends for a specified period and conditions;
  - removing the chairman, board member or the managing director, any other executive officer or the manager of foreign branches;
  - imposing administrative penalties;
  - revoking the bank’s license.

### Recovery and Resolution Planning: key findings (paragraphs 28–30, Box 2)
- There is no recovery and resolution planning (RRP) framework in the Maldives.
- The legal framework does not authorize the MMA to require banks to prepare recovery plans or require the MMA to prepare resolution plans and undertake resolvability assessments.
- Given the lack of crisis experience, the absence of effective RRP may cause authorities to rely on administrative take-overs and public recapitalization in systemic cases.
- Recommended sequencing and scope:
  - Authorize the MMA to require banks to prepare recovery plans consistent with requirements specified by the MMA, proportionate to the size and complexity of each bank.
  - Start recovery planning with a pilot program focusing on the largest bank, then extend proportionally to other banks.
  - MMA should issue a regulation on recovery planning and provide necessary guidance to banks.
  - MMA should prepare resolution plans for systemically important banks and perform resolvability assessments.
  - Resolution plans should determine resolution strategies to protect financial stability while protecting critical functions, and MMA should be empowered to require banks to remove impediments to resolution (including changes to legal, operational and financial structure or business activities).

- Role and content of RRPs (Box 2):
  - Recovery plans: bank-prepared instruments to identify options to restore financial strength or viability under stress; include scenarios addressing capital shortfalls and liquidity pressures; boards have oversight; supervisors assess plans.
  - Resolution plans: prepared by resolution authorities (or banks, to be reviewed by authorities); identify potential resolution strategies and assess preconditions and operational requirements, including cross-border coordination; include organizational, ownership, critical functions, assets, liabilities, contractual obligations, sources of resolution funding, interdependencies.
  - Resolvability assessments: analyze (a) extent critical services/functions can be maintained in failure, (b) nature and extent of intragroup exposures, (c) capacity to deliver adequate and timely information, and (d) robustness of cross-border cooperation and information sharing arrangements.

### Summary of recommendations (section C)
- Include clearly defined and forward-looking early intervention triggers in the MBA.
- Issue relevant regulations or guidelines for operationalizing the early intervention regime comprising preventative and corrective actions, including guidance for parameters and governance of early intervention decisions.
- Develop a formalized EWS.
- Develop contingency plans for how the MMA would respond to emerging stress and weakness in a bank and noncompliance with regulatory requirements and undertake regular testing of MMA capacity to apply early intervention.
- Authorize the MMA to require banks to prepare recovery plans and require the MMA to prepare resolution plans and undertake resolvability assessments.

### Bank resolution and liquidation: key issues and procedural findings (paragraphs 31–40)
- The MBA includes provisions for orderly resolution, recapitalization by public funds, and voluntary or administrative liquidation.
- Resolution process summary:
  - a. Resolution triggering and appointment of the conservator: MBA specifies triggers; appointment of a conservator is a mandatory step for resolution initiation.
  - b. Intervention: upon appointment, shareholder powers are suspended; a moratorium may be imposed on all of the bank's liabilities, with the exception of the withdrawal of 50 percent of their total deposits by natural persons upon the approval of the MMA.
  - c. Resolution proposal: conservator prepares a report to the MMA, including the proposed action plan, within 30 days following the appointment; conservator may propose P&A or bridge bank options, recapitalization by public funds (to be submitted to MOF approval by the MMA), or liquidation.
  - d. Resolution approval: resolution is triggered and conservator appointed at sole discretion of the MMA; transactions (private recapitalization, sale, M&A) could be undertaken on circumstances and terms approved by the Court at MMA recommendation; recapitalization by public funds depends on MOF decision.
  - e. Liquidation: administrative liquidation conducted by the receiver under supervision of the MMA.

- Triggers for conservator appointment (paragraph 32):
  - Mandatory triggers: (i) the bank fails to pay its financial obligations; (ii) capital of the bank is reduced to less than 50 percent of the minimum requirements; (iii) a petition has been submitted for the bankruptcy of the bank; (iv) the board of directors is unable or unwilling to manage the affairs of the bank.
  - Discretionary triggers include: (i) the bank fails to carry out an order of the MMA; (ii) the bank’s capital is too low to support safe and sound banking operations; (iii) evidence or reasonable cause to believe that the bank or any of its administrators have engaged or are engaging in criminal activities; (iv) reasonable cause to believe that the board of directors is unable or unwilling to manage the affairs of the bank.

