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Amendment to Financial Institutions Act, RPPL 8-28 2011

PALAU

EIGHTH OLBIIL ERA KELULAU

Twelfth Special Session, February 2011
RPPL No. 8-28
(Passed as: Senate Bill No. 8-178, SD2, HD2, CD1)

AN ACT

To amend Sections 31, 33, and 53 of RPPL No. 6-3, as amended by RPPL No. 7-41; and for other related purposes.

THE PEOPLE OF THE REPUBLIC OF PALAU REPRESENTED IN THE OLBIIL ERA KELULAU DO ENACT AS FOLLOWS:

Section 1. Legislative Findings. The Olbiil Era Kelulau finds that the five million dollar ($5,000,000) minimum capitalization requirement has become too onerous for foreign banks that were already operating in Palau at the time that RPPL 6-3 (the Financial Institutions Act) was enacted. Accordingly, the Olbiil Era Kelulau finds that it is appropriate to amend the Financial Institutions Act to ease the minimum capitalization requirement for these banks by reducing the minimum capital requirement from five million dollars ($5,000,000) to two million dollars ($2,000,000).

The Olbiil Era Kelulau finds that the easing of the minimum capitalization required should not result in a blanket exemption for foreign banks from minimum capitalization requirements because such a move would effectively remove these foreign banks from Palau oversight and provide no protection for Palau depositors. Indeed, to exempt the foreign banks from all minimum capitalization requirements would provide no oversight over these banks to ensure that they are financially healthy banks and less likely to fail. The Olbiil Era Kelulau believes it is important for the Republic to ensure some protection for Palauan depositors.

Therefore, instead of exempting foreign banks from the minimum capitalization requirement, the Olbiil Era Kelulau finds it more appropriate to reduce the five million dollar minimum capitalization requirement to two million dollars.

In addition, the Olbiil Era Kelulau finds it appropriate to, while reducing the level of protection for depositors in one fashion by reducing the minimum capital requirements, increase the protection for depositors in another fashion by increasing the capital to total asset ratio from five percent (5%) to eight percent (8%), which comports with the current accepted international standard set at the Basel Accords and will allow Palau to be a trendsetter throughout independent Micronesia islands in protecting bank depositors and ensuring bank stability.

Finally, the Olbiil Era Kelulau finds that the current minimum capital escrow requirement is onerous on foreign banks, discourages investment in Palau, and encourages banks to maintain a portion of their capital off-island, in escrow. The elimination of the escrow requirement will free up capital for banks to lend in Palau, encourage banking investment in Palau, and discourage banks from maintaining capital off-island. However, the Olbiil Era Kelulau is cognizant that the escrow requirement was originally introduced as a way to ensure that the Financial Institutions Commission would have access to capital to protect Palauan depositors. To counteract the elimination of this part of the intent behind the capital escrow requirement, all minimum capital required by both the minimum capital of $2,000,000, and the capital to risk-weighted assets ration is amended to be required to be maintained in Palau. The Olbiil Era Kelulau finds that by requiring banks to maintain their capital in Palau provides a measure of insurance to Palauan depositors as it will allow the Financial Institutions Commission greater oversight over that capital.

Section 2. Amendment. Section 33 of RPPL 6-3, as amended by RPPL 7-41, is hereby amended to read as follows:

ASection 33. License Decision

(a) . . .

. . .

(f) Branches of foreign banks shall maintain minimum capital in the amount of two million dollars ($2,000,000.) in the Republic of Palau or provide the Commission with written proof that the foreign bank=s deposits are insured in accordance with a government sponsored depository insurance program.@

Section 3. Amendment. Section 31 of RPPL 6-3, as amended by RPPL 7-41, is hereby amended as follows:

ASection 31. Minimum Capital

(a) . . .

(b) The minimum capital ...

(1) . . .

(2) For foreign bank subsidiaries in the Republic of Palau, the amount may not be less than two million dollars ($2,000,000); . . .

(5) . . .@

Section 4. Amendment. Section 1074 of Title 26 of the Palau National Code, enacted by Section 53 of RPPL 6-3, and as amended by Section 54 of RPPL 7-41, is hereby amended to read as follows:

ASection 1074. Prudential requirements.

(a) Banks shall observe the following limits and those prescribed by regulation of the Commission:

(1) the ratios and exposures to be maintained by a bank concerning its assets, risk-weighted assets, and off-balance-sheet items and various categories of capital and reserves; provided, that the capital to risk-weighted assets ratio of capital that shall be maintained in Palau shall not be less than eight percent (8%);

. . .@

Section 5. Effective Date. This Act shall take effect upon its approval by the President of the Republic of Palau, or upon its becoming law without such approval.

PASSED: August 25, 2011

Approved this 26th day of August , 2011.

/s/
Johnson Toribiong
President
Republic of Palau