i IMPLEMENTATION OF MINIMUM CAPITAL REQUIREMENT OF BASEL-II IN BANGLADESH: A COMPARATIVE ANALYSIS AMONG BANKS IN BANGLADESH by Rezia Farhana Khan A project submitted in partial fulfillment of the requirements for the degree of Professional Master in Banking and Finance Examination Committee: Dr. Sundar Venkatesh (Chairperson) Dr. Winai Wongsurawat Dr. Markus Freiburghaus (External Expert) Nationality: Bangladeshi Previous Degree: Master of Science in Economics Jahangirnagar University Savar, Dhaka, Bangladesh Scholarship Donor: Bangladesh Bank (Central Bank of Bangladesh) Asian Institute of Technology School of Management Thailand May 2012
Transcript
i
IMPLEMENTATION OF MINIMUM CAPITAL REQUIREMENT OF BASEL-II IN BANGLADESH: A COMPARATIVE ANALYSIS AMONG
BANKS IN BANGLADESH
by
Rezia Farhana Khan
A project submitted in partial fulfillment of the requirements for the degree of Professional Master in Banking and Finance
Examination Committee: Dr. Sundar Venkatesh (Chairperson)
Dr. Winai Wongsurawat Dr. Markus Freiburghaus (External Expert)
Nationality: Bangladeshi Previous Degree: Master of Science in Economics
Jahangirnagar University Savar, Dhaka, Bangladesh
Scholarship Donor: Bangladesh Bank (Central Bank of Bangladesh)
Asian Institute of Technology
School of Management Thailand May 2012
ii
Acknowledgements
First of all I want to pay my gratitude to the Almighty Allah for giving me strength and will power to complete the project successfully. Secondly, I want to express my gratitude to my
supervisor, Prof. Dr. Markus Freiburghaus, Professor, University of Applied Science Northwestern Switzerland, for providing me his valuable advices, suggestions, time bound supervision and guideline to prepare a collaborative formal paper. In fact, his contribution
can only be acknowledged but never be compensated.
My sincere gratitude goes to Mr. K.M.Abdul Wadood, General Manager, Banking Regulation
& Policy Department (BRPD), Bangladesh Bank for his valuable discussions on the issues
related to the study. My special thanks go to Chowdhury Md. Feroz Bin Alam, Deputy General Manager, and Mr. Asif Iqbal, Assistant Director, BRPD, Bangladesh Bank for their continuous support and cooperation during the project.
Furthermore, I want to convey my heartiest thanks to all my teachers of PMBF for their great
effort in teaching and knowledge sharing during my study.
Moreover, I want to thank my employer Bangladesh Bank and AIT for giving me such an
opening through facilitating scholarship. Studying in this esteemed institution has obviously enhanced my knowledge and skills to a great extent that will certainly enlighten my carrier in the days to come.
Lastly, I want to thank my family members for their inspiration, love and encouragement throughout my life.
iii
Abstract
The gradual shift towards the Risk based Capital Structure framework by Bangladesh Bank
(BB) for the last several years from the fixed amount of capital for running banks has induced
to furnish the project. To analyze the implementation effectiveness of Pillar-1 of Basel-II and
to check out the alignment of the capital standard of Bangladesh Bank is with the Core
Principles of Banking Supervision has been the target of the report. To pursue this objective,
a precise but concise overview has been given to illustrate the evolution of risk based capital
standards i.e. Basel-I, II and III over the globe. In addition to that, the evolution of capital
adequacy regulation in Bangladesh has been described. The assessment of Bangladesh
regulation in this context has been done with the international benchmark. Later, analysis of
capital related data of the Bangladeshi banks have been conducted to compare the Intra-
industry picture.
iv
Table of Contents
Title Page i
Acknowledgements ii
Abstract iii
Table of Contents iv-v
List of Abbreviation vi
List of Tables vii
List of Figures viii
Chapter 1 Introduction 1-2
1.1 Rational for this study 1
1.2 Objectives of the study 1
1.3 Methodology, Scope & Limitations of the study 1-2
Chapter 2 Evolution of Basel Accord (RBC Approach) in the banking industry 3-9
2.1 Basel-I 3-4
2.2 Basel-II 4-6
2.3 Basel-III 7-9
Chapter 3 History of Risk based capital adequacy regulations in Bangladesh 10-15
3.1 Adoption of Basel-I in Bangladesh 10
3.2 Revised Capital Adequacy Regulation 10
3.3 Basel-II implementation Scenario In Bangladesh 11-15
Chapter 4 Evaluation of regulations in Bangladesh in the context of global standard
16-18
4.1 Core Principles for Effective Banking after 1990 crisis 16
4.2 Principle 6: Capital Adequacy 16-17
4.3 Assessment of capital adequacy regulation of BB 17-18
v
Chapter -5 Data Analysis & Findings 19-39
5.1 Comparative Capital Adequacy Ratio (CAR) 19-21
5.2 Risk Weighted Asset (RWA) Composition 21-26
5.3 Capital Composition 27-32
5.4 Strength of Capital Base 32-39
Chapter 6 Recommendation & Conclusion 40
6.1 Recommendations 40
6.2 Conclusion 40
References 41
Appendices 42-43
vi
List of Abbreviation
BB-Bangladesh Bank
BCA-Bank Company Act, 1991
BCBS- Basel Committee for Banking Supervision
BIS-Bank for International Settlements
BRPD-Banking Regulation and Policy Department
CA-Capital Adequacy
CAR-Capital Adequacy Ratio
CC-Core Capital
CET1-Common Equity Tier-1
CR-Credit Risk
DFI-Development Financial Institution
EAD-Exposure at Default
ECA-External Credit Assessment
ECAI- External Credit Assessment Institution
FCB-Foreign Commercial Banks
FSB-Financial Stability Board
GDP-Gross Domestic Product
ICAAP-Internal Capital Adequacy Assessment Process
ICCMCS- International Convergence of Capital Measurement and Capital Standards
IMF-International Monetary Fund
IRB-Internal Rating Based
IRRBCA- Interest Rate Risk in the Banking Book
LCR-Liquidity Coverage Ratio
LGD-Loss Given Default
MCR-Minimum Capital Requirement
MR-Market Risk
NSFR-Net Stable Funding Ratio
OECD-Organization for Economic Co-operation & Development
OR-Operational Risk
PB-Probability of Default
PCB-Private Commercial Banks
PUC-Paid up Capital
RWA-Risk Weighted Assets
SCB-State Owned Commercial Bank
SIFI-Systematically Important Financial Institutions
SREP- Supervisory Review Evaluation Process
SRP-Supervisory Review Process
WB-World Bank
vii
List of Tables
Table Title Page
1 Comparative Capital Adequacy Ratio in Different Banks 19-20
2 Risk Weighted Asset for Credit Risk (CR) as % of Total RWA 21-22
3 Risk Weighted Asset for Market Risk as % of Total RWA 23-24
4 Risk Weighted Asset for Operational Risk as % of Total RWA 25-26
5 Comparison of Core Capital among banks 27-28
6 Comparison of Supplementary Capital among banks 29-30
7 Ratio of tier –II capital to Tier-I Capital 30-31
8 Paid Up Capital as % of Tier-I Capital 32-33
9 Paid Up Capital as % of Total Capital 34-35
10 Paid Up Capital & Reserve as % of Tier-1 Capital 36-37
11 Paid Up Capital & Reserve as % of Total Capital 37-38
viii
List of Figures
Figures Title Page
1 Summary of Basel-II 5
2 Summary of Basel-III 9
3 Comparative Capital Adequacy Ratio in Different Banks 21
4 Risk Weighted Asset for Credit Risk (CR) as % of Total RWA 23
5 Risk Weighted Asset for Market Risk as % of Total RWA 24
6 Risk Weighted Asset for Operational Risk as % of Total RWA 26
7 Comparison of Core Capital among banks 28
8 Comparison of Supplementary Capital among banks 30
9 Ratio of Tier–II capital to Tier-I Capital 32
10 Paid Up Capital as % of Tier-I Capital 34
11 Paid Up Capital as % of Total Capital 35
12 Paid Up Capital & Reserve as % of Tier-1 Capital 37
13 Paid Up Capital & Reserve as % of Total Capital 39
1
Chapter-1
Introduction
1.1. Rationale for this study
The zeal to deal with Risk-based Supervision in financial sector is the
elementary motivation to select the area for the project. Moreover, for the last several years, Bangladesh Bank (BB) has been gradually shifting towards the Risk based Capital
Structure framework for banks from the fixed amount of capital for running ba nks in its jurisdiction. As the work experience of the author as central banker is entirely related with the policy formulation and clarification regarding corporate governance of banks and the
prime country law for the banking industry, the academic resea rch on the selected topic would add value to have a better understanding on the status of the implementation of a
globally recognized supervision benchmark in respect of capital adequacy of banks in Bangladesh.
