Implementation of Basel Core Principles for Effective Banking Supervision in the context of Bangladesh
2012
Bangladesh Bank (BB) is empowered to act as the supervisory authority for all scheduled banks operating in Bangladesh. In order to enforce supervisory activities the objectives, independence, effective legal framework, enforcement powers and Information Sharing System of Bangladesh Bank are laid down in “Bangladesh Bank Order, 1972” & “the Bank Company Act 1991”. Thus, the first assessment on compliance was carried out by the IMF/World Bank jointly as a part of Financial Sector Assessment Program (FSAP) in October 2002. In October 2006, ‘a self-audit on compliance with Basel core principle for effective banking supervision’ has been conducted by Basel II Implementation Cell of BB. It shows a significant development in compliance with the ‘BCPs’ for Effective Banking Supervision. “The Bangladesh Bank Order” and “the Bank Company Act” were passed by the parliamentarians in the year of 2003; Bangladesh Bank attained largely compliant status in October 2006 as against Materially Non Compliant in October 2002. There are certain shortcomings in the 1988 Accord, some of which are mentioned as under: The 1988 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 Accord does not give due recognition to the process of reducing credit risk. It also not emphasized more on collateral that has impact in reducing the losses on account of credit risk. The first Basel Capital Accord not impose charges against operational risk though it is very important source of risk and can be more devastating than credit risk. “The International Convergence of Capital Measurement and Capital Standers – A revised framework (Basel II) represents a major revision f the international standard on bank capital adequacy that was first introduced in 1988 by the Basel Committee of Banking Supervision (BCBS). It promotes development in risk management and is intended to enhance comprehensive framework for regulatory capital and risk management, a mixture of challenges to both supervisors and banks are anticipated”. The New Capital accord is more wide and complex than the ‘1988 accord’. The efforts were to expand a framework that is risk sensitive and includes fresh options for gauging “credit and operational risk. In its simplest form, however, this more risk-sensitive framework is only slightly more complex than the 1988 Accord. Moreover, in the New Accord, the Committee is emphasizing the role of supervisory review process and market discipline as essential complements to minimum capital requirements. The elements in the new” capital accord comprises with IRB approach and external credit assessments, ‘credit risk mitigation techniques’ and ‘asset securitization’, the treatment of ‘operational risk’, ‘supervisors review’ and the third one is ‘market discipline’. Objectives of the new capital accord are: a. It is a further complete approach intended for addressing risk, placing more emphasis on banks’ ‘internal risk methodologies’, ‘supervisory review’ and ‘market discipline’ b. It is a highly sensitive measure to assess the level of risk involved in a banks position and activities. c. It highlighted the banks that are globally active. This accord comprises with ‘Minimum Capital Requirements’ ‘Supervisory review’ ‘Market Discipline’ The ‘Basel II’ accord cannot come on effect until all the three pillars in a row. At present minimum ‘capital ratio’ that is 8% of total risk weighted assets is already maintained. In the same time new accord will be more comprehensive on holding the industries to ensure hazards. The minimum total ‘capital ratio’ wills comprises with three parts: “the sum of all risk weighted assets for credit risk, plus 12.5 times the sum of the capital charges for market risk and operational risk”. Under pillar II, regulators will have the flexibility to need banks to hold excess of ‘minimum capital’. Internal models should be used internally to set limits, measure risks and to allocate economic capital under pillar III ‘market discipline’ encourages high disclosure standards. Basel committee will issue guidance on public disclosure. The committee anticipates its members to move forward with the appropriate adoption procedures in their respective countries. In a number of instances, these procedures will comprises extra impact assessment of the committee’s structures as well as additional opportunities for explanation by interested parties to be provided to domestic authorities. The committee intends the frame work set out here to be available for implementation as of end of” the year 2006. But due to some unavoidable circumstances BB was not able to fully on operation. “The new accord is “being circulated to supervisory authorities worldwide to encouraging the supervisors to consider adopting this modified framework at such time as they believe is consistent with their wider supervisory priorities. When the modified structure has been designed to provide options for banks and banking systems worldwide the committee acknowledges that moving toward its adoption in the near future may not be a first main concern for all non G10 supervisory authorities in terms of what is needed to empowering their supervision. When situation is like that, each domestic supervisor should think the benefit of the revised structure in the context of its domestic banking system while developing a timetable and approach to implementation”. Our financial marketplace is not completely efficient. And our banking system still follows the old accord, in convergence with the guidelines of the regulatory authorities. Moreover, our banking system lacks sufficient expertise to make the new accord effective. But to fit in the changing scenario and to grab the fruit of globalization, our banks must take measures to comply with the New Basel Capital Accord. And finally they kicked off the operation in December 2010. Yet we need to wait some times for the operation to move on full throttle. CHAPTER
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