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Implementation of Basel Core Principles

for Effective Banking Supervision in the

context of Bangladesh
Presented by:
Sarder Azizur Rahman
Student ID-112286

Examination Committee:

Mr.Weerakoon Wijewardena (Chairperson)

Dr. Winai Wongsurawat
Dr. Sundar Venkatesh

Agenda of the Presentation:

1. Objective of the study
2. Research Methodology
3. Brief introduction about Bangladesh Bank
4. Basel Principles
5. Why Basel Accord is needed
6. Findings in Bangladesh Perspective
7. Recommendation and Conclusion

Objective of the research

To explore an overview of the BASEL Accords and
Basel core principles for effective Banking supervision
To assess the compliance status of the BASEL core
principles of banking supervision in Bangladesh.
To review the need of Basel II in place of Basel I
Accord and make a comparison between them.
To study the implications and impact of Basel Core
principles in Banking Supervision in Bangladesh.

Research Methodology
Exhaustive study

Brief introduction about Bangladesh Bank

Central Bank of Bangladesh
Formed under presidential order 1972 ,127(A)
Follows The Bank Company Act 1991
Started to implement Basel Core Principles since 2002
under the FSAP carried out by IMF and World Bank
Basel Core Principles for Effective Banking
Supervision is conducted by Basel II implementation
cell of BRPD. Officially kicked off from 2010.

What is Basel
The Basel Accords refer to the banking supervision Accords
Basel I, Basel II and Basel III issued by the Basel Committee
on Banking Supervision (BCBS). They are called the Basel
Accords as the BCBS maintains its secretariat at the Bank for
International Settlements in Basel, Switzerland.

Basel I
1988 with a set of minimum capital requirements for
Basel I credit risk. Assets of banks were classified and
grouped in five categories according to credit risk.
Risk weights of zero (for example home
country sovereign, debt), ten, twenty, fifty, and up to
one hundred percent. Banks with international
presence are required to hold capital equal to 8 % of
the risk-weighted assets.

Few shortcomings of Basel I

Basel I framework does not make adequate differentiation of credit
risk, although the risk is different as the recovery of the two
instruments would be different.
There is no recognition of the term structure of credit risk.
The current rules do not recognize the portfolio diversification effects
for credit risk while at the same time recognizing it for market risk
under the internal VAR models of banks. As a result the current rules
can represent a false picture of the riskiness of an institution.
The current Accord does not give due recognition to the credit risk
mitigation techniques and does not recognize the role collateral can
play in reducing the losses on account of credit risk.
The 1988 accord does not levy any capital charge for operational risk
although that is a very important source of risk and can be more
devastating than credit risk.

Basel II
Basel II, initially published in June 2004.
For creating international standard for banking regulators to
control how much capital banks need to put aside to guard
against the types of financial and operational risks banks face.
To maintain sufficient consistency of regulations so that this
does not become a source of competitive inequality amongst
internationally active banks.
In theory, Basel II attempted to accomplish this by setting up
risk and capital management requirements designed to ensure
that a bank has adequate capital for the risk the bank exposes
itself to through its lending and investment practices. In general
the greater risk to which the bank is exposed, the greater the
amount of capital the bank needs to hold to safeguard
its solvency and overall economic stability

Basel II (Cont..)
Basel II consists of three pillars:
Minimum capital requirements for credit risk, market risk and
operational riskexpanding the 1988 Accord (Pillar I)
Supervisory review of an institutions capital adequacy and internal
assessment process (Pillar II)
Effective use of market discipline as a lever to strengthen disclosure
and encourage safe and sound banking practices (Pillar III)

Principle 1

Preconditions for effective banking supervision

Principles 2 5

Licensing and structure

Principles 6 -15

Prudential regulations and requirements

Principles 16-20

Methods of ongoing banking supervision

Principles 21

Information requirements

Principles 22

Formal powers of supervisors

Principles 23- 25

Cross-border banking

Basel Implementation in Bangladesh.docx


Preconditions for effective banking supervision and

Section 44 of the Bank Companies Act, 1991 vests powers
in Bangladesh Bank for inspection of books of any banking
company at any time.

A suitable legal framework is in place for the BB to

take action as needed against banks, and the BB
appears to use these powers as needed. In the light of
qualitative judgment and BB by law has access to bank
Compliance Level: Largely Compliant.