- Critique and recommended legislative amendments:
  - The MBA’s triggers for initiating resolution are backward-looking, jeopardizing timely resolution initiation; MBA should be amended to include forward-looking resolution objectives.
  - The governance trigger should be strengthened to link to capability of the bank to maintain adequate systems and controls and to effectively manage its risks.
  - Early intervention and bank resolution framework should include internal arrangements on escalation from exercise of MMA’s enforcement powers under section 55 through initiation of resolution under section 70.
  - The MBA requires conservator to be fit and proper, but eligibility criteria are not specified in the MBA or in regulation or guideline.
  - Conservator appointed for a term of 12 months renewable twice for 12 months periods; conservator must prepare a financial report within 30 days of appointment estimating asset realizable value in liquidation and proposing an action plan, but there is no guideline for valuation of assets during liquidation.
  - The requirement for delivery of conservator’s report should not be a prior requirement to implementing resolution powers; amend MBA to empower MMA to trigger resolution and apply resolution powers immediately in a quick failure based on available information.
  - Authorities should amend the MBA to set a timeframe to expedite court approval for P&A transactions to prevent delays that may increase costs and/or jeopardize financial stability.
  - Bridge bank tool: MBA allows two procedures; when organized and licensed by the MMA without public recapitalization, the bridge bank entails full ownership and control by the MMA—recommendation that the government, not the MMA, should own and capitalize the bridge bank to address conflicts of interest and protect MMA's balance sheet.
  - Chapter 15: recapitalization with public funds should be justified by preserving stability and decided by MOF on MMA recommendation but lacks sufficient safeguards for use of public funds; MMA must prepare a recapitalization plan in consultation with the conservator.
  - During rehabilitation, MMA may direct conservator to transfer assets/liabilities to a bridge bank; bridge bank should be established and capitalized by the government and licensed by the MMA; MBA does not specify a maximum period for bridge bank operations.
  - All resolution measures are equally applicable to state-owned banks.
  - Given deposit-based funding structure, P&A and bridge bank tools would likely be used in Maldives; a bail-in tool is not included in the resolution toolkit.
  - The moratorium regime may be applied to creditors for a maximum period of three months.

*Source: Excerpt from 1mdvea2024002 - 25. The legal framework lacks clearly defined qualitative and quantitative early intervention triggers*

### 41.      Another option is to use the P&A tool. Upon the request of the conservator made in

### 1mdvea2024002 - 41.      Another option is to use the P&A tool. Upon the request of the conservator made in

### Resolution tools: design, P&A, bridge bank, recapitalization
- Upon the request of the conservator made in accordance with the rehabilitation plan, and with the approval of the MOF, the MMA may authorize the conservator to transfer the shares, assets and liabilities of the bank to a healthy acquiring institution (P&A). This transaction may include financing by the government in the form of deposits, loans, grants, the provision of guarantees or infusion of capital. There are no safeguards for the financing by the government (please see Resolution Funding).
- Another option for the conservator (again with authorization by the MMA based on the approval of the MOF) is to order an increase in the authorized capital of the bank on the terms and conditions determined by the MMA.
- The MBA includes different mechanisms for the same resolution tools, producing unclear differentiations:
  - Recapitalization by new investors, or a sale, merger or amalgamation with another bank require court approval, while these tools can be utilized without court approval when public funds are used.
  - Implementation of bridge bank tool is subject to two distinct procedures.
- Recommendation: Amend the MBA to provide a resolution framework incorporating a unified mechanism under which different resolution tools can be implemented sequentially or in combination, and where feasible under the legal framework, without court involvement, subject to relevant safeguards to protect interests of shareholders and creditors.