1.2. Objectives of the study
BB adopted Basel-I in 1996 by replacing the Liability-to-capital approach with the Risk based capital approach (Linking the capital with the risk weighted assets). BB formulated regulation for Basel-II at the end of 2008 and pursued the parallel run of Basel-
I and Basel-II in 2009. Finally, the full implementation of Basel- II in banking sector of Bangladesh started from the January 2010. According to BB's verse, the implementation of
Pillar-1 of Basel-II has been completed and the execution of Pillar-II (Supervisory Review Process) is now underway. The objective of the study is to analyze the implementation effectiveness of Pillar-1 of Basel-II and to find out the problems and prospects of
implementation of Pillar-2 of Basel-II in Bangladesh. Moreover, the objective also includes checking out whether the capital standard of Bangladesh Bank is aligned with the
Core Principles of Banking Supervision or not. The following aspects also have been addressed in pursuing the report:
1.2.1. A comparative analysis regarding the level of compliance of scheduled banks in respect of the Pillar-1 of Basel- II requirement set by BB,
1.2.2. The differences in the implementation level among the sub-sectors, 1.2.3. The probable required actions to be taken by the supervisor, 1.2.4. The possible portions of the master guidelines on Risk Based Capital
Adequacy in Bangladesh which should be improvised,
1.3. Methodology, Scope & Limitations of the study
1.3.1. Methodology of the study:
This has been a quantitative evaluation research. Several qualitative
analyses also have been entailed in this research. The regulation related to capital adequacy framework of BB has been be evaluated in the context of global standard. In addition to that, the information related to capital adequacy framework of banks has been analyzed
and an intra-industry comparison has been made. The comparison has been made among the sub-sector of the banking industry-State Owned Commercial Bank (SCB), Specialized
Banks or Development Financial Institutions (DFI), Private Commercial Banks (PCB),
2
Foreign Commercial Banks (FCB). 1As secondary data will be the major source of data, sampling has not been applied.
1.3.2. Scope of the study:
The paper has been built upon the following area of study:
Basle Committee on Banking Supervision (June 2006) International Convergence of Capital Measurement and Capital Standards,
Basle Committee on Banking Supervision (December 2010) Basel III: A global regulatory framework for more resilient banks and banking systems,
Bangladesh Bank (December 2010) Guidelines on Risk Based Capital
Adequacy Framework.
The numerical information used in this paper has been collected from
quarterly statements submitted by the banks to the Department of Off-site
Supervision2,
Size of population: 47 scheduled banks3 .
1.3.3. Limitations of the study:
The following aspects have limited the scope for going into a more deep discussion on this topic:
Time constraint: The period spent by the author in Bangladesh during
project work has not been sufficient to have effective insight,
Space constraint: During the project, the author could not fully reside in
Bangladesh, thus spacial movement has been constraint factor to make the
report better.
Data Constraint: As secondary and processed data have been used to
prepare the report, deep and diversified insights cannot be brought down in
several cases.
1 SCB-State-owned Commercial Banks- These are fu lly owned by Government of Banglades h.
PCB- Private Commercial Banks
DFIs- Development Financial Institutions or Specialized Commercial Banks were established with a
specific development vision and fully owned by Govt.
FCB- Banks which are incorporated in abroad and having branch operation in Bangladesh. 2 Department of Off-site Supervision- One of supervision departments of BB. To know more detail, please
browse: http://www.bb.org.bd/aboutus/dept/dept_details.php?dept_id=20 3 Banks which are allowed to conduct banking business under Bank Company Act, 1991.
3
Chapter -2
Evolution of Basel Accord (Risk based capital approach) in the Banking Industry
Before 1988, many countries applied national capital standards to banks operating within their jurisdiction. These standards varied from country to country so that a
similar exposure could receive different treatments depending on where it was booked. In addition, national standards did not always relate capital requirements to risk levels and, in most cases, did not account for off-balance sheet exposures.
2.1. Basel–I:
In July, 1988 Basel Committee for Banking Supervision (BCBS)4 of Bank for International Settlement (BIS)5 published a paper titled "International Convergence of
Capital Measurement and Capital Standards(ICCMCS)" in order to secure global uniformity of regulatory directions modulating the capital adequacy of banks. This is
popularly known as Basel accord (Basel-I) which spelled out the details of the agreed framework for measuring capital adequacy and the minimum standard to be achieved which the national supervisory authorities were to implement in their respective countries.
This proposition was grounded by two fundamental objectives:
The finalized structure was supposed to strengthen the solidity & soundness of the global banking system, and,
The outline was expected to be in evenhanded and to possess a lofty extent of steadiness in its application to banks operating in different countries. Its motive was to
retreat the prevailing source of competitive disparity among internationally active banks.
