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Oct 24, 2008 (LBO) - Sri Lanka's central bank says there were some measures to protect the banking sector from a financial 'cyclone' that is sweeping the world and the country's banking sector is well capitalized to meet upcoming challenges.

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Deputy Central Bank governor in charge of financial sector stability Ranee Jayamaha said the regulator had noticed an asset price bubble developing in 2006 and had tightened rules on mortgage and credit card lending.

She said the minimum capital requirement of commercial banks was raised to 2.

5 billion rupees. The floor for specialized banks was raised to 1,500 million rupees, and banks were required to keep to international Basel capital adequacy rules.

Finance companies, which deal in 'sub-prime' lending sectors in Sri Lanka, were also closely monitored.

Central Bank had placed interest rate caps of 24.

5 percent to curb borrowing and lending at unsustainable levels.

Jayamaha said increased attention was also paid to local bank exposure to foreign investments, especially in possible sub-prime assets.

"We started to closely monitor foreign investment exposures