Contents

i

The BankingRegulation

Review

Law Business Research

Third Edition

Editor

Jan Putnis

ii

The Banking Regulation Review

Reproduced with permission from Law Business Research Ltd.

This article was first published in The Banking Regulation Review,3rd edition (published in May 2012 – editor Jan Putnis).

For further information please email Adam.Sargent@lbresearch.com

THE BAnking REguLATion

REViEW

Third Edition

EditorJan Putnis

Law Business Research Ltd

PuBLiSHER gideon Roberton

BuSinESS dEVELoPMEnT MAnAgER Adam Sargent

MARkETing MAnAgERS nick Barette, katherine Jablonowska

MARkETing ASSiSTAnT Robin Andrews

EdiToRiAL ASSiSTAnT Lydia gerges

PRoducTion MAnAgER Adam Myers

PRoducTion EdiToR caroline Rawson

SuBEdiToR charlotte Stretch

EdiToR-in-cHiEF callum campbell

MAnAging diREcToR Richard davey

Published in the united kingdom by Law Business Research Ltd, London

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v

AcknoWLEdgEMEnTS

The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:

ABduLAziz ALgASiM LAW FiRM in association with ALLEn & oVERy LLP

AFRidi & AngELL

ALi BudiARdJo, nugRoHo, REkSodiPuTRo

AndERSon MōRi & ToMoTSunE

ARTHuR cox

BonELLi EREdE PAPPALARdo

BREdin PRAT

BuggE, AREnTz-HAnSEn & RASMuSSEn

Bun & ASSociATES

cHAncERy cHAMBERS

cLAyTon uTz

conSoRTiuM cEnTRo AMéRicA ABogAdoS

conSoRTiuM – TABoAdA & ASociAdoS

dAVid gRiScTi & ASSociATES

dAViES WARd PHiLLiPS & VinEBERg LLP

vi

Acknowledgements

dAViS PoLk & WARdWELL LLP

dE BRAuW BLAckSTonE WESTBRoEk

dLA PiPER WEiSS-TESSBAcH REcHTSAnWäLTE gMBH

ELVingER, HoSS & PRuSSEn

F.o. AkinRELE & co

FoRMoSA TRAnSnATionAL ATToRnEyS AT LAW

gERnAndT & dAniELSSon

gidE LoyRETTE nouEL AARPi

goRRiSSEn FEdERSPiEL

HEngELER MuELLER

kAdiR AndRi & PARTnERS

kiM & cHAng

LEnz & STAEHELin

LS HoRizon LiMiTEd

MARVAL, o’FARRELL & MAiRAL

MATToS FiLHo AdVogAdoS

MAyoRA & MAyoRA, Sc

MoRATiS PASSAS LAW FiRM

MouRAnT ozAnnES

vii

MuLLA & MuLLA & cRAigiE BLunT & cARoE

Muñoz TAMAyo & ASociAdoS ABogAdoS SA

nAgy éS TRócSányi ÜgyVédi iRodA

nAuTAduTiLH

PAkSoy

RuSSELL McVEAgH

RužičkA cSEkES SRo

ScHoEnHERR şi ASociAţii ScA

SkudRA & udRiS

SLAugHTER And MAy

SyciP SALAzAR HERnAndEz & gATMAiTAn

T STudnicki, k PłESzkA, z ĆWiąkALSki, J góRSki SPk

uRíA MEnéndEz

ViEiRA dE ALMEidA & ASSociAdoS

WASELiuS & WiST

WEBBER WEnTzEL

WongPARTnERSHiP LLP

zHong Lun LAW FiRM

Acknowledgements

Contents

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Editor’s Preface ������������������������������������������������������������������������������������������xviiJan Putnis

Chapter 1 International Initiatives �������������������������������������������������������� 1Jan Putnis and Tolek Petch

Chapter 2 Argentina �����������������������������������������������������������������������������29Santiago Carregal, Martín G Vázquez Acuña and Josefina Tobias

Chapter 3 Australia ������������������������������������������������������������������������������41Louise McCoach and David Landy

Chapter 4 Austria ���������������������������������������������������������������������������������76Wolfgang Freund

Chapter 5 Barbados ������������������������������������������������������������������������������86Trevor A Carmichael QC

Chapter 6 Belgium �������������������������������������������������������������������������������95Anne Fontaine

Chapter 7 Brazil ���������������������������������������������������������������������������������107José Eduardo Carneiro Queiroz

Chapter 8 Cambodia ��������������������������������������������������������������������������113Bun Youdy

conTEnTS

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Chapter 9 Canada ������������������������������������������������������������������������������127Scott Hyman, Carol Pennycook, Derek Vesey and Nicholas Williams

Chapter 10 Cayman Islands �����������������������������������������������������������������143Richard de Basto

Chapter 11 China ���������������������������������������������������������������������������������154Wantao Yang, Emily Xiaoqian Wang and Carol Dongping Cao

Chapter 12 Colombia ���������������������������������������������������������������������������175Diego Muñoz-Tamayo

Chapter 13 Denmark ���������������������������������������������������������������������������191Tomas Haagen Jensen and Tobias Linde

Chapter 14 El Salvador ������������������������������������������������������������������������203Aquiles A Delgado and Oscar Samour

Chapter 15 European Union ����������������������������������������������������������������214Jan Putnis and Benjamin Hammond

Chapter 16 Finland ������������������������������������������������������������������������������236Tarja Wist and Jussi Salo

Chapter 17 France ��������������������������������������������������������������������������������247Olivier Saba, Samuel Pariente, Jennifer Downing, Jessica Chartier and Hubert Yu Zhang

Chapter 18 Germany ����������������������������������������������������������������������������278Thomas Paul and Sven H Schneider

Chapter 19 Greece ��������������������������������������������������������������������������������292Dimitris Passas and Vassilis Saliaris

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Chapter 20 Guatemala �������������������������������������������������������������������������312María Fernanda Morales Pellecer

Chapter 21 Guernsey ����������������������������������������������������������������������������325John Lewis and Jeremy Berchem

Chapter 22 Hong Kong ������������������������������������������������������������������������337Laurence Rudge and Peter Lake

Chapter 23 Hungary ����������������������������������������������������������������������������353Zoltán Varga and Tamás Pásztor

Chapter 24 India ����������������������������������������������������������������������������������366Shardul Thacker

