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
B ank 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 of 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 of 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 Point-in-time assessment Continuous 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 order,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 on 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 events events of bank supervision in Bangladesh (2000 of bank supervision in Bangladesh (2000 – –2010) 2010) Key Key of bank supervision in Bangladesh (2000 of bank supervision in Bangladesh (2000 – – 2010) 2010) events events � 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 operations 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.
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