Capital Adequacy
According to BB circular No. 01, 08-01-1996, Capital
adequacy takes account of different degrees of credit risk
and covers both on balance sheet and off balance sheet
Minimum Capital Standard:
Each bank will maintain a ratio of capital to risk weighted
assets of 400 Crore or 10% of risk weighted assets which
one is higher.
Compliance Level: Largely Compliant.

Assessment of the risk factors

Country and Transfer Risk
1. Bangladeshi banks in overseas operations need to follow the internal
guidelines on country risk management and fix based on risk rating of
the country. Limits should also be fixed for a group of countries in a
particular risk category subject to a maximum ceiling fixed by
Bangladesh Bank.
2. For investment in abroad by banks, permission of Bangladesh Bank is
necessary according to BRPD circular no. 1/96.

Market risk
1. Under section 49 of the Banking Company Act, 1991 to impose
specific limit and/or specific charge on market risk exposures.
2. The capital charge for some of the market risks already exists. Market
risks in the investment Portfolio are controlled through quantitative
restrictions, (BRPD circular no. 2/95).

Compliance Level: Compliant

Other risk management (e.g. Liquidity risk, Interest

Rate risk, Currency risk)
Already issued guidelines for banks to set up effective Asset- Liability management (ALM)
Liquidity risk management:
All banks are required to maintain Cash Reserve Ratio (CRR) and statutory Liquidity Ratio (SLR) as per
section 36(1) of Bangladesh Bank order, 1972 and section 24(2a) of the Banking Company Act, 1991
Interest Rate Risk Management:
The banks are expected to measure interest rate risk through traditional gap analysis supplemented by
sophisticated techniques wherever possible.
Currency Risk Management:
The banks are to assign 100% risk weight to their open position limit in foreign exchange. Besides, they are
required to fix aggregate and individual limits for each currency with the approval of Bangladesh Bank. They
are required to adopt value at risk associated with forward exposures. The Bangladesh Bank monitors
currency risk through a monthly return on maturity and positions for both on and of balance sheet items in
foreign exchange.
Compliance Level: Largely Compliant

Internal control and know your Customer

Examination and evaluation of the adequacy and effectiveness of the
internal Control System in the banks form one of the important aspects
during on-site inspection by the Bangladesh Bank periodically.
In Bangladesh, Know your Customer Rules are in place right form
the beginning. There are specific directions for obtaining proper
introduction while opening Deposit Accounts. Requirement of
obtaining photographs of account holders before opening accounts has
been prescribed. Numbered accounts are not permitted in Bangladesh.
Anti-Money Laundering Act 2002 has been enacted in 2003 in this
Compliance Level: Largely Compliant

Methods of Ongoing Banking Supervision

(a) The main instrument of supervision in Bangladesh is the
periodical on-site inspection of banks that is supplemented
by off-site monitoring and supervision. Since 1995, on-site
inspections are based on CAMEL Rating. The domestic
banks were rated on CAMEL model.
(b)Two separate departments were established in Bangladesh
Bank for the supervision and examination purposes:
Department of Off-site Supervision (DOS); and
Department of Banking Inspection (DBI).

Compliance Level: Largely Compliant

Recommendation & conclusion:

Supervision function of Bangladesh Bank should be strengthened for effective
supervision. Supervisor must be careful so that nothing happens like the
collapse of the Oriental Bank Limited in recent past.
Supervisors of Bangladesh Bank must have to understand the nature of
investment that bank are incurring. In the same time they have to ensure the
risks taken by the banks are being sufficiently managed.
It is essential for the supervisors to ensure that the banks have appropriate
resources to undertake risks, having sufficient capital, strong management,
effective control systems and all sorts of accounting records.
It is important and essential for the national legislators that they could give
urgent thought to the changes important to make sure that principles can be
applied in all material compliments.
A serious effort is needed to bring the Bangladesh Bank supervisory standards
up to the level indicated in the core principles.

Recommendation (Cont..)
Bangladesh Banks autonomy and ability to act on ownership changes
needs to be further strengthened through legislation and practices.
Bangladesh Bank should issue guidelines to set Ethical Standards for
the commercial banks.
Deposit insurance system should be made more effective.
Since the new Accord is complex, and may affect different banks
varying degrees, careful and compatible strategy need to be
This deserves infusion of market participants in the decision making

Thank you