Mongolia approves the law on government bailout of commercial banks

An overview of the Law of Mongolia on Ensuring Banking Sector Stability


31 July 2018


Parliament approved the Law of Mongolia on Ensuring Banking Sector Stability on 22 June 2018. The law was passed with immediate effect in a closed session.


The purpose of the law is to regulate matters related to raising funds from shareholders and other investors to meet the capital adequacy requirements for banks, recapitalizing banks by government bailout if deemed necessary, and managing funds provided by the Government and recalling the funds to the state budget. The following summarizes the key features of the law.


Application


The law applies to the banks that are regarded as systemically important (accounting for five percent or more of the total assets of the Mongolian banking system) and that do not meet relevant capital adequacy requirements. The law provides for the main requirements and eligibility criteria for systemically important banks to receive government-funded bailout.


The Bank of Mongolia (the Central Bank of Mongolia) will generally play a central role in implementing the law by way of determining non-compliance with the capital adequacy requirements, the eligibility of an applicant bank for government bailout and submitting recommendations to the Ministry of Finance for government bailout.


Eligibility for government bailout


If a systemically important bank is determined to be short of meeting the capital adequacy requirements following asset quality reviews or during the course of regular supervisory activities, the Bank of Mongolia will require the relevant bank to comply with the requirements within six months. The relevant bank then may raise requisite funds from its shareholders or other investors. If such an option is not feasible, the bank may apply for government bailout by preparing a bank reform plan and submitting the same to the Bank of Mongolia together with other necessary documents. To be eligible, the bank must be able to carry out normal operations in the medium term, i.e. the bank should become profitable without government support within five years by way of carrying out normal operations.


The Bank of Mongolia will review the (submitted) documents within one month and deliver its recommendation to the Ministry of Finance. The Minister of Finance is tasked to submit the Bank of Mongolia’s recommendations to the Cabinet meeting within three days of the receipt of the same.


Bailout forms and authority


The government bailout may come in two forms: (i) government-issued securities under market conditions; and (ii) cash. Subject to relevant circumstances, the Government may invest in bank’s Tier 1 or Tier 2 capital. The law does not provide any quantitative limits (cap) to the government bailout. The Ministry of Finance will exercise shareholder rights attached to the government funds following the bailout. The law provides for the power of the Ministry of Finance in exercising the shareholder rights and other management related matters.


Deadline for recalling the government funds


The law provides that the Ministry of Finance will recall the government funds from the recipient banks within five years of the adoption of the law, i.e. by June 2023. This deadline suggests that the law was adopted to address the capital adequacy issues only in the near term.


The Bank of Mongolia is yet to approve implementing regulations under this law. It is again yet to be seen how this law will be applied in practice and how many banks would receive government bailout.


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If you have any questions concerning any of the points above, please contact the person below.


Solongoo Bayarsaikhan, Partner

solongoo@avinexlaw.mn

Avinex Partners LLP


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