Chapter 25 Indonesia ���������������������������������������������������������������������������379Ferry P Madian and Yanny Meuthia S

Chapter 26 Ireland �������������������������������������������������������������������������������398Carl O’Sullivan, William Johnston, Robert Cain and Eoin O’Connor

Chapter 27 Italy �����������������������������������������������������������������������������������410Giuseppe Rumi and Andrea Savigliano

Chapter 28 Japan ���������������������������������������������������������������������������������421Hirohito Akagami, Toshinori Yagi and Wataru Ishii

Chapter 29 Jersey ���������������������������������������������������������������������������������432Simon Gould and Sarah Huelin

Chapter 30 Korea ���������������������������������������������������������������������������������444Sang Hwan Lee, Chan Moon Park and Hoin Lee

Contents

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Chapter 31 Latvia ���������������������������������������������������������������������������������457Armands Skudra

Chapter 32 Luxembourg ����������������������������������������������������������������������468Franz Fayot

Chapter 33 Malaysia ����������������������������������������������������������������������������485Andri Aidham bin Dato’ Ahmad Badri, Julian Mahmud Hashim and Tan Kong Yam

Chapter 34 Malta ���������������������������������������������������������������������������������495David Griscti and Clint Bennetti

Chapter 35 Netherlands �����������������������������������������������������������������������506Joost Schutte, Annick Houben and Mariken van Loopik

Chapter 36 New Zealand ����������������������������������������������������������������������519Debbie Booth and Guy Lethbridge

Chapter 37 Nicaragua ��������������������������������������������������������������������������533Rodrigo Taboada R

Chapter 38 Nigeria �������������������������������������������������������������������������������545Adamu M Usman and Jumoke Onigbogi

Chapter 39 Norway ������������������������������������������������������������������������������560Terje Sommer, Markus Nilssen and Mats Nygaard Johnsen

Chapter 40 Philippines ������������������������������������������������������������������������571Rafael A Morales

Chapter 41 Poland �������������������������������������������������������������������������������586Tomasz Gizbert-Studnicki, Tomasz Spyra and Michał Bobrzyński

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Chapter 42 Portugal �����������������������������������������������������������������������������600Pedro Cassiano Santos

Chapter 43 Romania ����������������������������������������������������������������������������615Adela-Ioana Florescu and Diana-Maria Moroianu

Chapter 44 Saudi Arabia ����������������������������������������������������������������������626Johannes Bruski and Julian Johansen

Chapter 45 Singapore ���������������������������������������������������������������������������635Elaine Chan

Chapter 46 Slovakia �����������������������������������������������������������������������������649Sylvia Szabó

Chapter 47 South Africa �����������������������������������������������������������������������663Johan de Lange and Matthew Gibson

Chapter 48 Spain ���������������������������������������������������������������������������������677Juan Carlos Machuca

Chapter 49 Sweden ������������������������������������������������������������������������������699Niclas Rockborn and Nils Unckel

Chapter 50 Switzerland ������������������������������������������������������������������������715Shelby R du Pasquier, Patrick Hünerwadel, Marcel Tranchet and Valérie Menoud

Chapter 51 Taiwan �������������������������������������������������������������������������������736Chun-yih Cheng

Chapter 52 Thailand ����������������������������������������������������������������������������749Montien Bunjarnondha and Rahat Alikhan

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Chapter 53 Turkey �������������������������������������������������������������������������������763Serdar Paksoy and Nazlı Bezirci

Chapter 54 United Arab Emirates ��������������������������������������������������������775Amjad Ali Khan and Stuart Walker

Chapter 55 United Kingdom ����������������������������������������������������������������783Jan Putnis, Michael Sholem and Nick Bonsall

Chapter 56 United States����������������������������������������������������������������������821Luigi L De Ghenghi and Reena Agrawal Sahni

Chapter 57 Vietnam �����������������������������������������������������������������������������887Samantha Campbell, Pham Bach Duong and Nguyen Thi Tinh Tam

Appendix 1 About the Authors �������������������������������������������������������������907

Appendix 2 Contributing Law Firms’ Contact Details ��������������������������942

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Editor’s PrEfacE

Jan Putnis

When the first edition of this book was published in mid-2010, banking regulation seemed to be undergoing a transformation driven by a reasonably coherent international agenda. There were questions about how long it would be before nationalist and protectionist tendencies fractured the broad consensus that seemed to have built up on such issues as the need for more and better quality capital resources, liquidity requirements and the strengthening and reform of vital market infrastructure. However, there appeared to be a reasonable degree of certainty about the direction and speed of reform, at least among the G20 countries.

Events, as they always do, have since conspired to make the position considerably more complicated, in two separate ways. first, achieving many of the regulatory reforms agreed in principle at the meeting of G20 leaders in London in 2009 has proved to be a far more complex and difficult task than even those expert in the field of banking regulation had expected. secondly, as concerns about solvency have spread to governments, sovereign debt has assumed centre stage. The eurozone crisis, as it has come to be known, rumbles on with no obvious short-term solution that would avoid significant economic and social upheaval in parts of the European Union. There is also the potential existential threat that sovereign defaults of eurozone countries would pose to banks that are either established in those countries or have significant exposure to banks or assets in those countries. Events in the eurozone have given the frenetic activity in the area of financial regulatory reform in the European Union a slightly surreal quality against the backdrop of the consequences of potential economic and financial upheaval in one or more eurozone countries. Meanwhile, in the United states, the rule-making process under the dodd-frank act has continued, behind its original schedule, and banks continue to digest the consequences of the Volcker rule.

on both sides of the atlantic the volume and complexity of new and proposed rules has continued to be a cause of criticism and frustration. a banking sector that was roundly blamed for creating the complexity in products, markets and business structures that exacerbated aspects of the financial crisis is facing the irony of a wall of

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new regulation of such complexity that the complexity itself might end up being the main reason that the new regulation fails to achieve its objectives.

separately, in many asian financial centres reforms are underway but are, in general, far behind those proposed and enacted in the United states and the European Union. Many governments, regulators and bankers in asia saw (and continue to see) the western financial crisis of 2007–2009 as exactly that, a western financial crisis, and view the gradual liberalisation of the chinese banking system and greater convertibility of the renminbi as the greater challenge and opportunity.

