Safeguarding financial stability through regulation
Tuesday, 26 October 2010
Farida Shaikh
To meet the global financial crisis, about a year ago, the Conference on Global Banking in Mumbai announced safe guarding financial stability through regulation and supervision with a note on 'altruism driven self discipline.'
Bangladesh Bank governor Dr. Atiur Rahman, in his keynote address said that the on-going reforms in financial sector regulation and supervision in Bangladesh aims at convergence with the global best practice standard set by the Basel Committee/BCBS for effective bank supervision. These are financial statements of the banks in internationally accepted accounting standard. Good corporate governance should be practised by the banks. These would consist of proper tests for directors and chief executives, their role and responsibilities and the accountability for directors prior to central bank clearance for appointment and removal of CEOs.
Recently the four state-owned commercial banks have been converted to public limited companies as steps towards privatisation. For sound risk management Bangladesh Bank has issued a set of guidelines for management of core risks by the banks. Limits have been set on large single borrower, limits and disclosure on loans and facilities to directors, senior management and connected interests. Further support to risk management is provided through internal control and compliance units reporting to audit committees of boards, annual external audits, on and offsite Bangladesh Bank supervision. From 2009 onwards banks are to work out their capital requirement according to Basel II capital regime along with continuing compliance of current Basel I minimum plus two percent capital requirement on risk weighted assets.
Upgraded regulatory and supervisory capacities would cover CAMELS rating of banks on a set of performance indicators. Introduction of intense stress testing routine would cover the shortfalls of the commercial banks trend towards engagement in capital market activities. Banks are engaged in major program of upgradation of IT platform to enable further the process of analyzing and reporting to Bangladesh Bank. To encourage the financial sector in underserved priority areas Bangladesh Bank is engaged in supporting and promoting 'deeper engagement of financial sector in agriculture, SMEs, low cost housing, renewable energy, environmental sustainability, solar/biogas, effluent treatment plants with provision for refinance if need be.'
It is significant to note that the financial return on these activities when below par will be compared with greater socio-economic benefit such as employment, more assured livelihood. 'Such long term economic engagement will be preferred over risky speculative investment in the short term.'
The governor's address ended on the resounding note that '… smaller developing economies should have opportunities for representation in these global consultation…Global dialogue for new global financial architecture should have voice of smaller economies. The new financial order should have tethering global liquidity.'
This end note is significant, for the members of the Basel Committee of Banking Supervision come from all over the world including India, Indonesia and not from Bangladesh, Nepal, Myanmar, SriLanka, Pakistan,Saudi Arabia or any of the Middle eastern countries.
Basil II is an improvement in 1988, International Bank Capital Accord on Basil I 1980. It offers more complex models for calculating regulatory capital. In other words banks holding riskier assets should have more capital at hand than those maintaining safer portfolios. Basel II standard requires that financial institutions maintain enough cash reserve to cover risks incurred by operations. Also requires banks to publish details of risks investments and risk management practices. It is mandatory for institutional managers to make capital allocation more risk sensitive. It requires the separation of credit risks from operational risks, there by reducing the scope or possibility of regulatory arbitrage by attempting to align the real or economic risk precisely with regulatory assessment.
According to the Credit Rating Information and Services Limited/CRISL, Bangladesh will have to follow the roadmap of Basel implementation… to remain in line with the international banking system. Briefly, Bangladesh financial system consists of Bangladesh Bank as the central bank, four nationalised commercial banks, and five government owned specialized banks, 30 private banks, ten foreign banks and 28 non-bank financial institutions.
The country's 28/29 non-banking financial institutions have for long demanded that the central bank allow foreign bank borrowing. The average cost of fund of an NBFI is much higher compared to a banking company. Under the Financial Institution Act 1993 direct foreign transaction is prohibited for the NBFI. To raise their capital nearly 20 NBFIs have issued initial public offering/IPO.
Recently Bangladesh Bank decided that NBFIs would come under Basel II from January 2012 aiming at consolidation of financial base of the institutions. NBFIs would calculate minimum capital requirement under Basel II on test basis from 2011 and on the draft guideline. Next would be to develop risk adjusted assets and liability portfolio and capital structure.
According to Bangladesh Bank risk is the vital issue to be addressed. Basel II will be implemented under three approaches. These consist of: standardised approach for calculating risk weighted amount against credit. Second is the standardised approach to measure market risks and the third approach is the basic indicator approach for operational risk. Feed back meeting between April-August will finalise the guideline.