### Operational preparedness and governance of MMA in resolution
- Given lack of resolution experience, the MMA should enhance operational preparedness by developing a resolution manual setting out comprehensive guidance on:
  - (a) the assessment of a bank’s viability;
  - (b) the selection of a resolution option for a bank, considering its systemic importance and whether it is domestic or foreign owned;
  - (c) procedures for facilitating entry into resolution;
  - (d) step-by-step implementation of resolution options;
  - (e) coordination between home and host resolution authorities for each stage of resolution;
  - (f) domestic coordination for the resolution of a bank (including, especially, between the MMA and the MOF);
  - (g) communications with stakeholders at each stage of a resolution; and
  - (h) the exit from resolution, including exit by the government to the extent it has provided public support (e.g., equity or debt funding or guarantees) to a bank in resolution.
- The resolution guideline or manual should specify operationalization of the P&A under conservatorship, receivership or under the rehabilitation process during recapitalization by public funds.

### Bridge bank operational and legal considerations
- When issuing the license for the bridge bank, the MMA should decide whether the bridge bank should meet all prudential requirements including the capital adequacy related ones.
- Legislation should clarify that the bridge bank should be required to meet most prudential requirements, in particular the capital requirement, if it cannot be sold within a short period.
- Purpose of the bridge bank should be clarified: to take over and continue operating certain critical functions and viable operations of a failed bank and not to carry over any legacy issues.
- MMA should be legally empowered to provide effective control over the bridge bank through powers including:
  - (i) the appointment and removal of the management;
  - (ii) the power to give instructions and recommendations to the management; and
  - (iii) approval of certain operations.
- Recommendation: Amend the MBA to ensure that the bridge bank is not owned and controlled by the MMA.

### Valuation, liquidation, receivership and timelines
- Separate guidelines for the valuation process should be issued.
  - Before transferring assets and liabilities to a third party or a bridge bank, the MMA should obtain a valuation of the bank’s balance sheet.
  - The valuation should be carried out by independent experts—with the option to use a valuation by the MMA if resolution timelines are too short—and used to guide the resolution decision, optimize the resolution structure, and reduce legal uncertainty.
- The bank liquidation/receivership process is court-based, although MMA has an important role:
  - The court accepts the request for bankruptcy of the bank, appoints and dismisses a receiver and authorizes specific actions requested by the receiver in accordance with the Banking Act.
  - The MBA contemplates forced liquidation after the bank’s license has been revoked by the MMA. Liquidation will be undertaken by a receiver under the supervision of the MMA.
  - Within 90 days from the appointment, the receiver should submit the MMA a liquidation plan for the bank, including a proforma balance sheet, quarterly income statements and a report on the sale of the bank or a part of its assets.
  - There is no guidance or regulation on valuation in place.
- MMA is authorized to open bankruptcy proceedings on one or more of the following grounds:
  - (i) the bank is not paying its financial obligations, including its deposit liabilities as they fall due, and no liquidity support acceptable to the MMA is available;
  - (ii) the core capital is less than 2 percent and no recapitalization plan acceptable to the MMA is available; and
  - (iii) the bank is no longer viable and the MMA determines that there is no realistic means to return the bank to a viable condition within a reasonable time.
- If the petition for opening bankruptcy proceedings is rejected by the Court:
  - the MMA should revoke the bank’s license and start the liquidation process.
- The MMA may authorize the receiver to transfer the shares or assets and liabilities of the bank to a third party (P&A) without consent of the bank or its governing bodies; this would require ex-ante court approval. If the Court does not disapprove within 15 days, the receiver may implement the proposal without further delay.
- The Court is authorized to award monetary compensation to affected parties and cannot modify, stay, suspend or reverse actions taken by the conservator, receiver or the MMA in good faith. Compensation should be provided, if justified, under the “no creditor worse off than in liquidation” (NCWOL) principle, which is missing in the legislation.

### Creditor hierarchy, depositor preference, and deviations
- Creditor hierarchy in the MBA:
  - Deposits up to Maldivian Rufiyaa (MVR) 100,000 receive preferential treatment.
  - Any other depositor claims and other unsecured creditors rank pari passu.
- Legislative recommendations:
  - Provide preference to insured deposits and uninsured deposits relative to unsecured creditors (tiered or general depositor preference).
  - Authorize the MMA to deviate from the pari passu treatment of creditors of the same class, under exceptional circumstances, to contain systemic impact or maximize value for all creditors. Reasons for deviation should be disclosed.
  - Legal framework should provide a right to monetary compensation if creditors receive less as a result of resolution than they would have received in liquidation (‘no creditor worse off’ safeguard).

