Examination Committee : Dr. Sundar Venkatesh(Chairperson) Dr. - - PowerPoint PPT Presentation

Examination Committee :

• Dr. Sundar Venkatesh(Chairperson)
• Dr. Juthathip Jongwanich (Co-chair)
• Dr. Yousre Badir ( Member)

Agenda of Presentation

Objectives Data and Methodology Risk Based Supervision Supervision by Bangladesh Bank

Bank Failure

Bank Failure Effectiveness of BB’s Supervision(Findings) Recommendations

Objective

To study the present supervisory role of Bangladesh Bank

(BB);

To review the supervisory methods used in developed (G-7)

countries and Risk based supervision; countries and Risk based supervision;

To identify the causes of Bank Failure and its effect; To analyze the effectiveness of BB’s supervision in the

Banking sector of Bangladesh;

Data & Methodology

Mainly secondary data Data collected for period from 2004 to 2010 Various laws, rules, regulation and circulars relating to

Bangladesh’s banking sector Bangladesh’s banking sector

Current Issues relating to international banking arena,

international best practice such as Basel core principles and Risk based supervision

For data analysis-Trend and Time series data, ratio analysis

and graphical presentation

Bank supervision in some developed countries and Risk

Based Supervision

Mainly group of seven (G-7) industrialized countries In those countries-mainly off-site supervision In those countries not only the Central Bank is the main In those countries not only the Central Bank is the main

supervisor of banking sector but several other agencies such as Financial Services Authority and Ministry of Finance/Department of Treasury are also involved

Risk Based Supervision

A new era in banking supervision The Basel Core Principles for Effective Banking Supervision

(BCPs) also explicitly require banks to have comprehensive risk management process which is described in BCP No. 7 “Supervisors must be satisfied that banks and banking groups have in place a Comprehensive risk management process have in place a Comprehensive risk management process (including Board and senior management oversight) to identify, evaluate, monitor and control or mitigate all material risks and to assess their overall capital adequacy in relation to their risk profile.”

Definition….. RBS may be defined as a supervisory approach

that is designed to identify activities and practices of greater risk to the soundness of banks and accordingly deploying supervisory resources towards the assessment of how those risks are being managed by banks.

Benefits of RBS

cost-effective use of supervisory resources through a

greater focus on risk, which in turn results in better use

• f bank resources;

a consistent framework for evaluating banks through the

separate assessment inherent and risk management processes; processes;

early identification of emerging risks at individual banks

and on a sectoral basis;

a better appreciation by supervisors of the characteristics

• f the banks' business, of the risks they face and of the

quality of their management;

it helps instill into banks’ management the culture of risk

management and oversight.

Traditional Vs. Risk Based Supervision

Traditional Approach Risk based Approach Transaction based testing Process-oriented Point-in-time assessment Continuous assessment Point-in-time assessment Continuous assessment Standard procedures Risk profile driven procedures Historical performance Forward looking indicators Focus on risk avoidance Focus on risk mitigation

Bank Supervision by Bangladesh Bank

Bangladesh Bank, being central bank of Bangladesh,

supervises banks and financial institutions

Legal framework in Article 7A(F) of Bangladesh Bank

• rder,1972 and section 44 of Banking Company Act,1991

Off-site, On-site and surprise inspection (various dept of BB) Off-site, On-site and surprise inspection (various dept of BB) CAMEL Rating from 1995 Issues rules and regulation time to time on need basis and in

public interest

Introduce “ Stress Testing” for Banks and FI’S after the global

financial crisis

Bank Supervision by Bangladesh Bank(Contd…)

Started risk based supervision from 2005, frequency annually

• n credit risk, foreign exchange risk, asset liability

management, information technology, anti money laundering risk and internal control and compliance risk

Currently traditional inspection and risk based inspection

going on parallel, but more focus on risk based inspection going on parallel, but more focus on risk based inspection

“Customer Interest Protection Center” established where any

individual can complain against banks and FI’s by letter, phone, fax and e-mail. Recently 24 hour hotline installed in CIPC.

Bangladesh Bank has signed MOU with various countries for

exchange of financial information regarding stolen or siphoned money.