The standard was later revised several times (November 1991, July 1994, April 1995 and April 1998) and a comprehensive amendment version was issued on April 1998. The first version was built up by focusing credit risk only, but the revised one also
incorporated some aspects of market risk like interest rate risk, exchange rate risk.
The accord was intended to establish minimum levels of capital for banks and their subsidiaries; those are conducting banking & financial business. The accord’s motive was to referring ownership information and the standpoint of banks within financial
conglomerate groups that are undergoing significant changes.
This framework suggested that the constituents of banks' capital are broadly categorized into two types:
Tier-1: Core Capital (basic equity),
4 Headquartered in Basel, Switzerland, BCBS was established by the central-bank Governors of the Group of
Ten countries at the end of 1974. It provides a forum for regular cooperation on banking supervisory matters
to enhance understanding of key supervisory issues and improve the quality of banking supervision
worldwide 5 Established on 17 May 1930 and being the world's oldest international financial organization, BIS works to
serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in
those areas and to act as a bank for central banks.
4
Tier-2:Supplementary Capital:
Limits and Restrictions were suggested to determine capital elements:
The total of Tier-II components should be restricted maximum 100% of the
total sum of Tier-I components,
subordinated term debt should be limited maximum 50% of Tier-I
elements,
Here general provisions or general loan-loss reserves should be maximum
1.25%. These provisions include lower valuations of asset or latent but the unidentified losses of the balance sheet.
Asset revaluation reserves (latent gains on unrealized securities) should be
discounted 55%.
For the maiden time, Basel-I suggested risk weights (five weights- 0%, 10%, 20%, 50%, 100%) for on-balance sheet exposures and credit conversion factors for off-
balance exposures to calculate total RWA and the capital requirement is a stipulated percentage of total RWA. The minimum suggested percentage was 8% for total capital and 4% for Tier-I Capital.
While calculating Risk Weighted Capital Ratio, that enhance bank’s capital
structure, following deductions were prescribed from the capital base:
Goodwill, should be deducted from Tier-I components,
Investments in subsidiaries, which are not consolidated in national systems.
Investments in other banks and financial institution’s capital.
2.2. Basel-II:
In June 2004, BCBS issued a revised framework 6 of ICCMS, introduced the
famous “Three Pillar Concept” of Capital Adequacy for strengthening the risk management practices of the banking industry. Later, in June 2006, a comprehensive revision of ICCMCS was in public by incorporating Basel II Framework, June 2004, the
elements of the 1988 Accord that were not revised during the Basel II process, the 1996 Amendment to the Capital Accord to Incorporate Market Risks, and the paper on the
Application of Basel II to Trading Activities and the Treatment of Double Default Effects, 2005. The paper has been invariably termed as Basel-II framework. This was also supposed to be applied on a fully consolidated basis to any holding company that is the
parent entity within a banking group to ensure that it captures the risk of the whole banking group. Basel-II incorporated the treatment for the activities of banking entities, securities
entities, financial entities, insurance entities and commercial entities when they are subsidiaries or minority owner of any bank holding company. Another groundbreaking addition in this version of this capital accord was the incorporation of the treatment of
securitization exposure for credit risk. Both traditional and synthetic securitization exposures have been accounted for consideration.
6
ICCMCS- "International Convergence of Capital Measurement and Capital Standards "
-A Revised Framework, June 2004.
5
Basel-II has been structured by formulating Three (03) pillars:
Figure-1: Summary of Basel-II
This framework introduced a newer dimension in capital structure of banks:
Tier-1: Core Capital
Tier-2-:Supplementary Capital
Tier-3- Additional Supplementary Capital
o At the prudence of the national authority or supervisor, banks may use
additional capital to fulfill a proportion of capital requirements for market risk. Short-term subordinated debt may be used for this purpose.
Tier-1, Tier-2, and Tier-3 components together will be qualified for capital base. Limitation & restriction by Basel Accord to determine capital
elements remain the same. In addition to that following limits were suggested:
o Tier-3 capitals will be limited to 250% of a bank’s Tier 1 capital.
The required deductions from capital base suggested by Basel-I were kept same in Basel- II.
6
This framework provided specific sets of rules to determine risk weighted assets against credit, market and operational risk under Pillar-1 in a comprehensive and
segregated fashion:
For standardized approach of credit risk, banks are required to impose risk
weight according to the rating provided by the ECAIs7. Credit Risk Mitigation techniques have been introduced for eligible guarantee and financial collateral along with supervisory
haircuts. Under IRB8 approach, banks are required to calculate internal rating of their exposures to impose risk weight on the basis their own estimates of PD, LGD, EAD 9 and Maturity.
Market risk has been highlighted to address interest rate risks along with
foreign exchange risk and commodities risk throughout the bank. In this regard, maturity method and duration method have been suggested to link the capital requirement with
exposures risks.
A formula10 has been developed to determine the capital charge against
operational risk by linking with the gross income of the bank under basic indicator approach. Similar formula is used under the standardized approach along with the
consideration of beta factor for 08 (eight) business lines11.
Four key principles have been suggested to formulate ICAAP by banks under
SRP for calculating adequate capital:
A process for measuring their overall capital adequacy in respect of their risk profile and a strategy for capital maintenance.
Regulator's evaluation of banks' ICAAP and their ability of regulatory compliance.
Banks would have adequate capital which should be the excess of minimum requirement.
Intercession of regulator at an early stage to take proper steps & corrective measures to prevent capital from declining below the minimum required levels.
Disclosure requirements (both qualitative and quantitative) have been introduced under Pillar-3 to complement Pillar 1 & 2 to bring transparency and market
discipline.
7 ECAI-External Credit Assessment Institution which are declared as elig ible by the national supervisory
authority on the basis of six criteria (Object ivity, Independence, International access/Transparency,
Disclosure, Resources, Credibility). Rating notches of ECAIs are mapped with rating grades of national
supervisor. 8 Internal Rating Based
9 PD= Probability of Default, LGD= Loss Given Defau lt, EAD= Exposure At Default, M= Maturity.
10 where, KBIA = the capital charge under the Basic Indicator Approach; GI =
annual gross income, where positive, over the previous three years, N = number of the previous three years
for which gross income is positive, α = 15%, which is set by the Committee, relating the industry wide level
of required capital to the industry wide level of the indicator. 11
Corporate finance, Trading and sales, Retail banking, Commercial banking, Payment and settlement,
Agency services, Asset management, Retail b rokerage.
7
2.3. Basel-III:
In the consequence of global financial turmoil and lessons learned from that to
promote a more resilient banking sector, BCBS undertook the reform initiatives for enhancing capital and liquidity rules. The goal was to develop a durable banking sector that can sustain and absorb shocks arising from financial and economic stress. The
outcome of the initiatives was released on December 2010 that was comprised of three core documents and known as Basel-III.