if we set ourselves the task of summarising the positive things that have emerged for banking regulation from that western financial crisis, what would we say now, three years on? There is little doubt that there is now much greater awareness among policymakers and regulators in all major jurisdictions of two important factors that will probably dominate any future international banking crisis:a Banks, however well capitalised, risk collapse in sufficiently extreme circumstances

and the crisis demonstrated that those circumstances should never be regarded as too extreme to contemplate. assumptions about the credit quality and liquidity of assets, and about withdrawal of sources of funding (including deposits), may cease to apply in stressed market conditions. That means that the maturity transformation role of banks (‘borrowing short term and lending long term’, as it is often simplistically described) makes them subject to existential threats that are, by their very nature, difficult to anticipate and address accurately.

b contagion can spread through financial systems in unexpected ways, or at least in ways that are unexpected by governments and regulators. studying the potential routes of contagion and considering whether there are ways of closing down those routes without adverse unintended consequences for economies that are recovering from recession is therefore an important aspect of regulatory endeavour.

it might seem incredible now that these points were not appreciated sufficiently by governments and regulators before the financial crisis first erupted in the United states in 2007 and then spread to Europe in the following year. But that was undoubtedly the case.

The past year has seen international banking groups grappling with the practical realities of regulatory reform. doubts about the ability of some banks to raise the additional capital (particularly tier i capital) that they will require in order to meet the gradually increasing capital requirements set out in the Basel iii agreement are feeding concerns about the long-term viability of some banks’ business models and, more generally, about previously long-held expectations as to returns on equity of banking groups. Banks have begun to respond to actual and prospective higher capital requirements, in some cases by raising equity with varying degrees of success (which has been difficult in the market conditions prevailing in most of the world in the past year) and in other cases by selling or preparing to sell assets and business units, or simply by closing down business lines.

Politics have intervened in banking in the past year in ways that have made the debate about the direction of regulatory reform in the banking sector more complicated. in some countries, concern about the remuneration of senior management of banking groups has reached fever pitch in the media while, at the same time, a less emotive and

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generally more thoughtful debate has continued on the need for more financing for businesses, particularly small and medium-sized enterprises.

The apparent shortage of finance for businesses in many economies, coupled with expected further pressure on the ability of banks to provide that finance as their capital requirements continue to increase, has led to concerns about the development of other sources of finance. is credit risk, and the contagion to which it can give rise if borrowers default, shifting in dangerous ways out of the banking sector into the so-called ‘shadow banking sector’? The European commission looks set to start investigating this topic in earnest in 2012. The consequences of regulatory intervention in this area are currently very difficult to predict, not least because any attempt to regulate non-bank sources of finance more heavily is bound to attract criticism from those who claim that it will only reduce further the sources of finance available to the ‘real’ economy.

another area of regulatory reform that banking groups continue to grapple with in 2012 is transparency with regulators. There are various examples of the ways in which this is starting to affect the sector. The most immediate and relevant example concerns the work that many of the largest banking groups in the United states and Europe are currently involved in to draw up ‘recovery plans’ and to draw up, or to assist their regulators in drawing up, ‘resolution plans’, those plans being collectively (and somewhat misleadingly) referred to as ‘living wills’. The phrase of the moment is ‘barriers to resolution’, describing factors that would prevent or inhibit the orderly resolution of a bank at or close to its collapse. Plenty of barriers to resolution are being identified as recovery and resolution plans are prepared. The second half of 2012 and 2013 will likely be an interesting period in which regulators ponder these barriers and deepen their discussions with banking groups as to what might be done about them.

fears of enforced structural reorganisations and changes to business models have led some banking groups to spend considerable amounts of time and resources developing their own solutions to perceived barriers to resolution. More immediately, the process of preparing recovery and resolution plans has proved difficult, the main challenges including how to reconcile differences between the statutory resolution and insolvency procedures for banks in different jurisdictions and to understand the cross-border elements of those procedures. fundamental questions about the availability of cross-border services to banking operations in a crisis, the treatment of banks’ global hedging arrangements, and ultimately the resolvability of banking groups, are at stake. it seems likely that we are many years away from having recovery and resolution plans that carry the benefit of clarity around how regulators would operate them on a cross-border basis in a crisis. it also remains to be seen whether cross-border cooperation between regulators would work in such circumstances given the significant differences between national resolution and insolvency procedures and the desire in many jurisdictions to protect local depositors. another major area of uncertainty concerns the proposals by some regulators that debt issued by banking groups be ‘bailed in’ (i.e., written off or converted into equity) in a crisis and how that could happen without spreading contagion through the banking system and the wider economy via the holders of that debt.

Meanwhile, scrutiny of the structure of banks themselves has continued in some countries. The likely implementation in the United Kingdom of proposals to require the ‘ring-fencing’ of retail banking activities within banking groups may be the start of a trend that spreads to other countries. despite the prevalence of ‘universal’ banks,

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combining retail and investment banking activities in single legal entities in many of the other Member states of the European Union, the European commissioner for the internal Market has commissioned a study into the structure of banks with a remit to consider ring-fencing of retail banking.

Liquidity has remained a central concern for many banking groups in the past year. short-term liquidity problems at banks (arising, in particular, from concerns about the strength of some banks as counterparties) have resulted in an increase in the range of funding for which banks generally are now expected to provide collateral. This trend is expected to be exacerbated by longer-term developments such as the Basel iii requirements on liquidity and the proposed introduction of depositor preference in some countries for the first time. Liquidity pressures have led to many banks engaging in new types of transactions, such as so-called ‘liquidity swaps’, to increase the amount of high-quality collateral that they have available for their funding operations. This ongoing search for liquidity, and for the collateral required to obtain liquidity, has made some financial regulators concerned about the potential spread of contagion within the banking sector and from the banking sector to other sectors. for example, some liquidity swap transactions have involved banks receiving liquid assets from insurers in return for assets that are less liquid.

This third edition of The Banking Regulation Review updates the position on important aspects of banking regulation in the countries covered, in most cases to february 2012. While the book is aimed principally at staff in the legal and compliance departments of banks, it is to be hoped that senior management also find it helpful. The book focuses most closely on the deposit-taking activities of banks. The constraints of space and time mean that it will never be possible to do full justice to all of the subjects covered in each chapter, but readers are of course welcome to contact me if they have any suggestions for future editions.

