Cost prices of stocks to be taken into account

The banks' exposure limit to the capital market will now be calculated taking into account the cost prices of stocks as Bangladesh Bank (BB) issued a circular in this regard on Thursday.
"The cost price of stocks purchased by the banks should be considered as the market price," said the circular, further explaining the 'market price' as defined in a previous circular.
From now on, the banks will calculate their exposures on the basis of cost prices of stocks, which are expected to create a big space for investing more by the banks.
The new calculation method has become effective immediately, replacing the previous calculation method.
With the frequent fluctuations of the market prices of stocks, the banks' exposure to the market often crosses the limit, violating the relevant regulation.
The commercial banks have been requesting the regulators to change the calculation method since the stock market debacle in 2010.
The banks can invest in the listed securities up to 25 per cent of their equity on a solo basis and 50 per cent on a consolidated basis, according to the Bank Companies Act 1991.
Earlier, the financial institution division of the ministry of finance also recommended that the BB calculate the capital market exposure limit of banks on a cost price basis instead of the market prices.
Banks are considered to be the major institutional investors in the bourses in Dhaka and Chattogram, and their selling pressure seriously affects the market.
Earlier, in a coordination meeting of the regulatory bodies, the Bangladesh Securities and Exchange Commission (BSEC) urged the BB to consider the matter for the sake of making the capital market vibrant and sound.
People familiar with the matter told the FE that currently many banks' investment exposure in the stock market remained below their respective limits. If calculated on the basis of purchase prices, the exposure limits of many banks will increase further.
Earlier, on July 17, the central bank sent a letter to the ministry of finance, seeking an opinion regarding a solution to the problem related to the banks' capital market exposure.

jasimharoon@yahoo.com