The Basel-III propositions have been formulated by incorporating the following themes:
To strengthen the capital framework of banks:
Uplifting the quality, constancy & transparency of the capital base,
Widening risk coverage,
Supplementing the RBC requirement with a leverage ratio,
Shrinking pro-cyclicality and supporting countercyclical buffers
o Cyclicality of the minimum requirement, o Forward looking provisioning,
o Capital conservation, o Excess credit growth,
Addressing systemic risk and interconnectedness,
To commence a global liquidity standard
Liquidity Coverage Ratio (LCR),
Net Stable Funding Ratio (NSFR),
Monitoring tools:
o Mismatch in contractual maturity, o Concentration of lending,
o Available unencumbered assets, o LCR by currency,
o Market-oriented monitoring tools. The capital structure has been faced bit alteration in Basel-II. The capital components have
been divided in following shape:
Tier-1 Capital (going-concern capital):
Common Equity Tier-1,
Additional Tier-1
Tier 2 Capital (gone-concern capital)
Supervisory reconciliation elements:
Goodwill and other intangibles,
Deferred tax assets,
8
Hedge reserve for cash flow,
Shortfall of the stock of provisions to expected losses,
Gain on sale related to securitization transactions,
Investments in own shares such as treasury stock,
Reciprocal cross holdings in the capital of banking, financial and insurance
entities,
Investments that are outside the scope of regulatory consolidation such as
investment in Financial Institution’s capita and where bank does not own more than 10% of the issued common share capital of the entity,
Basel-III prescribed to create buffer against the systemic risk and cyclicality of economy:
Capital conservation buffer which must be comprised of common equity and has a link with the net profit of the bank.
Countercyclical buffer which is to be determined by the supervisor itself on the basis of relationship of the credit-GDP12 growth of that country. This buffer can be country specific or banks specific.
One of the fresh injections of these suggestions is the leverage ratio 13 which
would be supplementary to the CAR for the regulatory assessment. The leverage ratio has been come into light to achieve the following objectives:
To restrain the upsurge of leverage in the banking sector, serving avoidance of destabilizing deleveraging processes that can smash up the whole financial system and the economy; and
With a simple, non-risk based “backstop” measure strengthening the risk based requirements.
For the maiden time, BCBS provided two liquidity measurements (LCR for short term and NSFR for long term assessments) along with the revised capital
measurements in this package to strengthen liquidity framework in regulatory aspects. The backdrop of this initiation stated by BCBS is as follows:
Though banks have sufficient capital, as they do not manage their liquidity properly, face difficulties. Liquidity is important for the proper functioning of financial
markets as well as banks. Before 2007, funds were available at low cost. Any kind of frustration collapsed market, liquidity can evaporate quickly and liquidity crisis can be extended for an unexpected period of time. Financial crisis began in 2007. The whole
financial system became unstable, which emerged the necessity of central banks action to facilitate and support the financial market, some time, individual institutions. 14
12
Gross Domestic Product 13
Leverage Ratio = Adjusted Tier-1 Capital/Total Assets 14
BCBS (December 2010) Basel III: International framework for liquidity risk measurement, standards and
monitoring, (P-1)
9
At a glance, Basel-III proposals look like as follows: Figure-2: Summary of Basel-III
Risk management and
supervision
Capital
G-S
IFIs
Pillar-2
Basel-III
Capital
Liquidity
Global liquidity standard and
supervisory monitoring
Liquidity coverage ratio
The liquidity coverage ratio (LCR) will
require banks to have sufficient high-
quality liquid assets to withstand a 30-day
stressed funding scenario that is specified
by supervisors.
Net stable funding ratio
The net stable funding ratio (NSFR) is a
longer-term structural ratio designed to
address liquidity mismatches. It covers the
entire balance sheet and provides incentives
for banks to use stable sources of funding.
Principles for Sound Liquidity Risk
Management and Supervision
The Committee's 2008 guidance entitled
Principles takes account of lessons learned
during the crisis and are based on a
fundamental review of sound practices for
managing liquidity risk in banking
organizations.
Supervisory monitoring
The liquidity framework includes a
common set of monitoring metrics to assist
supervisors in identifying and analyzing
liquidity risk trends at both the bank and
system-wide level.
Pillar-1 Pillar-3
Risk Coverage Containing
Leverage
Market discipline
All B
an
ks
Quality and level of capital
Minimum Common Equity (CE) will be raised to 4.5% of RWA, after deductions.
"Gone concern" contingent capital "Gone concern" capital proposal would
requires contractual terms of capital instruments to include a clause allowing
at the discretion of the relevant authority write-off or conversion to common
shares if the bank is judged to be
nonviable.
Capital conservation buffer Comprising Common Equity of 2.5% of
RWA, bringing the total CE standard to
7%.
Countercyclical buffer Imposed within a range of 0-2.5%
comprising common equity, when
Authorities judge credit growth is resulting in an unacceptable build up of
systematic risk.
In addition to meeting the Basel III requirements, global systemically important financial institutions (SIFIs) must have higher loss absorbency capacity to reflect the greater
risks that they pose to the financial system. The Committee has developed a methodology that includes both quantitative indicators and qualitative elements to identify global
SIFIs. The additional loss absorbency requirements are to be met with a progressive Common Equity Tier 1 (CET1) capital requirement ranging from 1% to 2.5%, depending on a bank's systemic importance. A consultative document was submitted to the Financial Stability Board (FSB), which is coordinating the overall set of measures to reduce the
moral hazard posed by global systemically important financial institutions.
Securitizations
Strengthens the capital treatment for certain
complex securitizations. By conducting more rigorous
credit analyses of externally rated securitization
exposures.
Trading book Significantly higher capital
for trading and derivatives activities and complex
securitizations held in the trading book. A stressed
VAR to mitigate pro-cyclicality.
Counterparty credit risk Substantial strengthening of
the counterparty credit risk
framework.
Leverage ratio
A non-risk-based leverage ratio that
includes off-balance sheet exposures will
serve as a backstop to the risk-based capital
requirement. Also
helps contain system wide build up of
leverage.
Supplemental Pillar 2
requirements. Address firm-wide governance
and risk management; capturing the risk of off-
balance sheet exposures and securitization activities;
managing risk concentrations; providing incentives for banks
to better manage risk and
returns over the long term; sound compensation practices;
for financial instruments; corporate governance; and
supervisory colleges.
Revised Pillar 3 disclosures
requirements The requirements introduced
relate to securitization exposures and sponsorship of off-balance
sheet vehicles. Enhanced disclosures on the detail of the
components of regulatory capital and their reconciliation to the
reported accounts will be
required, including a comprehensive explanation of
how a bank calculates its
regulatory capital ratios.
10
Chapter-3
History of Risk based capital adequacy regulations in Bangladesh
Historically Bangladesh Bank adopted the Liability- to-Capital approach for determining the regulatory capital within its jurisdiction. Under Bank Company Act 199115, the capital requirement for banks in Bangladesh under the jurisdiction of its central bank was 6% of
total time and demand liabilities of banks or the amount determined under that act whichever is higher.
