The financial sector in Bangladesh has grown at an unprecedented pace over the last half a decade or so. The liquidity in June 2011 was Taka 976.90 billion (97,690 crore) which jumped to Taka 2146.76 billion (2,14,676 crore) in June 2014. The foreign exchange reserve increased more than seven times over a decade or so, from $3.0 billion to $22 billion. The overall capital adequacy ratio has grown to 10.68 per cent, fulfilling the BASEL-II requirement. The access to finance has also increased significantly, reflecting higher level of financial inclusion. The number of bank accounts has increased from 37.6 million in 2008 to 94 million in 2014. This also includes more than 16 million mobile bank accounts. Greater financial sector development also demands greater supervision and hence increased discipline.
Despite many negative observations like 'slack supervision' by populist commentators (unfortunately including one or two former regulators too), the fact remains that Bangladesh Bank has embarked on a number of down to earth reforms in this area.
It is true one cannot ensure overnight improvement in the quality of supervision of financial sector given our political economy and less than desirable stock of human resources. Yet, we have been able to learn great lessons from some of the 'big scams' (that are not uncommon in any financial system) and improved our quality of bank supervision in a significant way. Let me elaborate on some of the recent reforms initiatives on bank supervision for public consumption.
We believe that our new supervisory tools and practices, together with the additional innovations we plan to introduce over the next two or three years, will provide effective regulation and supervision over our growing banking sector. Although these developments may not have all fallen neatly under the category of risk-based supervision (RBS), they are very much needed and we do feel that they have addressed the risks that we have identified, and continue to identify, in our banks.
Our banking sector is not as complex as that which is found in the more advanced industrialised countries. The risks that we face and we attempt to tackle on a daily basis are the familiar ones, but their familiarity does not mean that we are complacent about them.
Credit losses leading to inadequate profitability and erosion of capital, the risks posed by concentration of credit in a few industries or a few firms, reductions in profitability due to adverse movements in the capital markets, the risks of internal and external fraud, the perils of ineffective liquidity management at a few firms, and the possibility of linked failures of banks due to their interconnectedness are all risks that we have identified and grappled with. And we do realise that the task of identifying and managing these risks cannot rest with Bangladesh Bank alone. The commercial banks have to do their part, which is why we have insisted on improvement in corporate governance, including better risk management.
It may be helpful to run through a list of the upgrades that have enabled us to better and more quickly identify and deal with emerging risks:
l Improvements in policies on loan classification, provisioning, and rescheduling, and focused inspections on the implementation of these policies, that have provided more accurate data on loan quality
l Revisions and upgrades to the CAMELS methodology that include more qualitative and quantitative indicators on the threats to liquidity, profitability and capital
l Macro - and micro-stress
testing
l New risk management guidelines that spell out Bangladesh Bank's expectations of commercial bank executives and staff
l New restrictions on capital market investments by banks and their subsidiaries
l Meetings with bank management to review their capital management activities, as part of the Supervisory Review and Evaluation Process (SREP) contained in Basel II and Basel III
l The collection of data on the Basel III liquidity metrics and a roadmap to introduce Basel III capital and liquidity calculations over the next few years
l Revised rules on single borrower exposure that group loans from borrowers who are connected to each other
l Revised rules on transactions with related persons of the bank, to reduce the risk of insider abuse
l An Integrated Supervision System (ISS) that provides on-line access to a wealth of financial information on individual banks and that is continually being refined and upgraded
l Better coordination between on-site inspection and off-site monitoring, by combining their functions under a single Deputy Governor and Executive Director
l An integrated approach to the monitoring of risks at individual banks by combining off-site monitoring functions into the role of Bank Supervision Specialist, who watches over a portfolio of banks
l Monthly meetings with the Executive Director in charge of on-site examination and off-site monitoring, to review the situation at individual institutions and discuss current and emerging risks
l A new Financial Integrity and Customer Services Department to focus on fraud risk reduction at banks
l A new Internal Controls and Fraud Risk Reduction self-assessment, completed by banks and validated by on-site inspections, that ramps up the requirements placed on banks
l New inspection procedures on asset quality, liquidity, and internal audit/internal controls that have been tested on the state-owned commercial banks
l Memorandum of understanding (MoUs) with the state-owned commercial banks, to correct their deficiencies so that their recapitalisation can be productively utilised
l A new Financial Stability Department, to focus on emerging risks throughout the economy and in the banking sector as a whole, and to deal with intervention and resolution of failing banks
l A Financial Stability Report to describe the condition and performance of the entire banking sector with a focus on current and emerging risks
l Mechanisms to identify domestic systemically-important banks (D-SIBs) and subject them to more intense supervision
l An action plan toward the development of an effective bank intervention and resolution regime for failing banks, including specific intervention points and a "lender of last resort" function
l A new tool to identify dangerous interconnections between banks that could lead to a generalised liquidity crisis
l A foreign Exchange Monitoring Dashboard and the Integrated Supervision System (ISS) are in place in Bangladesh Bank to monitor banking operations at the branch level digitally. Any irregularity shown in either of the dashboards warrants immediate interventions by the relevant examiners. Bankers are, therefore, kept on their toes and have become extremely cautious about due diligence in their operations
All the while that we are dealing with "old" risks and looking for "new" ones, we are conducting baseline supervision of inspection and monitoring and pushing for greater data integrity, so that our supervisory decisions have factual justification. Conducting baseline supervision and upgrading it to full-fledged RBS at the same time is a difficult task. Our inspectors and analysts do need a more structured, comprehensive training programme. We realise that some of our practices may be considered out of date, such as the routine review of so many commercial bank branches, and we are striving to streamline the process and focus our efforts on the riskiest areas of the riskiest institutions. Our field examiners are unearthing many irregularities at the branches and bringing the dirt from below the carpets. Smoke will certainly settle down as we move on: Move we must, steadily and steadfastly.
Adapted from a speech Dr. Atiur Rahman, Governor of Bangladesh Bank, gave at
the Annual Conference of
Bank CEOsat BIBM on September 13, 20-14.
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