Key Key Key Key events

events events events of bank supervision in Bangladesh (2000

• f bank supervision in Bangladesh (2000
• f bank supervision in Bangladesh (2000
• f bank supervision in Bangladesh (2000 –

– – –2010) 2010) 2010) 2010)

Loan right-off Corporate governance in banks Guideline for core risk areas Risk based inspection or system audit Credit risk grading manual

Limiting banks exposure to capital market

Limiting banks exposure to capital market Single borrower exposure limit fixed Some amendment in Bank Company Act,1991 Money Laundering Prevention Act,2002 Terrorist Financing Act,2009 Risk Management Unit in all banks Stress Testing Establishing “Complaint Cell” in all Banks

Bank Failure : Cause and effect (Literature Review)

Bank failure has occurred domestically and internationally In the wake of recent global financial crisis, bank failure has

also a concern for bank supervisors because some “ Too big too fail” banks also collapsed

Definition…. The financial institution was recapitalized Definition…. The financial institution was recapitalized

either by the central bank or an agency specifically created to address the crisis, and/or required a liquidity injection from the monetary authority; and The financial institution’s

• perations were temporarily suspended (“frozen”) by the

government; (Bongini, Claessens, and Ferri 2001; Gonzalez- Hermosillo 1999)

Causes of Failure (Literature Review)

Government permeation of the banking system Poor management Excessive risk-taking Supervisory forbearance Supervisory forbearance Ineffective market discipline Supervision is not on a consolidated basis

Cass E. Brian (1998).Banking as facilitator of domestic and global economies: Basle’s Core Principles of effective Banking Supervision: Maintaining the momentum,

Implication of failure (Literature Review)

Failures have occurred causing losses to consumers, investors and governments impending economic activity in communities and sometimes threatening banking and economic losses internationally. (Nadler and Bergen 1933) Failure has a negative impact upon growth of credit, government costs, capital accumulation, monetary policy and system liquidity. “domino effect” of a single failure on several banks in other countries may impair significant parts of the world economy.

How to ensure effective supervision

For supervision to be effective following preconditions are needed :

In order to perform his job effectively and efficiently,

a supervisor must have operational independence, the means and powers to collect information both on-site and off-site and authority to enforce them; authority to enforce them;

Close collaboration with other supervisors is essential, mostly

where the operations of banking organizations run across the national boundaries;

Supervisors must look into the fact that banks have sufficient

resources including adequate capital, efficient management and effective internal control system, because these should be sound before going to take any risky venture;

How to ensure effective supervision ( Contd…)

For effective banking supervision the risk profile of

individual banks needs to be assessed and also supervisory resources allocated accordingly;

exactly how much power supervisor has and how it uses it

is equally important. First, the supervisory authority must is equally important. First, the supervisory authority must have powers that enable it to take prompt corrective action when it observes deterioration in bank solvency levels, to restructure and reorganize a troubled bank and in extreme circumstances, declare a seriously troubled bank insolvent; Second, when violations in regulation and legal requirements or imprudent behavior by banks are observed, the supervisory authority should have the discretion to address these issues; third, the supervisory authority should have the power to act without undue involvement from the courts.

Effectiveness of BB’s Supervision/Findings

The banking sector of Bangladesh comprises 47 banks and

around 7000 bank branches. Bangladesh Bank perform supervisory function by its various departments. Bangladesh Bank is striving hard to promoting and maintaining soundness, solvency and systematic stability of the financial soundness, solvency and systematic stability of the financial sector as well as to protecting interest of depositors. Even though it cannot be firmly claim that all the improvements have been made in the overall banking sector but significant improvement are the result of central bank’s stringent supervisory functions.

5 10 15 20 25 30 35 40 45 50 Percent

NPL to total loan by types of Banks

SCB DFI PCB FCB

A Non-performing loan is either default or close of being

• default. From the above diagram we can see that from 2004-

2010 Non-Performing loans declining gradually due to rigorous monitoring of Bangladesh Bank. Private commercial banks and Foreign commercial banks have low level of NPL compared to State controlled banks and development financial institution.

2004 2005 2006 2007 2008 2009 2010 Year

5 10 15 20 25 Percent

Ratio of net NPL to Total loans by types of Banks

SCB DFI PCB FCB

From the above diagram we see that the ratio of net NPL(net of provision and interest suspense) is 0 for private commercial banks and negative for foreign commercial

• banks. And for state controlled banks and development

financial institutions is declining considerably.