3.1. Adoption of Basel-I in Bangladesh:
In 1996, Bangladesh Bank adopted the Basel-I propositions to formulate the capital adequacy regulations against risk weighted assets vide BRPD Circular No. 01/1996. The key points of that circular were to define capital following Basel-II.
Minimum Capital Standards: Bank should maintain not less than 8% of
capital to risk weighted assets with at least 4% in core capital. However the minimum capital requirements of Tk. 200 million for locally incorporated
banks and Tk. 100 million for banks incorporated outside Bangladesh if the capital against risk weighted assets will be less than that.
Determination of Risk-weighted Assets: Calculation methodology of Risk Weighted Assets (RWAs) was framed out by considering only Credit Risk
and balance sheet assets and off-balance sheet exposures are to be weighted according to broad categories of relative risk. Five categories of risk weight were suggested- 0%, 10%, 20%, 50% and 100%.
Implementation Deadline: The regulation was supposed to be in effect b y
June, 1996.
Reporting timeframe: Banks were instructed to assess their capital adequacy
position on half-yearly basis, i.e. 30th June and 31st December.
3.2. Revised Capital Adequacy Regulation:
Capital adequacy regulation issued vide BRPD Circular No. 01/1996, was revised through BRPD Circular No-10/2002 state that:
Bank should maintain not less than 9% capital to risk weighted assets with
at least 4.5% in core capital and this requirement was supposed to be achieved by 30 June 2003. However, the minimum capital requirements of
Tk. 400 million for locally incorporated banks and an amount equivalent to USD 10 million for banks incorporated outside Bangladesh were also there.
15
The supreme act for licensing and supervision of banks in Bangladesh
11
3.3 Basel-II Implementation Scenario in Bangladesh:
In 2006, BB undertook the initiatives to implement Basel-II accord proposed by BIS within the earliest possible time by forming three separate bodies:
i. National Steering Committee headed by a Deputy Governor, ii. Co-ordination Committee headed by an Executive Director,
iii. Basel-II Implementation Cell headed by a Deputy General Manager.
In the consequence of the synchronized activities of these three bodies, BB issued an action plan/roadmap16 for proper and full- fledged implementation of Basel-II in banking
industry of Bangladesh. Following this roadmap, BB pursued two major tasks:
Issuance of Guidelines17 for recognition of eligible External Credit Assessment Institutions (ECAIs18) in September 2008 for in order to instruct banks to nominate recognized ECAIs for their own as well as their counterparty credit rating.
Issuance of Guidelines19 on Risk Based Capital Adequacy (RBCA) for Banks
(Revised Regulatory Capital Framework in line with Basel II) in December 2008.
In accordance with the roadmap, BB carried out Parallel run of existing regulation
(Basel I) on Capital Adequacy & Basel II Accord from January to December 2009. After the parallel run, the full implementation20 of Guidelines on Risk Based Capital Adequacy (RBCA)
for Banks was in effect from January 2010. BB circulated a revised version of Guidelines on Risk Based Capital Adequacy in December 2010 by compiling all the concerned regulations related to Basel-II implementation.
To adopt the international best practices and to make the bank's capital more risk-
absorbent as well as to build the banking industry more shock resistant and stable, all scheduled banks are obligated to comply with "Guidelines on Risk Based Capital Adequacy (RBCA) for Banks - Revised Regulatory Framework in line with BASEL –II” from January 01, 2010. These
guidelines have been structured on following three aspects:
Minimum capital requirement has been defined and to be maintained by a bank
on solo basis as well as consolidated basis against RWA for credit, market, and operational risks.
Process for assessing the overall capital adequacy aligned with comprehensive
risk management of a bank.
Framework of public disclosure on the position of a bank's risk profiles, capital
adequacy, and risk management system. 16
BRPD Circu lar no. 14/2007 dated December 30, 2007 17
BRPD Circu lar no. 7/2008 dated September 23, 2008 18
Under the Standardized Approach of the Basel II, cred it rating is to be determined on the basis of risk profile
assessed by the ECAIs duly recognized by the supervisor. 19
BRPD Circu lar no. 9/2008 dated December 31, 2008 20
BRPD Circu lar no. 20/2009 dated December 29, 2009
12
3.2.1. Definition of Capital: Regulatory capital categorized in three Tiers:
Tier-1 capital comprises the highest quality of capital elements:
a) Paid up capital
b) Non-repayable share premium account c) Statutory reserve
d) General reserve e) Retained earnings f) Minority interest in subsidiaries
Tier-2 capital represents other elements which fall short of some of the characteristics of the core capital but contribute to the overall strength of a bank :
a) General provision
b) Revaluation reserves
Revaluation reserve for fixed assets
Revaluation reserve for securities
Revaluation reserve for equity instrument
c) All other preference shares d) Subordinated debt
Tier-3 capital known as ‘Additional Supplementary Capital’, consists of short-term subordinated debt (original maturity less than or equal to five years but greater
than or equal to two years) would be exclusively used to meet a proportion of the capital requirements for market risk.
For foreign banks operating in Bangladesh-
Tier 1 capital consists of the following items:
a) Funds from head office b) Remittable profit retained as capital
c) Any other items approved by BB for inclusion in Tier 1 capital
Tier 2 capital consists of the following items:
a) General provision b) Borrowing from head office in foreign currency c) Revaluation reserve for securities
d) Any other items approved by BB for inclusion in Tier 2 Capital.
13
3.2.2. Conditions for maintaining regulatory capital: The calculation of Tier 1 capital, Tier 2 capital, and Tier 3 capital shall be subject to the following conditions:
a) The amount of Tier 2 capital will be limited to 100% of the amount of
Tier 1 capital.
b) 50% of revaluation reserves for fixed assets and securities eligible for
Tier 2 capital.
c) 10% of revaluation reserves for equity instruments eligible for Tier 2
capital.
d) Subordinated debt shall be limited to a maximum of 30% of the
amount of Tier 1 capital.
e) Limitation of Tier 3: A minimum of about 28.5% of MR needs to be supported by Tier 1 capital. Supporting of MR from Tier 3 capital shall be limited up to maximum of 250% of a bank’s Tier 1 capital that
is available after meeting credit risk capital requirement.
3.2.3. Eligible regulatory capital: For calculating CAR, banks make following deductions from their Tier-1 capital:
a) Intangible asset e.g., book value of goodwill and value of any contingent assets, etc. which are shown as assets
b) Shortfall in provisions required against classified assets
c) Shortfall in provisions required against investment in shares
d) Remaining deficit on account of revaluation of investments in securities
after netting off from any other surplus on the securities.
e) Reciprocal/crossholdings of bank’s capital/subordinated debt artificially
intended to inflate the capital position of banks
f) Holding of equity shares in any form exceeding the approved limit under
section 26(2) of Bank Company Act, 1991. The additional/unauthorized amount of holdings will be deducted at 50% from Tier 1 capital and 50% from Tier 2 capital.
g) Investments in subsidiaries which are not consolidated: The usual practice
is to consolidate subsidiaries for evaluating the capital adequacy of banking groups. To restrict the multiple use of the same capital, deduction is essential. The deduction for such investments
will be 50% from Tier-1 capital and 50% from Tier-2 capital. The assets invested in subsidiary companies and whose capital had been deducted from that of the parent company, while computing CAR this asset will not be considered in total assts.