### Summary of recommendations (resolution & creditor framework)
- Amend the MMA to:
  - enhance resolution triggers by including forward looking triggers and enhancing governance triggers by including links to the capability of the bank to maintain adequate systems and controls and to effectively manage its risks; and
  - provide a resolution framework incorporating a unified mechanism under which different resolution tools can be implemented sequentially or in combination, and if feasible under the legal framework, without court involvement, subject to relevant safeguards to protect interests of shareholders and creditors, and if feasible under the legal framework, without court involvement, subject to relevant safeguards to protect interests of shareholders and creditors.
- Include internal arrangements on the escalation process in the early intervention and bank resolution framework, from the exercise of the MMA’s power to take enforcement actions under section 55 through the initiation of resolution under section 70.
- Amend the MBA to empower the MMA to trigger resolution and for resolution powers to be applied immediately for a bank deemed non-viable or likely non-viable.
- Include necessary provisions in the MBA to expedite the Court approval for the P&A tool in section 72 of the MBA.
- Enhance operational preparedness of the MMA for bank resolution.
- Prepare guidelines or manuals for the operationalization of the resolution tools.
- Prepare valuation guidelines.
- Include the NCWOL principle in the legislation.
- Provide teared or general depositor preference in the MBA.
- Empower the MMA to deviate from the pari passu treatment of creditors of the same class.

### Emergency Liquidity Assistance (ELA) — key issues and recommendations
- No ELA framework in place to provide liquidity support in local currency or foreign currency.
- MMA Act authorizes the MMA to grant loans, advances and re-discounts to banks and other financial institutions in Maldives for a maximum period of 90 days, based on terms and conditions prescribed by the MMA Board. Terms may be extended by additional periods of 90 days for a maximum of three times. This provision is not in line with international best practices and needs redrafting.
- No regulation or guideline provides safeguards regarding solvency of banks or prospect of restoration to a sound liquidity position and recovery of funds provided by the MMA.
- MMA should be legally empowered to provide ELA within a well-designed framework via amendment to the MMA Act:
  - ELA should be discretionary to banks with temporary liquidity shortages but assessed to be solvent and viable.
  - MMA Act should provide legal basis for operational independence of the MMA in ELA decisions.
  - Given large share of government in banking sector and government representatives on the MMA Board, the MMA should have an internal management committee responsible for assessment and approval of ELA.
  - ELA should be provided against adequate collateral and at a sufficiently high rate. A stress testing exercise could be used for viability assessment purposes.
  - MMA should adopt an action plan to identify time-bound actions and legal amendments to implement the ELA framework.
- MMA should develop legal and procedural documentation for ELA applications, including:
  - indicative terms and conditions for ELA, collateral eligibility, haircuts on collateral values, interest rate policy (at a premium over a benchmark rate), ELA master agreement, funding templates, MMA’s contingency planning, communications and exit strategies;
  - minimum requirements for a bank making an ELA application, including forward-looking solvency assessment by the supervisor and cash flow and funding plan for the duration of ELA.
- In exceptional circumstances where ELA is imperative but concerns exist about insolvency or inadequate collateral, the MMA should be provided a government indemnity to protect its balance sheet.
- FX considerations and constraints:
  - High dollarization and FX shortages pose risks to MMA’s ability to mitigate FX ELA demand; FX ELA capacity will be limited to FX reserves freely available at the time.
  - FX reserves typically sufficient only for idiosyncratic cases rather than systemic events; MMA may need to bolster FX reserves, request swap arrangements with another central bank, or tighten prudential requirements (e.g., reduce FX net open positions or increase reserve requirements in FX).
  - Interest rate on ELA in FX should deter overuse but not threaten bank solvency.
  - ELA in FX to subsidiaries or branches of foreign-owned entities should be part of comprehensive measures and only under specific circumstances. Principles:
    - Prefer parent support/home authority support first.
    - Provide FX ELA only for systemically important foreign-owned banks if it stabilizes a viable ongoing entity and after enhanced supervisory monitoring and pre-approval of any flows from the local entity to its parent.
    - Ensure ELA in FX does not substitute for parent liquidity support and that alternative funding sources are exhausted.
    - Develop contingency plans to take control and ring-fence the local entity if necessary.
- MMA should be able to provide liquidity support in resolution, subject to adequate safeguards:
  - Components for ELA in resolution: forward-looking viability assessment, government indemnity (in close collaboration with MOF) if significant uncertainty exists, and feasible exit arrangements.