• 5

2004 2005 2006 2007 2008 2009 2010 Year

20 40 60 80 100 120 Percent

Provision maintenance ratio All Banks

Provision maintenance ratio

Provision maintenance ratio is also increasing for the period (2004-2010). Provision maintenance ratio is provision maintained divided by required provision . Here we also see that provision maintenance ratio of all types of banks in Bangladesh are increasing.

2004 2005 2006 2007 2008 2009 2010 Year

10 20 30 40 50 60 70 80 90 Percent

Net Interest Income by Types of Banks

SCB DFI PCB FCB

Net interest income (NII) by all types of banks in Bangladesh is rising for the period (2004-2010). Net Interest Income is the difference between the revenue that is generated from banks assets and the expenses associated with its liabilities. Private commercial bank’s NII is highest.

• 10

2004 2005 2006 2007 2008 2009 2010 Year

• 150
• 100
• 50

50 2004 2005 2006 2007 2008 2009 2010

Return on equity by types of Banks

SCB DFI PCB FCB

Return On Equity (RoE) is net income after tax divided by shareholders equity. It measures banks efficiency at generating profit from every unit of shareholders equity. It shows how well a bank uses investment funds to generate earning growth. Here we can see steady growth of RoE for PCB’s, FCB’s and SCB’s in (2004-2010) except for DFI’s.

• 200

0.5 1 1.5 2 2.5 3 3.5

Return on assets By Types of Banks

SCB DFI PCB FCB

Return on Assets (RoA) is net income divided by total asset. RoA gives idea as to how efficient management is at using its assets to generate earnings. Here we can see RoA of SCB’s and PCB’s increased for the period (2004-2010) with exception to DFI’s and FCB’s.

• 1
• 0.5

2004 2005 2006 2007 2008 2009 2010

20 40 60 80 100 120 Percent

Expenditure income ratio by types of bank

SCB DFI PCB FCB

Banks are able to reduce the expenditure income ratio during the period (2004-2010). It is one of the indicator of management efficiency. From the above diagram we can see that expenditure income ratio is gradually reducing by all types of banks.

2004 2005 2006 2007 2008 2009 2010 Year

Problem bank scenario in Bangladesh has also witnessed a significant improvement. When Bangladesh Bank introduced problem bank system in 1994 there were initially seven banks. Due to Bangladesh Banks continuous monitoring and supervision all seven banks were able to come out from it before 2005. BB introduced Early Warning come out from it before 2005. BB introduced Early Warning System (EWS) of supervision from March 2005 to address the difficulties faced by the banks in any of the areas of

• CAMELS. Any bank found to have faced difficulty in any

areas of operation, is brought under early warning category and monitored very closely to help improve its performance. Presently 2 banks are monitored under EWS.

Conclusion and recommendations

Bangladesh Bank is not enjoying the autonomy to its fullest

• extent. It is very much essential for a central bank to regulate

the scheduled/listed banks stringently. So necessary steps should be taken for greater autonomy of Bangladesh Bank. If needed, appropriate amendments in Bangladesh Bank Order,1972 are required. Order,1972 are required.

Strict enforcement of policies should be made by the

Bangladesh Bank to ensure that no banks, especially private commercial banks, relax credit standards on insider loans and make such loans on preferential terms.

Conclusion and recommendations ( Contd…)

Risk Based Supervision (RBS) is getting priority in developed

countries for its logical superiority. Because one of the key issues of bank supervision is to keep the risks under control or at a minimum level which is the main focus of Risk Based

• Supervision. Bangladesh bank should try to adopt this system
• f bank supervision as its main supervisory weapon.
• f bank supervision as its main supervisory weapon.

Bangladesh Bank’s supervision departments are required to

take steps for further strengthening the on-site inspection. More and more manpower are needed in these departments as banks network (branch) are ever increasing. Also proper and up to date training are needed for the bank supervisors.

Conclusion and recommendations( Contd….)

Present banking laws have ineffective and loan

defaulters are taking full advantage of this weakness. So it is the crying need of the hour to make suitable amendments to the Artho Rin Adalot Ain,1990.

World in now a global village. Capital movements World in now a global village. Capital movements

have increased more under foreign direct investment and Public Private Partnership. More multinational corporations are coming to our country. So foreign exchange transaction has increased manifold. So proper amendment in the Foreign Exchange Regulation Act, 1947 is needed to regulate foreign exchange transactions.