Bangladesh Bank circular 14, 2007 Roadmap to Basel II: For implementation of Basel II the Quantitative Impact study showed that steps are needed to strengthen the capacity building of the supervisory officials who would then be prepared to implement the Basel II the new capital accord.
The initial steps are standardized approach, which is that all banks need to have the same method to calculate risk weighted amount against credit risk supported by external credit assessment institutions/ ECAIs. There is to be standardised rule to assess market risk and basic indicator approach for operational risk.
Risks then are of three types: weighted, market and operational. There are standard measures for risk management. To follow the roadmap of Basel II implementation, it is necessary to remain in line with international banking system.
On February 9, 2009 Sameer Dossani interviewed Noam Chomsky about the global economic crisis and its roots: Double Standard: part of the question was '… Can you talk a little about the international implications of the financial crisis …' Chomsky's answer, partly, was '…It is rather striking to notice that the consensus on how to deal with the crisis in the rich countries is almost the opposite of the consensus on how the poor should deal with similar economic crisis. When the so-called developing countries have a financial crisis the IMF rules are: raise interest rates, cut down economic growth, tighten the belt, pay off your debts (to us) privatize and so on. That's the opposite of what is prescribed here. What's prescribed here is lower interest rates, pour government money into stimulating the economy, nationalise (but don't use the word) and so on. So yes, there is one set of rules for the weak and a different set of rules for the powerful. There is nothing novel about that.'
My own thoughts on the global financial crisis take me back to my school days. I recollect a passage for précis writing, thus: Upon a hill site there was a clear cool stream of flowing water. A huge, fearful animal, probably a lion, was drinking water in the upstream region. Quite far away from him, a timid docile creature was also drinking water from the down stream region. Suddenly the big animal pounced upon the small animal and said that he had polluted the water by drinking from the same stream. The smaller creature disagreed and said this was not possible from the down stream position. The big animal then said that then it was the father of the small animal who had polluted the water for 'he drank water before you.' shouted the big animal. For me the current crisis bears a strong semblance to the content of this passage.
The author is a sociologist/ freelance writer. She can be reached at
e-mail : farida_s9@optimaxbd.net
To meet the global financial crisis, about a year ago, the Conference on Global Banking in Mumbai announced safe guarding financial stability through regulation and supervision with a note on 'altruism driven self discipline.'
Bangladesh Bank governor Dr. Atiur Rahman, in his keynote address said that the on-going reforms in financial sector regulation and supervision in Bangladesh aims at convergence with the global best practice standard set by the Basel Committee/BCBS for effective bank supervision. These are financial statements of the banks in internationally accepted accounting standard. Good corporate governance should be practised by the banks. These would consist of proper tests for directors and chief executives, their role and responsibilities and the accountability for directors prior to central bank clearance for appointment and removal of CEOs.
Recently the four state-owned commercial banks have been converted to public limited companies as steps towards privatisation. For sound risk management Bangladesh Bank has issued a set of guidelines for management of core risks by the banks. Limits have been set on large single borrower, limits and disclosure on loans and facilities to directors, senior management and connected interests. Further support to risk management is provided through internal control and compliance units reporting to audit committees of boards, annual external audits, on and offsite Bangladesh Bank supervision. From 2009 onwards banks are to work out their capital requirement according to Basel II capital regime along with continuing compliance of current Basel I minimum plus two percent capital requirement on risk weighted assets.
Upgraded regulatory and supervisory capacities would cover CAMELS rating of banks on a set of performance indicators. Introduction of intense stress testing routine would cover the shortfalls of the commercial banks trend towards engagement in capital market activities. Banks are engaged in major program of upgradation of IT platform to enable further the process of analyzing and reporting to Bangladesh Bank. To encourage the financial sector in underserved priority areas Bangladesh Bank is engaged in supporting and promoting 'deeper engagement of financial sector in agriculture, SMEs, low cost housing, renewable energy, environmental sustainability, solar/biogas, effluent treatment plants with provision for refinance if need be.'
It is significant to note that the financial return on these activities when below par will be compared with greater socio-economic benefit such as employment, more assured livelihood. 'Such long term economic engagement will be preferred over risky speculative investment in the short term.'