### ELA recommendations (summary)
- Amend the MMA Act to legally empower the MMA to provide ELA within a well-designed framework aligned with international best practices.
- Develop the legal and procedural documentation regarding provision of ELA for solvent and viable banks with temporary liquidity shortages.
- Empower the MMA to provide liquidity support in resolution, subject to adequate safeguards.

### Deposit insurance and payout
- The deposit insurance fund (DIF) was introduced in 2015 and is managed by the MMA. The deposit insurance regulation (DIR) was issued in 2015 and has not been changed since.
- DIF guarantees current, time and savings deposits up to MVR 30.000 or its equivalent in foreign currency per depositor in each member bank. Deposit insurance coverage is not differentiated across currencies and shall be paid out in MVR equivalent.
- DIR specifies certain exemptions to deposit insurance.
- Membership is mandatory for deposit-taking banks, including branches and subsidiaries of foreign banks.
- MVR 30.000 covers about 90 percent of total insurable deposit accounts.

*Source: 1mdvea2024002*

### 56.      The DIF is managed by the BOFD in the MMA which is responsible for the licensing,

### 1mdvea2024002 - 56.      The DIF is managed by the BOFD in the MMA which is responsible for the licensing,

### Governance and management of the DIF
- The DIF is managed by the BOFD in the MMA which is responsible for the licensing, regulation and onsite and offsite supervision of banks and financial institutions.
- The BOFD is also responsible for bank resolution, albeit without a separate unit.
- The organizational structure raises concerns about the operational independence of the DIF.
- The DIF is segregated from other funds within the MMA and subject to external audit on a yearly basis, but there are no other governance rules specified for the Fund.
- Recommendation: The MMA should have a separate, dedicated unit responsible for the management of the DIF with:
  - a sufficient level of human resources, including independent management,
  - an operational budget to support operational independence and fulfillment of its mandate.
- The DIF should be subject to sound governance practices including appropriate accountability, internal controls, transparency and disclosure regimes (IADI CP3).

### Funding, premium structure, and target size
- Funding sources:
  - initial contributions, annual premiums and late payment fees from the member banks.
  - contributions, premiums and fees for foreign currency deposits are paid in MVRs.
- Member contributions and premiums:
  - initial contribution corresponding to 0.5 percent of total insurable deposits.
  - annual premiums correspond to 0.1 percent of total insurable deposits, raised to 0.125 percent for banks with a CAR below 15 percent.
- Current fund coverage:
  - The fund currently covers 2.5 percent of total insurable deposits as of end-2022.
- Given the DIF is new and reserves are low, recommendation: adopt a flat premium structure for insured deposits to help build a larger fund.
- Target fund size:
  - The DIF does not have a target fund size.
  - Recommendation: MMA should work on a target fund size sufficient to meet expected future obligations and cover operational and related costs determined on the basis of clear, consistent and transparent criteria and a reasonable timeframe (IADI CP 9).
  - Given absence of historical bank-failure data, recommendation: conduct top down and bottom-up stress tests to determine target fund size.
  - Considerations for stress tests: amount of insured deposits system-wide; uneven distribution of deposits (86 percent of total number of insurable deposit accounts is concentrated in two banks, one of which is the systemically important domestic bank); availability of a public backstop.

### Payout timelines, data access, and operational readiness
- Legal payout deadline:
  - MMA is required to pay out reimbursement to insured depositors within thirty days following revocation of a bank’s license or appointment of a receiver.
  - The existing 30-day deadline far exceeds international standards and best practice (which is 7 days).
- Data submission:
  - Member banks are required to submit deposit data to the MMA by the end of each January.
  - Recommendation: increase frequency of deposit-data collection and ultimately secure real time access to depositor information to facilitate rapid deposit payouts.
- Operational capacity recommendations:
  - Enhance MMA’s IT capacity to access online depositor accounts.
  - Prepare an operational handbook to facilitate insured deposit payouts.
  - Adopt a credible, time-bound plan to reduce reimbursement period to international best practice (IADI CP 15).
  - Conduct regular tests of technical preparedness, run by the DGS in cooperation with individual banks, ensuring availability of data and sufficiency of processes.