Preparing successive editions of this book continues to be an onerous task for the busy lawyers who contribute the chapters and who are otherwise much in demand. My thanks go to them for their dedication to the task. significant changes to a book such as this also mean much more work than would otherwise be the case for the publisher. i am therefore very grateful to the publisher’s team for their understanding, hard work and patience with a group of authors who often have many other commitments.

finally, i would like to thank the partners and staff of the financial regulation group at slaughter and May for appreciating this book’s value and for encouraging our involvement in it for a third successive year.

Jan Putnisslaughter and MayLondonapril 2012

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Chapter 8

Cambodia

Bun Youdy1

I INTRODUCTION

The first privately owned commercial bank was established 20 years ago, shortly before the country transformed itself from a mono-banking system to a two-tier banking system, along with the conversion from planning economy to market economy. The National bank of Cambodia (‘NbC’) launched an important reform between 1998 and 2001 which consisted of:a an abolishment of the existing requirement of a 15 per cent NbC stake in all

privately owned banks; b a classification of the banking and financial institutions into three categories,

namely commercial banks, specialised banks and microfinance institutions; andc an increase of the minimum capital of commercial banks from US$5 million to

US$12.5 million, which resulted in numerous banks being forced into liquidation.

Even though the Cambodian banking system is still generally considered to be in its development phase, foreign banks continue to express great interest in the sector, taking into account the country’s continuous economic growth and the entry of new investors in this emerging market located in one of the world’s fastest-growing regions. in addition, the existing legal framework offers notable incentives to which foreign investors might not be entitled to in neighbouring countries, including no restriction on foreign ownership, no local joint venture requirement, liberalisation of interest rates, free repatriation of benefits, no exchange control and minimum currency risk due to its highly dollarised economy.

1 bun Youdy is an attorney-at-law and a partner at bun & associates.

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as of February 2012, there are 34 commercial banks,2 seven specialised banks, four representative offices of foreign banks,3 and 30 microfinance institutions. The Rural development bank is the only state-owned specialised bank whose principle role is to service and refinance loans to licensed financial institutions, associations, development communities and small and medium enterprises that take part in rural development in Cambodia.

The Cambodian banking system is still composed of largely cash-based transactions, while aTms and e-banking are being developed gradually thanks to the recent increase of financial literacy and improvement of information technology infrastructure. Financial services offered by banking and financial institutions are often limited to conventional products, such as deposits and loans. Large loans are usually arranged through cross-border financing by the parent or affiliated company of foreign banks with participation from its locally incorporated subsidiary; however, it is rare to see syndicated loans jointly organised by different banks in the country.

II THE REGULATORY REGIME APPLICABLE TO BANKS

The banking activities in Cambodia are mainly governed by the Law on the organisation and Functioning of the National bank of Cambodia (‘the NbC Law’) promulgated in 1996,4 the Law on banking and Financial institutions (‘the banking Law’) promulgated in 1999, the Law on Foreign Exchange promulgated in 1997, and the Law on anti-money Laundering and Combating the Financing of Terrorism (‘the amL Law’) promulgated in 2007, as well as a number of implementing Sub-decrees, Regulations and Circulars issued by the NbC. Compared to other sectors, the legal framework governing the banking industry is the most comprehensive and the NbC regularly updates existing and introduces new regulations. However, cross-border loans provided by financial institutions not established in Cambodia remain an unregulated area.

The NbC performs the traditional role of a central bank and all banking activities are under its exclusive jurisdiction. its main functions are to conduct monetary policy, act as the sole issuer of the national currency and as the supervisory authority of the banking and financial system, including the authority to grant operating licences to banking and financial institutions, as well as to oversee the payments system. The NbC has recently upgraded its supervision structure and is making good progress towards fully complying with the 25 basel Core Principles. despite the fact that the country is still facing considerable challenges in securing qualified human resources, the NbC has continued to improve the capacity building to cope with the increasing workload and complexity of the sector.

2 one additional Vietnamese bank has undergone necessary procedures to set up a wholly owned commercial bank.

3 Two Japanese banks (the bank of Tokyo-mitsubishi UFJ and Sumitomo mitsui banking Corporation) were recently licensed to establish representative offices.

4 amended in 2006.

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Even though under existing regulations, the NbC has the power to exercise consolidated supervision, the current practice shows that sectoral supervision prevails instead. The Securities and Exchange Commission of Cambodia supervises the securities market while insurance is under the jurisdiction of the Financial industry department of the ministry of Economy and Finance (‘mEF’). For the time being at least, Cambodia has not adopted the universal banking system, whereby a banking institution which intends to conduct additional related financial services, such as securities or insurance business, has to operate under separate entities and is governed by different supervisory authorities.

The banking system in Cambodia consists of commercial banks, specialised banks, microfinance institutions and newly introduced financial leasing firms.5 Specialised banks operate in the same way as finance companies, since they are not allowed to collect deposits but are permitted to provide credit facilities. microfinance institutions have generally been regarded as banking for the poor; and according to the 2011 first-semester NbC report, among its 1,019,411 customers, 82 per cent are women in rural areas.6 microfinance institutions are generally not permitted to accept deposits unless they have obtained a separate licence from the NbC after fulfilling certain conditions including, inter alia, being in operation for at least three years.7

banks established in Cambodia must be either a locally incorporated entity or a branch of foreign bank.8 Foreign banks may also establish representative or liaison offices whose activities are solely limited to information purposes.9 in theory, the representative office has a lifespan of two years and may be renewed only once. additional renewals, however, can in practice be granted by the NbC.

Every banking institution shall be incorporated as a public limited company and comply with minimum capital requirements. Even though the banking Law sets different levels of requirements applicable to commercial banks and specialised banks, depending on the background of their influential shareholder(s),10 in practice, the NbC requires that all commercial and specialised banks have a minimum capital of at least US$37.5 million and US$7.5 million respectively, with the aim of enhancing public confidence. Similarly, the NbC also usually requires any newly established microfinance institutions to have a much higher minimum capital (approximately US$500,000) than the one set by the existing regulation (US$62,500).11

5 Regulation on Licensing of Financial Lease Firms dated 27 december 2011.6 NbC, 1st Semester Report of 2011, p. 19.7 article 2 of Regulation on Licensing of microfinance institutions Taking deposits institution

dated 13 december 2007.8 article 12 of banking Law.9 id., article 13.10 Shareholder directly or indirectly holds at least 20 per cent of capital or voting rights. See

article 26 of banking Law.11 article 4 of Regulation on Licensing of microfinance institutions dated 10 January 2000.