Eligible Tier 2 capital will be derived after deducting components (if any) qualified for deduction. Total eligible regulatory capital will be calculated by summing up the
eligible Tier-1, Tier-2 and Tier-3 capital.
14
3.2.4. Minimum Capital Requirement (MCR): MCR for the each scheduled bank in
Bangladesh is now 10% of total RWA which has been in effect from July 2011 to onwards or the amount determined by BB from time to time which is now BDT 400 Million. Moreover, banks
have to maintain at least 50% of required capital as Tier 1 capital. Banks have to maintain minimum CAR on ‘Solo’ basis as well as on ‘Consolidated’ basis as per instruction(s) given by BB from time to time.
3.2.5. Approaches for calculating RWA: For calculating RWA, Standardized
Approach for Credit Risk, Standardized (Rule Based) Approach for Market Risk and Basic Indicator Approach for Operational Risk is being followed. In this regard, following things are shown under credit risk:
Risk weights for Balance Sheet Exposures,
Risk Weight for Short Term Exposures,
Risk Weight against ECA Score (Published by OECD),
Credit Conversion Factor under Current Exposure Method,
Credit Conversion Factor under Original Exposure method and
Credit Conversion Factor for Non-market-related Off-balance sheet
transactions.
Under the standardized approach, the credit ratings assigned by the ECAI duly recognized by BB are used to assign risk weight against credit risk. BB has already recognized 05 (Five) ECAIs after assessing eligibility criteria and Risk Weights have been mapped against
different credit rating of ECAIs.
3.2.6. SRP & SREP: In respect of SRP, banks assess their overall capital adequacy to their risk profile and follow a strategy for maintaining adequate capital to compensate all the
risk fact in business. Banks are instructed to form an exclusive body (called SRP team) where risk management unit is an integral part, and a process document (called ICAAP) for assessing
their overall risk profile, and a strategy for maintaining adequate capital and to develop and practice better risk management techniques in monitoring and managing their risks. Supervisory Review Evaluation Process (SREP) of BB includes dialogue between BB and the bank’s SRP
team followed by findings/evaluation of the bank’s ICAAP. During SRP-SREP dialogue BB will review and determine additional capital to MCR of banks. For this purpose, banks are asked to
provide information in specified format on risks addressed by BB under SRP in line with their own ICAAP. BB has developed a process document21 for evaluation of ICAAP along with a uniform reporting format for the banks which identifies 9 risks beyond the 3 risks of Pillar-1 for
the banks of Bangladesh.
Those risks are: Residual Risk, Evaluation of Core Risk Management, Credit
Concentration Risk, and Interest Rate Risk in the Banking Book, Liquidity Risk, Reputation Risk, Settlement Risk, Strategic Risk, and Environmental & Climate Change Risk.
21
Process Document for SRP-SREP Dialogue on ICAAP -February 2011
15
Banks have been asked to calculate additional capital against each risk and identify whether any other risks is applicable for them or not. Summation of minimum capital of Pillar-1
and additional capital of Pillar-2 will be the adequate capital.
3.2.7. Market Discipline: The aim of Market Discipline is to establish more transparent and more disciplined financial market so that stakeholders can assess the position of a bank regarding holding of assets and to identify the risks relating to the assets and capital
adequacy to meet probable loss of assets. For the said purpose, banks have been instructed to develop a set of disclosure containing the key pieces of information on the assets, risk exposures,
risk assessment processes, and hence the capital adequacy to meet the risks. Banks should have a formal disclosure framework approved by the Board of Directors/Chief Executive Officer. The process of their disclosures will include validation and frequency. Banks provide all required
disclosures in both qualitative and quantitative form, as at end March of each year along with the annual financial statements. Banks have to submit a copy of their disclosures to BB. Banks also
make their annual disclosures both in their annual reports as well as their respective web sites. Qualitative disclosures will provide a general summary of a bank’s risk management objectives and policies, reporting system and definitions. The disclosure on the websites is made in the web
page of respective banks titled “Disclosures on Risk Based Capital (Basel II)” and the link to this page should be prominently provided on the home page of the bank’s website. Each of these
disclosures pertaining to a financial year should be available on the websites until disclosure of the 4th subsequent annual (as on March 31) disclosure is made. Disclosure requirements are:
a) Scope of application, b) Capital structure, c) Capital adequacy, d) Credit Risk, e) Equities: disclosures for banking book positions, f) Interest rate risk in the banking book (IRRBB), g)
Market risk, h) Operational risk.
3.2.8. Reporting Requirement: All banks are required to submit the RBCA report (according to the prescribed formats) on quarterly basis within the next 30 days of each quarter-end to the Department of Off-site Supervision of BB.
3.2.9. Penalty for non-compliance: BB may impose penalty and/or punishment as
per Bank Company Act, 1991, if a bank-
fails to meet minimum capital or CAR within the stipulated period,
willfully furnishes any false information in the reporting,
Fail to submit the RBCA report within stipulated time without any
acceptable/ satisfactory reason.
16
Chapter-4
Evaluation of Regulation in Bangladesh in the Context of Global Standard
4.1. Core Principles for Effective Banking after 1990 crisis:
After the emerging market crisis of the 1990s, “The IMF and the World Bank’ has jointly developed set of guiding principles and initiatives to work on standards and codes to
ensure financial stability and to provide reinforcement to international financial structure. These set standards are aimed for strengthening the economic institutions as well as developing and
disseminating required knowledge of the market participants of the contributing countries. In addition, these standards create the pavement for effective IMF surveillance and promote World Bank’s country assisting strategies. By timely adoption and execution of these principles,
participating countries can safeguard and advance in securing greater financial stability at both domestic and international levels.
The IMF and World Bank make a review in March 2011.They observed that uniform standard is more helpful in this changing environment in identifying countries gap, assessing
financial institution’s performance, financial stability & soundness. It also been identified that before taking any measures it is better to prioritize sector, assess policy areas, integrate the findings, then set standards. IMF, WB & Financial Stability Board decide to combine the
auditing standards under one policy area. They introduced internationally accepted code and standards in 12 areas.
Amongst those 12 standards and codes, standard for assessment of banking supervision
is Basel Committee on Banking Supervision’s Core Principles for Effective Banking
Supervision. BCBS suggested 25 principles for assessment of effectiveness of banking supervision in different jurisdiction. The principle regarding capital adequacy is Principle no. 6.