### Public awareness
- Current state:
  - MMA has not conducted any surveys to reveal level of public awareness of the DIS.
- Recommendation:
  - MMA should inform the general public, on an ongoing basis, about the benefits and limitations of the scheme through a long-term strategy with specific objectives and appropriate monitoring tools on banks’ communication practices and efficient use of media (IADI CP10).

### Resolution funding and government backstops
- Current mandate:
  - The DIF has a paybox mandate, without any potential contribution in case a bank is placed into resolution.
- Recommendation:
  - Expand to a paybox plus mandate enabling DIF to provide contributions to bank resolution subject to sufficient safeguards with emergency backup funding from the MOF.
  - DIF should be responsible for providing support for resolution only up to what it would pay out in liquidation (least-cost basis).
  - Legal system should allow for ex-post recovery funding from the banking system of temporary public financing used to facilitate orderly resolution.
- Emergency funding/backstop:
  - Currently no emergency funding arrangements for the deposit insurance system.
  - Recommendation: pre-arranged and assured sources of liquidity funding, preferably a credit line from the government (in law or regulation); a pre-agreed contingency line from the government (IADI CP 9) requiring agreement between the MOF and the MMA.
  - Note: The DIR counts borrowings and contributions from the MMA or the Government among Fund sources, however legislation should not allow for any borrowings and contributions from the MMA in case of a shortfall of funding from the DIF.
- Safeguards against public recapitalization:
  - Recapitalization by public funds should be exceptional and only where there is significant risk of destabilization and no other option.
  - Public funds should be used only after estimated losses allocated to shareholders and, to extent possible, unsecured creditors.
  - Public solvency support should be combined with deep restructuring and management reforms.
  - Pre-defined mechanisms for loss recovery such as ex-post levies from the banking sector should exist.
- Exit strategy:
  - The MOF should have a clear exit strategy to extricate government from funding support arrangements and shareholdings as soon as market conditions permit, aiming to maximize net present value of recoveries consistent with resolution objectives.

### Contingency planning and crisis management
- Key issues:
  - Crisis preparedness is currently low.
  - Banks are not required to prepare recovery plans.
  - MMA has not operationalized its functions as a resolution authority.
  - MMA does not prepare resolution plans and resolvability assessments for banks.
  - MMA has not issued regulations for operationalizing the crisis management framework or engaged in crisis simulation exercises.
  - MMA’s experience in implementing enforcement actions is low; last action taken more than a decade ago.
- FSN participants:
  - Participants in the financial safety net do not have contingency plans to deal with weak banks.
  - None of the FSN participants have a contingency plan detailing how they will respond to contingencies, nor a business continuity plan detailing how operations will continue if affected by a disaster.
  - FSN participants, jointly or individually, have not conducted any crisis simulation exercise.
- Recommendations:
  - Enhance MMA’s role by developing an overarching crisis-management plan and conducting regular domestic crisis exercises.
  - Ensure FSN participants have regularly updated contingency plans.

### Summary of Recommendations
- Expand the DIF mandate in the DIR to a paybox plus mandate.
- Ensure the DIF has clear back-up emergency funding from the government where resources are insufficient.
- Establish a separate, dedicated unit responsible for management of the DIF, ensuring operational independence and sound governance arrangements.
- Determine a target fund size on the basis of clear, consistent and transparent criteria and a reasonable timeframe to reach the target fund size.
- Increase frequency of deposit-data collection, enhance MMA’s IT capacity to access online depositor accounts and adopt a plan to reduce the reimbursement period for insured deposits to seven working days.
- Adopt a long-term strategy to promote public awareness of the DIS.
- Ensure legislation (the MMA Act and the DIR) does not allow for any borrowings and contributions from the MMA in case of a shortfall of funding from the DIF.
- Strengthen safeguards against recapitalization by public funds to minimize moral hazard and risks to taxpayers.
*1mdvea2024002 - 56.      The DIF is managed by the BOFD in the MMA which is responsible for the licensing,*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1mdvea2024002.pdf_