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III PRUDENTIAL REGULATION

i Relationship with the prudential regulator

The NbC has gradually changed its supervisory approach by shifting from a compliance-based supervision to a risk-based and consolidated one in order to be more focused on certain specific high-risk areas. its supervisory work is carried out through both off-site examinations and on-site visits.

banking institutions are required to comply with a series of disclosure obligations, namely periodical reports including daily, weekly, monthly, quarterly, and semi-annual reports, as well as reserve requirement reports and audited annual financial reports.12 in addition, the NbC also has the power to require covered entities to provide ad hoc reports whenever necessary. The NbC is developing its supervisory report template which aims at harmonising the content of the reports and improving the capture of information. banks will enjoy a speedy report process as the submission of these reports will be possible online in the near future instead of the traditional hard copy.

The transparency of banking and financial institutions is generally much more significant compared to companies operating in other financial sectors in Cambodia. Every bank is required to publish its annual audited financial report no later than 30 June of the following year and such report is available to the public.

ii Management of banks

The management of banking and financial institutions is organised pursuant to the Regulation on Corporate Governance of banking and Financial institutions dated 25 November 2008 (‘the Regulation on Corporate Governance’), which also defines key good governance principles to be adhered to. Their usual structure consists of a board of directors (except foreign bank branches) and compulsory committees, namely audit and risk committees, as well as other specialised committees as needed or required by the NbC.13

The independent director is an important feature of the management of the banking and financial institutions. The board of directors of commercial banks shall be composed of at least two independent directors, while at least one-third of the total number of board members of specialised banks and microfinance institutions shall be independent director(s).14 The audit committee and compensation committee, if any, shall be each chaired by an independent director.15

The regulation on Corporate Governance vaguely defines an independent director as a person being capable of exercising judgement independent of the view of

12 article 1 of Regulation on Reporting date for Commercial banks and Specialized banks dated 13 September 2006, and article 1 of Regulation on Reporting date for microfinance institutions dated 13 September 2006.

13 article 7 of Regulation on Corporate Governance.14 id., article 6.15 id., article 8 and 19.

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management, political interests or inappropriate outside interest.16 The NbC’s current interpretation of a non-independent director includes any person exercising any function within an affiliated entity of the company, including the overseas subsidiaries. an independent director of an overseas-affiliated entity of the company, however, is permitted to act as independent director of the relevant bank in Cambodia. due to the limited availability of qualified people, an independent director is not required to be a resident or a Cambodian national.

The relevant regulation requires a strong autonomy of the board of directors and management of all locally incorporated banks, including foreign subsidiaries. all decision-making, including credit approval, shall be made locally. Such requirements have not been fully implemented by some foreign subsidiary banks, which have long depended on their headquarters due to the lack of adequate resources on the ground.

While a branch of foreign bank in Cambodia does not have a separate board of directors, it is still required to adopt good governance policies and procedures aimed at complying with the principles set forth in the Regulation on Corporate Governance, including the strength of local governance through the enhancement of management autonomy granted by foreign headquarters to local executives.17 Under the current practice, all decisions of a foreign branch, in particular credit approval, are made by the parent company.

all banking and financial institutions are required to have internal audit and compliance officers. in the case of outsources, permitted under the current regime, the internal audit cannot be performed by the same firm as the one in charge of the external audit.18 any designation, dismissal, removal or resignation of the head of internal audit and compliance must be reported to the NbC.19

With respect to remuneration policies, the board of directors is allowed to determine the company compensation’s policies and practices as long as they are consistent with the institution’s corporate culture, long-term objectives and strategy, and control environment.20 in other words, there is no specific restriction on the remuneration’s package, except that the NbC has the authority to recommend institutions to review their decisions considered not aligned with the above-mentioned principles; the NbC’s current focus is on financial situation of each institution.

iii Regulatory capital and liquidity

The NbC recognises the importance of adhering to international banking supervision standards, and is working to harmonise its standards and regulations in accordance with the basel accords. Cambodian regulatory capital standards are not fully in compliance with basel ii, but the current standards are seen as a mixture of elements found in basel i,

16 Supra footnote 13, article 6.17 id., article 6.18 article 7 of Regulation on internal Control of banking and Financial institutions dated 18

September 2010.19 id., article 8.20 Supra footnote 13, article 18.

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basel ii and basel iii. The compliance process is progressing from a banking supervision technical standpoint but there are still a number of new regulations to be introduced, including the amendment of the existing NbC Law and the banking Law. The process is time-consuming as the full implementation of the new standards requires sufficient number of qualified personnel.

all regulatory capital requirements described below apply equally, without discrimination, to all banks operating in the country whether they are locally incorporated or branches of foreign banks.

Net worth calculationThe NbC has recently amended its method of calculation of net worth to be in line with basel iii.21 The sum of paid-in capital and net worth must at least be equal or larger than the minimum capital.22 Net worth is composed of two components: Tier i capital (core capital) and Tier ii capital (supplement capital).23

Tier i capital must include: paid-in capital; reserves; share premium; retained earnings; audited net profit for the last financial year; and profits as recorded on intermediate dates (subject to the NbC’s approval). Tier i capital must deduct: own shares held by the bank; accumulated losses; intangible assets; loans to related parties; and losses determined on dates other than regular year-ends.24

Tier ii capital, which must not exceed 100 per cent of Tier i capital, must include: reevaluation reserves; provisions for general banking risks; subordinated debt instruments; general provision of 1 per cent foreseen; and other items with prior approval of the NbC. deducted items include: equity participation in banking or financial institutions and other items including deferred charges.25

Solvency ratio (capital adequacy ratio)Commercial banks must not let their solvency ratio slip below 15 per cent.26 Prior to december 2004, the solvency ratio was 20 per cent, and one of the main reasons for scaling down the solvency ratio was to boost credit transactions.

The numerator of the ratio is the net worth, and the denominator of the ratio consists of the aggregate of assets and off-balance-sheet items. assets are subject to a weighting system according to their risks. So far, Cambodia’s risk-weighting system takes into account only the credit risks while basel ii requires two additional factors, the market risks and the operational risks.