4.2. “Principle 6: Capital adequacy:
Supervisors must set prudent and appropriate minimum capital adequacy requirements for banks that reflect the risks that the bank undertakes, and must define the
components of capital, bearing in mind its ability to absorb losses. At least for internationally active banks, these requirements must not be less than those established in the applicable Basel requirement.”22 Under this principle a supervisory regulation concerning capital adequacy should
meet the following criteria:
4.2.1. Essential criteria:
1. Proper regulation needed to define capital components that are available to
absorb any kind of financial and economic shocks and monitoring and supervision needed for the compliance of banks to calculate and maintain minimum capital adequacy ratio,.
22
BCBS (October 2006) Core Principles Methodology
17
2. For internationally active banks, Basel accord should be followed in capital definition, computation method and ratio requirements.
3. The supervisor has the authority to impose a specific capital charge and/or
limits on all material risk exposures. 4. The required capital ratio reflects the risk profile of individual banks where
on-balance sheet and off-balance sheet risks are included.
5. Capital adequacy requirements consider all the banking system operation conditions. So, higher capital adequacy ratio than Basel specification may be required for a special jurisdiction.
6. If a bank fails to maintain minimum capital ratio Supervisory authority has
the power to take measures. 7. In calculating regulatory capital and assessing risk, bank should follow
supervisor approved standards. If banks do not continue to meet these qualifying standards on an ongoing basis, the supervisor may revoke its approval of the internal assessments.
4.2.2. Additional criteria :
1. For non- internationally active banks, the capital definition, the method of calculation and the capital requirement should be consistent with the principles of Basel requirements relevant to internationally active banks.
2. For non- internationally active banks and their holding companies, capital
adequacy ratios are calculated and applied in a manner generally consistent with the applicable Basel requirement, as set forth in the footnote to the Principle.
3. The supervisor has the power to require banks to adopt a forward- looking approach to capital management and set capital levels in anticipation of possible events or
changes in market conditions that could have an adverse effect. 4. The supervisor requires adequate distribution of capital within different
entities of a banking group according to the allocation of risks.
5. The supervisor may require an individual bank or banking group to maintain capital above the minimum to ensure that individual banks or banking groups are operating with the appropriate level of capital.
4.3. Assessment of capital adequacy regulation of BB:
BCA Section 13, 13A and 14 address capital and authorize BB to issue policies regarding maintenance of risk capital. Under this framework, all banks are required to semi-
annually calculate and maintain minimum capital adequacy ratios. As stated above, absolute capital for Bangladeshi banks is BDT 4000 million and foreign banks are required to deposit
18
BDT 4000 million in cash or unencumbered approved securities with Bangladesh Bank which represents paid up capital and reserves. The ratio required for all banks of Bangladesh, including
the internationally active banks, exceeds the Basel II requirement; each bank is to maintain a ratio of capital (the sum of Tier-1, Tier-2 and Tier-3) to risk weighted assets of at least 10%
capital, with core capital at least 50% of total capital. MCR is the above stipulated percentage of RWA or the amount of MCR fixed by Bangladesh Bank from time to time which one is higher.
Power to impose a specific capital charge and/or limits on all material risk exposures may be inferred in BCA Section 13A, which states that BB may with the previous consent of the
Government, make policies regarding the maintenance of risk capital. The section empowers the Guidelines on RBCA to be in effect and contains the local capital framework. Moreover, this authority has started to impose a specific capital charge or limits on material risks through the
implementation of Pillar-2. Failure to maintain adequate capital can result in a fine, as determined by BB (BCA Section 13 (7) and Guidelines on RBCA Section 1.9); additionally, if
during an exam, the capital is found to be deficient, the BB can issue a direction to address the failure to maintain the minimum ratio. In practice, this has been infrequently. The capital adequacy framework defines Tier-1, Tier-2 and Tier-3 capital and the definitions are broadly
consistent with those used in the Basel capital adequacy framework. Banks are required to maintain capital on both 'Solo' and 'Consolidated' basis. Both on and off balance sheet risks are
included in the risk calculation. In several other respects, the local standard has not been consistent with the Basel standard. They are:
• The Bangladesh treatment of commercial enterprises owned by the public sector is more liberal. The Basel framework requires such enterprises to be given the same risk weight as their private sector equivalents (100 percent) so as to avoid competitive inequalities. Most state
owned enterprises (Public sector entities) are assigned a 50 percent risk weight.
• Despite the very broad nature of permissible activities available to banks, there are no additional capital requirements to address some potential risks being undertaken by the banks. Capital adequacy requirements do not take into account the conditions under which the banking
system operates, such as non-compliance with international accounting standards, legal difficulties in recovering loans in default, prevailing economic conditions, problems with
directed and connected lending and the lack of sophistication in the banking industry. • BB capital adequacy framework does not contain treatment of securitization
framework against credit risk. Although banks in Bangladesh have no securitization instrument in their portfolio of exposures, there should be a provision in this respect under a forward
looking consideration. • Banks in Bangladesh are allowed to include revaluation reserve in Tier-2 capital while
there exist no guidelines or specific instruction for revaluations of assets.
Yet, Guidelines on RBCA (December 2010) for banks is almost aligned with the Basel standard of capital adequacy. BB has made the alterations where discretion of national supervisors is allowed.
19
Chapter-5
Data Analysis & Findings
As stated above, secondary data have been used in analysis. As the full implementation of
Basel-II has been started in Bangladesh from January 2010, first reporting quarter (March 2010) has been considered as starting point. The end point of analysis has been last available quarter
(June 2011). 11 indicators under 4 broad heads have been used in this analysis.
5.1. Comparative Capital Adequacy Ratio (CAR)
CAR is the proportion between the total RWA and total eligib le capital for any bank. In
Bangladesh, minimum CAR for the banks regarding Basel-II has been scheduled as follows:
8% from January 2010 to June 2010,
9% from July 2010 to June 2011,
10% from July 2011 to till date.
As stated above, minimum CAR prescribed by BIS is 8%. Considering this conditions, it is
observed from table-1 that:
10 banks were operating below the minimum CAR on June 2010, 4 banks were operating below the minimum CAR on June 2011
Table-1: Comparative Capital Adequacy Ratio in Different Banks
If the intra- industry situation is observed (Figure-3), it is found that foreign banks
are operating well above the regulatory requirement, though they faced slight fall in the middle of the period which has been recovered later on. Private Banks move around the regulatory
compulsion. Although the SCBs stood significantly below the requirement, they recovered their position at later phase. But, the DFIs especially BKB and RAKUB which were established for agricultural development of the country have been standing significantly below the regulatory
requirement and have experienced worsen situation.
