The case for bigger and stronger banks

WHEN recent cyclones disrupted livelihoods, supply chains, and regional economies, banks were once again expected by those affected to step in—grant moratoria, restructure loans, and extend fresh credit—often precisely when risks were peaking.

- By Dinesh Weerakkody

This recurring pattern, seen during the pandemic and the economic crisis, exposes a hard reality: not all banks have the Balance-Sheet strength to play a counter-cyclical role when the economy needs them most.

This strengthens the case for market-driven consolidation among Sri Lanka's mid-sized and smaller licenced banks. Consolidation is not about size for its own sake, nor about reducing competition. It is about building institutions with sufficient capital, governance depth, and operational resilience to absorb shocks and continue lending through economic cycles.

Sri Lanka is a small, open economy repeatedly exposed to external shocksglobal interest-rate cycles, trade disruptions, geopolitical developments, and increasingly frequent climate-related disasters. Banks without scale struggle to absorb these shocks without curtailing lending or weakening Balance Sheets. The economic crisis revealed these structural vulnerabilities, particularly among institutions with limited capital buffers and constrained access to funding.

The Central Bank of Sri Lanka (CBSL) has responded by proposing a framework to strengthen financial system stability and address the long-term viability of weaker banks.