21 The old calculation method set in Regulation on Calculation of banks’ Net Worth dated 16 February 2000 was repealed by Regulation on Calculation of banks’ Net Worth dated 15 october 2010.

22 article 2 of Regulation on Calculation of banks’ Net Worth dated 15 october 2010.23 id., article 4.24 id., article 5.25 id., article 6.26 amendment of Regulation Relating to the banks’ Solvency Ratio dated 29 december 2004.

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The weighting system includes:a zero per cent: cash, gold, claims on the NbC, assets collateralised by deposits 100

per cent lodged with the bank, and claims on or guaranteed by the sovereigns rated aaa to aa-;

b 20 per cent: claims on or guaranteed by the sovereign rated a+ to a-, and claims on or guaranteed by banks rated aaa to aa-;

c 50 per cent: claims on or guaranteed by sovereign rated bbb+ to bbb-, and claims on or guaranteed by banks rated a+ to a-; and

d 100 per cent: all other assets.

off-balance sheet items are classified into four categories:a 100 per cent of their value if they carry full risk;b 50 per cent of their value if they carry medium risk;c 20 per cent of their value if they carry moderate risk; andd items carrying low risk are not taken into account.

Capital guaranteeCambodia has yet to establish any deposit insurance scheme, but to help protecting depositors, the regulator has imposed capital guarantee on banks. institutions must permanently deposit 10 per cent of its minimum capital with the NbC as capital guarantee. This amount was increased in 2001 from 5 per cent.27 deposits made in riel bear interest at half of the six-month refinancing rate set by the NbC, whereas deposits in foreign currencies will bear interest at three-eighths of the six-month SiboR (Singapore interbank offered Rate).28 The depositing institution may get a refund of its capital guarantee after its liquidation and settlement of all liabilities.

Reserve requirementas one of the monetary tools, the NbC demands a commercial bank to maintain, with the NbC, reserve requirements against deposits and borrowings at a daily average balance equal to 8 per cent in riel and 12 per cent29 in foreign currencies.30 The reserve requirements were previously increased to 16 per cent in order to curb booming credit activities and to limit lending to real estate-related transactions. The NbC also provides interest fees on reserve requirements maintained with the NbC. The first 8 per cent of the reserve requirements bears zero per cent interest, while the remaining 4 per cent of reserve requirements in foreign currencies bears an interest rate set by the Regulation

27 See article 16 of banking Law.28 article 5 of Regulation on bank’s Capital Guarantee dated 15 october 2001.29 Reserve requirements against deposits and borrowing in foreign currencies have been reduced

from 16 per cent to 12 per cent in 2009. See repealed Regulation on maintenance of Reserve Requirements against Commercial banks’ deposits and borrowings, dated 25 april 2008.

30 article 1 of Regulation on maintenance of Reserve Requirements against Commercial banks’ deposits and borrowings dated 26 January 2009.

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on Term deposit interest Rate determination, deposit on Reserve Requirements and banks Capital Guarantee in american dollars.31

Large exposure and related parties transactionsLarge exposure refers to gross exposure larger than 10 per cent of the banks’ net worth.32 a bank’s total credit exposure to a single beneficiary is limited to 20 per cent of the bank’s net worth.33 Commercial and specialised banks are required to maintain a maximum ratio of 300 per cent between total large exposure and net worth.34 as for the purpose of identifying the beneficiary of large credit exposure, two or more individuals or legal entities will be considered as a single beneficiary if:a one of them exercises control over the other, whether or not directly or indirectly;b they are subsidiaries of the same parent company;c they are under the same de facto management; ord one of them holds an equity interest of more than 10 per cent of the other and

they have a special business relationship.35

in case a large exposure is guaranteed by another bank or international financial institution, with prior approval from the NbC, the exposure will be reduced to half when calculating solvency ratio.36 Furthermore, the NbC may increase the large exposure ratio to up to 35 per cent of the net worth upon request from the bank, if the NbC finds that the bank is ‘satisfactory’ and the borrower’s financial health is strong.37

Related parties are: any individual or legal entity who directly or indirectly holds 10 per cent of capital or voting rights; or any person who participates in the administration, direction, management or internal control, and the external auditor.38 outstanding loans granted to related parties cannot exceed 10 per cent of the banks’ net worth,39 and the banks must submit a quarterly report of related parties’ loans to the NbC.

Liquidity ratiodespite the presence of numerous banks, the regulations governing inter-bank markets are still being developed and the inter-bank transactions are still limited. in order to

31 Supra footnote 30 article 2.32 id., article 1.33 article 2 of Regulation on Controlling banking and Financial institutions’ Large Exposure

dated 3 November 2006.34 id., article 7.35 id., article 4.36 id., article 537 id., article 6.38 article 49 of banking Law.39 article 4 of amendment of Regulation on Loan to Related Parties dated 7 June 2002.

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remedy the liquidity shortfall in the banking sector, the NbC has imposed a minimum liquidity ratio of 50 per cent on all banking and financial institutions.40

Equity investmentEach banking and financial institution may hold up to 15 per cent of its net worth in each equity participation, provided that the maximum total equity participation is restricted to 60 per cent of their own net worth.41 Under the Cambodian banking regime, equity participation is defined as holding at least 10 per cent of the capital or voting rights of another company.42

Loan classification and provisioningThe Regulation on asset Classification and Provisioning in banking and Financial institutions (‘The Regulation on asset Classification’) dictates the objective and prudential grading system of all loans and assets held by banks. The classification of loans and assets are based on the repayment capacity which includes:a past payment experience;b financial condition of the borrower;c business prospective and cash flow projections;d ability and willingness to repay;e financial environment; andf quality of documentation.43

Every bank’s assets are classified into five categories: Standard, Special mention (overdue by more than 30 days), Substandard (overdue by more than 90 days), doubtful (overdue by more than 180 days), and Loss (overdue by more than 360 days). Each category is subject to minimum provisioning percentage amounts based on the respective gross loan: Standard, 1 per cent; Special mention, 3 per cent; Substandard, 20 per cent; doubtful, 50 per cent; and Loss, 100 per cent.44

IV CONDUCT OF BUSINESS

The banking Law prohibits banks, as well as their personnel, from disclosing information related to their clients to any person except to the NbC, auditors, provisional administrators, liquidators, and the court.45 The banks may share clients’ negative credit information with other banks for the purpose of sound credit activities and risk

40 article 1 of amendment of Regulation on Liquidity Ratio of banking and Financial institutions dated 29 december 2004.