The governor's address ended on the resounding note that '… smaller developing economies should have opportunities for representation in these global consultation…Global dialogue for new global financial architecture should have voice of smaller economies. The new financial order should have tethering global liquidity.'
This end note is significant, for the members of the Basel Committee of Banking Supervision come from all over the world including India, Indonesia and not from Bangladesh, Nepal, Myanmar, SriLanka, Pakistan,Saudi Arabia or any of the Middle eastern countries.
Basil II is an improvement in 1988, International Bank Capital Accord on Basil I 1980. It offers more complex models for calculating regulatory capital. In other words banks holding riskier assets should have more capital at hand than those maintaining safer portfolios. Basel II standard requires that financial institutions maintain enough cash reserve to cover risks incurred by operations. Also requires banks to publish details of risks investments and risk management practices. It is mandatory for institutional managers to make capital allocation more risk sensitive. It requires the separation of credit risks from operational risks, there by reducing the scope or possibility of regulatory arbitrage by attempting to align the real or economic risk precisely with regulatory assessment.
According to the Credit Rating Information and Services Limited/CRISL, Bangladesh will have to follow the roadmap of Basel implementation… to remain in line with the international banking system. Briefly, Bangladesh financial system consists of Bangladesh Bank as the central bank, four nationalised commercial banks, and five government owned specialized banks, 30 private banks, ten foreign banks and 28 non-bank financial institutions.
The country's 28/29 non-banking financial institutions have for long demanded that the central bank allow foreign bank borrowing. The average cost of fund of an NBFI is much higher compared to a banking company. Under the Financial Institution Act 1993 direct foreign transaction is prohibited for the NBFI. To raise their capital nearly 20 NBFIs have issued initial public offering/IPO.
Recently Bangladesh Bank decided that NBFIs would come under Basel II from January 2012 aiming at consolidation of financial base of the institutions. NBFIs would calculate minimum capital requirement under Basel II on test basis from 2011 and on the draft guideline. Next would be to develop risk adjusted assets and liability portfolio and capital structure.
According to Bangladesh Bank risk is the vital issue to be addressed. Basel II will be implemented under three approaches. These consist of: standardised approach for calculating risk weighted amount against credit. Second is the standardised approach to measure market risks and the third approach is the basic indicator approach for operational risk. Feed back meeting between April-August will finalise the guideline.
Bangladesh Bank circular 14, 2007 Roadmap to Basel II: For implementation of Basel II the Quantitative Impact study showed that steps are needed to strengthen the capacity building of the supervisory officials who would then be prepared to implement the Basel II the new capital accord.
The initial steps are standardized approach, which is that all banks need to have the same method to calculate risk weighted amount against credit risk supported by external credit assessment institutions/ ECAIs. There is to be standardised rule to assess market risk and basic indicator approach for operational risk.
Risks then are of three types: weighted, market and operational. There are standard measures for risk management. To follow the roadmap of Basel II implementation, it is necessary to remain in line with international banking system.
On February 9, 2009 Sameer Dossani interviewed Noam Chomsky about the global economic crisis and its roots: Double Standard: part of the question was '… Can you talk a little about the international implications of the financial crisis …' Chomsky's answer, partly, was '…It is rather striking to notice that the consensus on how to deal with the crisis in the rich countries is almost the opposite of the consensus on how the poor should deal with similar economic crisis. When the so-called developing countries have a financial crisis the IMF rules are: raise interest rates, cut down economic growth, tighten the belt, pay off your debts (to us) privatize and so on. That's the opposite of what is prescribed here. What's prescribed here is lower interest rates, pour government money into stimulating the economy, nationalise (but don't use the word) and so on. So yes, there is one set of rules for the weak and a different set of rules for the powerful. There is nothing novel about that.'
My own thoughts on the global financial crisis take me back to my school days. I recollect a passage for précis writing, thus: Upon a hill site there was a clear cool stream of flowing water. A huge, fearful animal, probably a lion, was drinking water in the upstream region. Quite far away from him, a timid docile creature was also drinking water from the down stream region. Suddenly the big animal pounced upon the small animal and said that he had polluted the water by drinking from the same stream. The smaller creature disagreed and said this was not possible from the down stream position. The big animal then said that then it was the father of the small animal who had polluted the water for 'he drank water before you.' shouted the big animal. For me the current crisis bears a strong semblance to the content of this passage.
The author is a sociologist/ freelance writer. She can be reached at
e-mail : farida_s9@optimaxbd.net