(Year 2009-2011)

Professor Dr. Mahmood Osman Imam

Course Instructor

(F-503)

Department of Finance

University of Dhaka

Banking Sector of Bangladesh

Banks are allowed to lend up to82% against deposits. But manyprivate banks lent up to 85% andsome lent more than 100%.

The banking industry inBangladesh has flourished over theyears and making double-digitprofit percentages.

Total size of the sector at26.54% of GDP dominates thefinancial system with its sustaininggrowth and attractive returns toshareholders.

Banks are allowed to invest upto 10% of their total liabilities inthe capital market. But, in late2010, the banks made most of itsinvestments in the capital market.

Banking Sector of Bangladesh

It has set a mandatorytimeframe for the banks tomaintain their capital against9% of risk weighted assets byJune 2011.

It has designed a stresstesting framework for banksand FIs to proactively managerisks in line with Basel-IIframework

Bangladesh Bank is theCentral Bank of Bangladeshand the Chief RegulatoryAuthority in the sector.

Stress Testing

At institutional level, stress testing techniques provide a way toquantify the impact of changes in a number of risk factors on theassets and liabilities portfolio of the institution.

It provides an indication how much Capital Adequacy Ratio(CAR) might be needed to absorb losses if any large shocks occur.

It is mandatory for all banks and FIs to carry out stress testing onhalf-yearly basis i.e. on June 30 and December 31 each year andreporting the results to Bangladesh Bank.

Prime Bank Limited

CAR required 9% and

maintained 12.49%

CAR increased from previous year

Capital Details in PBL

Stress Testing in PBL

Risk Management Unit (RMU) of PBL has already prepared a stress testing model in line with the Bangladesh Bank’s guideline which initially focused on “Simple Sensitivity and Scenario Analysis” on the following five risk factors:

Interest rate; Forced sale value of collateral; Non-performing loans (NPLs); Share prices; and Foreign exchange rate.

The 1st phase of stress testing was based on the financial performance of the bank as of June 30, 2010.

The 2nd phase of stress testing was based on the financial performance as on December 31, 2010 .

PBL claims that it has adequate capital to absorb minor, moderate and major level of shocks. In case of cumulative shocks, some additional capital may be required.

I have done stress testing on PBL based on year-end data of 2009, 2010 &2011. I have also used some assumptions in case of unavailable data.

Interest Rate Risk Calculation

Interest Rate Risk Calculation

Current market rate PV (rate, nper, pmt, [fv] )

DURATION (settlement, maturity, coupon,yield, frequency)

Settlement date = Present dateMaturity date = Settlement Date + Repricing Period

Assumption

Excel File

Interest Rate Risk Calculation

Given in Annual Report

Market Value weighted YTM and Duration

Interest Rate Risk Calculation

Revised Regulatory Capital = Regulatory Capital – Tax adjusted loss

Revised RWA = RWA – Tax adjusted loss

Revised CAR (%) = (RRC/RRWA)

Interest Rate Risk Calculation

Exchange Rate Risk Calculation

Exchange Rate Risk Calculation

Equity Price Risk Calculation

Equity Price Risk Calculation

Liquidity Risk Calculation

Total Liabilities – Borrowings of more than one year

All the deposits including the term deposits areassumed to be liquid

Credit Risk Calculation 1 : Increase in NPLs

Total NPLs * % increase in NPLs

Credit Risk Calculation 2 : Shift in NPLs Category

Multiply

(SMA*%Shift*Provision Substandard + Substandard * (1-%Shift)*Provision Substandard) + (Substandard * %Shift* Provision doubtful + Doubtful * (1- %Shift)*Provision doubtful) + Doubtful *% Shift*Provision Loss + Loss * Provision Loss

Credit Risk Calculation 2: Shift in NPLs Category

Credit Risk Calculation 3 : Fall in FSV of Mortgaged Collateral

Multiply

Credit Risk Calculation 4 : Increase in NPL in Particular 1 or 2 sectors

Credit Risk Calculation 5 : Increase in NPL for default of top 10 large borrowers

Credit Risk Calculation 6 : Increase in NPL up to that position in which whole capital will be wiped out

Cumulative Credit Risk Calculation

Calculation of All Risk Cumulative

Comparison among Individual Risks

Reason for the highest risk Each Year

Findings

And The highest risk is caused by Fall in FSV of Mortgaged Collateral