41 article 33 of banking Law.42 id., article 32.43 article 3 of Regulation on asset Classification and Provisioning in banking and Financial

institutions dated 25 February 2009.44 id., article 13.45 article 47 of banking Law.

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management46 provided that the banks must obtain prior approval from the clients on exclusive utilisation of the information for assessing creditworthiness.47

Pursuant to the amL Law, banks, through their services, must not participate in conversion or transfer of proceeds of offences, and must immediately report those transactions to the Financial intelligence Unit (‘FiU’) as soon as they become aware of such circumstances.48 banks are also required to conduct due diligence prior to doing business with clients, and establish internal programmes for the prevention of money laundering according to guidelines stipulated by the FiU.49 Failure to do so can result in criminal liabilities punishable by an imprisonment from six days to one year and monetary fines from US$250 to US$1,250. Proceeds resulting from such violations may also be confiscated.50

Should the banking and financial institutions contravene any provision of their governing laws and regulations or fail to comply with any injunction imposed by the NbC, the NbC may inflict disciplinary sanctions ranging from reprimanding, prohibiting certain operations, suspending or forcing resignation of executives, setting up a provisional administrator, withdrawing the license, or imposing a fine not exceeding the minimum capital of the relevant banking and financial institution.51

V FUNDING

The core funding of banking and financial institutions is generally sourced from (a) shareholders capital, (b) cash deposits, and (c) borrowed capital from third-party banking and financial institutions. an overdraft not exceeding 50 per cent of the reserve requirement may be extended by the NbC to banking and financial institutions.52 The overdraft facility only serves as a mean to assist banking and financial institutions to overcome short-term liquidity shortages, ranging from one week to one month. The NbC may consider extending such facility for a new period of time that shall not exceed one month and that shall not be rolled over more than two times.53

The NbC is still working on the development of the inter-bank market through the securitisation process of certificates of deposits issued for banking and financial institutions with excess liquidity. once the securities market (CSX, Cambodia Securities Exchange) becomes fully operational, some banking and financial institutions will also

46 article 1 of Regulation on Utilisation and Protection of Credit information dated 10 may 2006.

47 id., article 14.48 article 12 of amL Law.49 id., article 16.50 id., article 29 and article 30.51 article 52 of banking Law.52 article 11 of Regulation on overdraft Facilities made available by the NbC to banking and

Financial institutions facing temporary liquidity shortage dated 20 January 2009.53 id., article 12.

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be expected to go public to source required funds, provided that the number of shares to be listed does not exceed a threshold to be determined by the NbC.

VI CONTROL OF BANKS AND TRANSFER OF BANKING BUSINESS

There is no restriction on the control structure of the banks except that, in order to prevent capital manipulation, the banking Law54 explicitly prohibits the practice of chain shareholding companies, where each is holding shares in the others. Under the existing regulations, a transfer of the shares’ ownership of banking and financial institutions is subject to different regimes of notifications and/or approvals depending on the amount of shares affected by the relevant transaction: a less than 5 per cent, no prior notification is required; b between 5 per cent to less than 10 per cent, prior notification is required; andc from 10 per cent and above, prior approval is required.55

Nevertheless, in practice, the NbC applies only one single regime, which is to require prior approval of any transfer of shares. it is expected that a specific rule be introduced to govern banking and financial institutions which list their shares on the upcoming securities market. The NbC levies a fee equivalent to 0.5 per cent of all transferred shares’ face value. any significant change56 in the shareholding structure of the parent company of a foreign branch operating in Cambodia shall be notified to the NbC.

VII THE YEAR IN REVIEW

Cambodia’s macro-economy continues to maintain a high level of GdP growth at a rate of 6.8 per cent57 for the year 2011, despite the country experiencing severe flooding. most of the banks are expected to have their performance improve compared to previous years. Non-performing loans have also substantially declined from 6 per cent to 3 per cent58 due to the reinforcement of prudential regulation.

The NbC has previously considered raising the reserve requirement to 16 per cent from 12 per cent, to curb inflationary pressure. Such attempt was later abandoned as the inflation rate was still manageable and in the line with the international monetary Fund’s forecast of 6.5 per cent. This decision helped the country’s economy achieve its high growth and was also applauded by the banking community seeking credit expansion as the sector is on the right track to recovery.

54 article 20 of banking Law.55 articles 2, 3 and 4 of Regulation on Transfer of Shares of banks dated 8 November 2001.56 id., article 7. ‘Significant change’ is defined as any change which requires an authorisation of

the supervisory authority of the relevant parent company. 57 asian development bank, asia Economic monitor, december 2011, p. 38.58 Supra footnote 6, p. 2.

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New leading global and regional banks have made inroads in the country, including bank of China (‘boC’), the industrial and Commercial bank of China (‘iCbC’), the mega international Commercial bank, Cimb bank, the bank of Tokyo-mitsubishi UFJ (‘mUFG’) and Sumitomo mitsui banking Corporation (‘SmbC’).

The first credit bureau acting as the centralised database of credit information was recently established by a joint venture between the association of banks in Cambodia, Cambodia microfinance association and a private company. The new system, expected to be online as early as march 2012, will have significant positive effects on the credit reviewing processes and heighten confidence among finance vendors and consumers. Until then, and due to the previous lack of a credit bureau, the credit reviewing process currently conducted by all banks heavily relies on fragmented and informal information. Each bank adopts various approaches and methodologies mostly depending on their experience in trying to arbitrarily assess the creditworthiness of each borrower. This is also the main reason that most loans are secured by real estate-based collaterals.

an important milestone has been reached in the area of financial leases since the relevant governing law was introduced in 2009. The NbC has enacted implementing sub-regulations institutionalising the delivery of such financial product and establishing operational procedures to grant licences to specialised financial lease firms. Such diversification of services will help support businesses which are not in a position to provide real estate-based collaterals.

another crucial development in the legal framework affecting the banking sector is the entry into force of the Civil Code and its implementation law. at least two major issues with an impact on past, ongoing and future financing transactions carried out by banking and financial institutions include the securitisation of collaterals and the interest rates ceiling. First, all exisitng mortages under the former legal regime are converted to a hypothec which has two new features: (a) the creditor (bank) may not retain the physical document of the title deed; and (b) the hypothecated property shall be allowed to be re-hypotecated with multiple creditors. From a legislative perspective, this new securitisation process will optimise the use of collaterals. However, the cadastral office in charge of handling the registration of hypothecs is still developing its technical capacity to fully ensure the transparency of the system. The practice previously permitting the institutions to place the physical title deed under its custody mitigates the general concern over the transparency of the land offices. Since, under the new hypothec regime, banks can no longer assume that they are the only secured creditor over a collateral provided by the borrower, banks are likely to consider that credit operations have become more risky. The credit review process will become more sophisticated as the assessment of the value of collaterals will be more challenging until the concern as mentioned is remedied.