21
Figure-3: Comparative CAR in Different Banks
5.2. Risk Weighted Asset (RWA) Composition
In Bangladesh, at least 65% of the RWA comes against Credit Risk (CR). The dominance
of CR in determining RWA is prevalent in foreign banks and private banks. Table-2 shows that, almost 85-90% of RWA sources from credit risk in foreign banks whereas private banks have RWA against CR at 70-95%. The situation is almost replicated in SCBs and DFIs except
Bangladesh Development Bank Ltd (BDBL). This bank was created from the amalgamation of BSB and BSRS which were instituted for industrial development of the country. Thus, this bank
has much higher RWA against Market Risk (32-39%) (Table-3) whereas the percentage lies between 1-15% for other banks except Agrani Bank Ltd. Agrani bank has RWA against Market Risk 16-21% of total RWA. As capital charge for Operational Risk (OR) is a function of Gross
profit, those banks having large credit portfolio or operating efficiency have higher portion of RWA from OR. That is seen in Table-4. Foreign banks have better operating efficiency and
SCBs have larger credit portfolio that makes the higher portion of RWA against Operational Risk compared to others.
Table-2: Risk Weighted Asset for Credit Risk (CR) as % of Total Risk Weighted Asset
SUB TOTAL 84.78% 85.01% 85.97% 85.06% 85.85% 85.61%
GRAND TOTAL 83.67% 84.07% 84.90% 84.53% 83.91% 83.58%
Risk weighted assets for the whole industry come against Credit Risk which implies the less market exposure by the banks, as 75%-91% of RWA come from CR in the industry
(Figure-4).
23
Figure-4: RWA for CR of Total RWA
Table-3: Risk Weighted Asset for Market Risk as % of Total Risk Weighted Asset
Figure-6 shows that RWA for Operational Risk have been very steady for all sub
sectors over the whole period which implies the steady movement of their gross profit.
Figure-6: RWA for OR as % of Total RWA
27
5.3. Capital Composition:
In context of capital composition, Table-5 shows that every bank in Bangladesh has much higher core capital than the required capital (50% of the total capital). Foreign banks have high
dependence on the core capital (almost 90%) for their capital base and 75%-80% of the private banks' capital comes from core capital. Some exception observed for BKB, RAKUB, BCBL, ICB Islamic Bank Ltd, as these banks are having huge provision shortfall and accumulated loss.
Only 10%-11% of foreign bank’s capital sources from supplementary capital while the percentage is 30%-40% for SCB’s (Table-6). In case of DFIs, capital composition scenario is bit
complex because of their huge accumulated loss and provision shortfall (Figure-7, 8 & 9). For these reasons, in spite of having ample paid up capital, they always lie below the regulatory requirement. Capital Composition scenario is much balanced in private banks where the ratio of
Tier-2 and Tier-I capital retains up to 60% (Table-7), which implies the usage of hybrid capital instruments by private banks.
SUB TOTAL 66.78% 68.05% 65.76% 60.61% 66.10% 65.76%
GRAND TOTAL 72.18% 73.50% 67.58% 62.81% 65.87% 67.58%
39
Figure-13: PUC & Reserve as % of Total Capital
Paid up capital is the most dominant component for the whole industry. In addition to that, reserve has significant share in the capital base. Here also, the situation of DFIs is very
worrisome for the whole period (Figure-10, 11 & 12). More importantly, worse situation is represented by BKB and RAKUB26 which are run for the development facilitating agricultural financing at national and regional level. But both of them are running with massive accumulated
loss which has not let them to improve capital adequacy context. This problem is also partially applicable for the SCBs though they have been able to show some symbol of improvement.
26
BKB- Bangladesh Krishi Bank.
RAKUB- Rajshahi Krishi Unnayan Bank
40
Chapter-6
Recommendation & Conclusion
6.1. Recommendations:
As the DFIs have been established with specific development objective, comprehensive and integrated initiatives should be undertaken by the
government and central bank to revive them out of the existing situation.
BB should align their capital adequacy regulations properly with the Basel Core Principles.
During the research, data from on-site supervision have not been much available. BB should take proper initiative to preserve real time on-site inspection data.
More emphasis should be given in corporate governance.
ECAI’s should be continuously evaluated and monitored.
6.2. Conclusion:
Risk based capital adequacy is first step for establishing risk based supervision. With a view to replacing the transaction based supervision with the risk based supervision, ensuring
capital adequacy by addressing asset risks properly is the only way to move forward. Moreover, maintaining capital adequacy under apposite and structured risk based assessment is the foundation to build up a resilient banking sector. So, taking into account of the present financial
market scenario, supervisor as well as banks have to renovate them to actually cope-up with the challenge of Basel II. Banks should reinforce their internal control systems, and make every
effort to develop internal risk models and management systems. In a nutshell, from a regulator’s perspective, a relevant standards and apt guidelines commensurate to BASEL framework should be set for the banking industry so that the benefits of risk management can be maximized and the
undesired outcomes of financial turmoil can be mitigated.
41
References
1. Basle Committee on Banking Supervision (July 1988) International Convergence of Capital Measurement and Capital Standards. Retrieved from Bank for International
2. Basle Committee on Banking Supervision (2004) International Convergence of Capital Measurement and Capital Standards. A Revised Framework. Retrieved from Bank for International Settlement website: http://www.bis.org/publ/bcbs107.pdf
3. Basle Committee on Banking Supervision (June 2006) International Convergence
of Capital Measurement and Capital Standards. Retrieved from Bank for International Settlement website: http://www.bis.org/publ/bcbs128.pdf
4. Basel Committee on Banking Supervision (October 2006) Core Principles Methodology. Retrieved from Bank for International Settlement website:
http://www.bis.org/publ/bcbs130.pdf
5. Basle Committee on Banking Supervision (July 2009) Enhancement to the Basel II
framework. Retrieved from Bank for International Settlement website: http://www.bis.org/publ/bcbs157.pdf
6. Basel Committee on Banking Supervision (December 2010). Basel III: A Global
Regulatory Framework for More Resilient Banks and Banking Systems. Retrieved from
Bank for International Settlement website: http://www.bis.org/publ/bcbs189.pdf
7. Basel Committee on Banking Supervision. (December 2010). Basel III: International Framework for Liquidity Risk Measurement, Standards and Monitoring. Retrieved from Bank for International Settlement website: http://www.bis.org/publ/bcbs188.pdf
8. Basel Committee on Banking Supervision.(December 2010). Guidance for National
Authorities Operating the Countercyclical Capital Buffer. Retrieved from Bank for International Settlement website: www.bis.org/publ/bcbs187.htm
9. Basle Committee on Banking Supervision (February 2011) Revision to the Basel II market risk framework. Retrieved from Bank for International Settlement website: http://www.bis.org/publ/bcbs193.pdf
10. Bangladesh Bank (December 2010) Guidelines on Risk Based Capital Adequacy-
(Revised Regulatory Capital Framework for banks in line with Basel II).
11. Bangladesh Bank (February 2011) Process Document for SRP-SREP Dialogue on
