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A stable financial system is a fundamental need for economic growth and prosperity. Hence, an efficient and continuous financial supervisory function is underscored by legal, economic and political rationale where prevention of bank runs reigns as the prime motive. The liquidity crisis faced by some financial institutions in Sri Lanka in 2008 resulted in the Central Bank of Sri Lanka being sued by depositors/investors of such institutions for alleged negligence. This situation is not alien in financial markets world over, as in times of crisis supervisory actions and responses are often criticised and questioned. Hence, supervisors, who are expected to work without fear or favour, perform their balancing act under a cloud of legal risk. In this background, the responsibilities and powers of the Central Bank of Sri Lanka is analysed to verify whether the supervisory role of the Central Bank conforms to the Basel Core principles. Immunity and accountability of the Central Bank of Sri Lanka is discussed in general as a preface to discussing the recent legal action faced by the financial sector supervisor of Sri Lanka, their implications and lessons to be learnt. With a plethora of new laws and regulations being borne out of crisis, the supervisors may be exposing themselves to a higher degree of legal risk apart from creating new liabilities. This paper recommends new provisions to be considered to be adopted into the financial sector laws in Sri Lanka.

Responsibility, Immunity and Liability: Are Financial Supervisors Liable for Depositors’ Losses? A Sri Lankan Case Study