Furthermore, the ministry of Justice’s new regulations set an interest rate ceiling at 18 per cent and a maximum interest rate for liquidated damages calculation at 27 per cent,59 and any capitalisation of interest will be permitted only after payment default reaches a period of one year. Nonetheless, banking transactions could arguably be considered special by nature and therefore would be covered by the special regulation

59 article 1 of Regulation on maximum interest Rate dated 21 december 2011.

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specifically applicable to banks and financial institutions,60 as opposed to being subject to the restriction under the common legal regime established by the Civil Code. However, it is still unclear at this stage whether such interpretation will be adopted by the courts, and the NbC has not yet provided any clarification on this matter. The interest rate ceiling, if applicable to all banking and financial institutions, will significantly affect the business of microfinance institutions since their average interest rate per annum is 33.6 per cent.61

VIII OUTLOOK AND CONCLUSIONS

at a macro level, in order to help maintaining price and financial system stability, the NbC will promote riel over the short and medium term, and de-dollarisation in the long term. differential treatment between riel and US dollars, in measures similar to the current regime and applicable to reserve requirement, will be further introduced to promote the use of riel. There is also a plan to offer investment products in riel, such as treasury bills and bills to the locals, and reserve eligible government securities to banks seeking to meet the reserve requirement without using cash reserves that bear nil interest.

Though the number of banks keeps increasing steadily, data on banking transactions to GdP suggests that there is still plenty of room for growth in the sector, in particular for new players who could bring innovative financial products, technology and solid source of funds. The current fierce competition among banks has not resulted in any negative consequences. it rather brings positive outcomes in term of liquidity and quality of services and products to consumers. The total assets,62 deposits63 and credit64 to GdP have been doubled over a period of five years from 2006 to 2010. The interest rate spread on deposits and loans in US dollars (90 per cent of deposits are in US dollars) is high compared to the average interest rate spread in the region and the world.65 according to 2010 and first-semester 2011 NbC reports,66 the average interest rate spread (six-month maturity) between January 2010 and June 2011 was estimated at 13.44 per cent.

While the NbC is pursuing the compliance with the basel Core Principles, the readiness of the banking system and regulatory structure in meeting such requirements

60 See article 1 of Regulation on Liberalisation of interest Rate Setting dated 9 September 2009. banking and financial institutions have the rights to determine interest rates on deposits and interest rates on loan according to each institution’s ability and interest rate policy.

61 Cambodian institute of development Study, impact of microfinance Services in Cambodia (2011), p. 6.

62 26 per cent to 53 per cent.63 18 per cent to 34 per cent.64 12 per cent to 28 per cent.65 according to the World bank the average interest rate spread in world was estimated to 6.3

per cent in 2010 and such interest rate spread in the East asia and Pacific region (developing countries only) was estimated at 6.9 per cent in 2010. See http://data.worldbank.org/indicator/FR.iNR.LNdP/countries/1W-Z4-4E?display=graph (last visited 27 January 2012).

66 See NbC annual Report 2010 p. 13, and NbC annual First Semester Report 2011 p. 13.

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will require a reasonable amount of time, taking into account the different sizes of banking and financial institutions, as well as the types of risks relevant to the Cambodian market.

There has been some anticipation that the NbC will introduce more specific measures to enable facilitate initial public offerings of banking and financial institutions, since the current approval regime on share transfers was not originally designed to deal with shares trading in securities market.

The securities market development has been progressing substantially. all the necessary legal frameworks and physical facilities have been put in place by both the market regulator and the market operator, and the first listing is expected to occur in the coming months. The insurance sector has always been populated by non-life insurance companies, but recently the mEF has started granting life insurance operating licences. Life insurance will be an interesting upcoming feature of the undeveloped part of the financial sector. The combination of banking, securities and insurance in particular life insurance sectors will mobilise private savings into the capital-hungry economy and reduce capital concentration in real estate assets.

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Bun YoudYBun & AssociatesYoudy is the firm’s practice leader of the corporate, banking and finance and commercial litigation practices. He is currently a panel lawyer for numerous foreign banks operating in Cambodia, including one of the largest banks in terms of assets and loan portfolio. He provides advice to some of the largest financial institutions and securities firms in Asia, relating to their business expansion and entry strategies into Cambodia. Youdy recently counselled a large Japanese electronics manufacturer with their $65 million investment project, establishing the first electronic large-scale mass-production facility in the country. He also previously counselled one of Cambodia’s largest conglomerates on the acquisition of a $60 million turn-key brewery plant, and assisted a foreign fund in a transaction for the partial debt assignment of the largest loan ever granted in the telecommunications sector. Youdy is one of the first commercial arbitrators selected in the Kingdom. He is an attorney-at-law admitted to the Bar Association of the Kingdom of Cambodia and its former Secretary-General. He studied at prestigious universities in Cambodia, France and the United States. Youdy has been ranked as a leading lawyer in Cambodia in Chambers & Partners’ 2011 Asia-Pacific guide, and is praised as a ‘detailed and meticulous’ lawyer who specialises in foreign investment, banking and corporate and commercial litigation. He is fluent in Khmer, English and French.

Bun & AssociAtes#29, St 294, Phnom PenhCambodiaPO Box 2326Tel: +855 23 999 567 / +855 12 817 817Fax: +855 23 999 566bun@bun-associates.comwww.bun-associates.com

Appendix 1

ABOUT THE AUTHOrS