“Although we have fortunately been spared some of the worst upheavals that have occurred in other countries, realizing the need to be constantly vigilant, Bangladesh Bank issued sets of guidelines starting from 2010 for capital adequacy in accordance with new Basel Accords and Stress Testing. “
Deputy Governor, Bangladesh Bank
Central banks around the world, work to ensure that banks and financial institutions operate in a safe and sound manner and comply with applicable laws and regulations. Promoting a healthy risk culture is something that we have been speaking a good deal about here in Bangladesh for more than a decade now. Our efforts to improve our ability to identify, monitor, and respond to emerging risks facing our banks and financial institutions and touch upon some of the risks we see building up in our financial services industry.
To strengthen the risk management practices of banks, Bangladesh Bank issued industry best practices as early as in 2003 for managing core risks in banking in six broad areas; namely- Asset Liability Management Risk, Credit Risk, Foreign Exchange Risk, Information & Communication Technology Security Risk, Internal Control and Compliance Risk, and Money Laundering Risk.
Since the onset of the Financial Crisis in 2008, the global economy has continued to face rough weather. Different jurisdictions continue to be tormented by financial fragilities and macroeconomic imbalances. Although we have fortunately been spared some of the worst upheavals that have occurred in other countries, realizing the need to be constantly vigilant, Bangladesh Bank issued sets of guidelines starting from 2010 for capital adequacy in accordance with new Basel Accords and Stress Testing. To ensure that the banks are prudently managing their risks, especially those can cause systemic threats and jeopardize the stability of the entire financial system, BB imposed prudential requirements to assess banks’ risk management capacity and has instructed the banks to establish an independent Risk Management Unit. The RMU not only conducts stress testing for examining the bank’s capacity of handling future shocks, but also deals with all potential risks that might occur in future.
Considering the deteriorating environment and climactic scenario as well as challenging social issues in the country; Bangladesh Bank has been taking concerted efforts to guide banks and FIs in protecting their financing from environment and social risks. In January 2011, Bangladesh Bank issued ‘Environmental Risk Management Guidelines for Banks and FIs’ in Bangladesh. The Environmental Risk Management Guidelines are now being updated as ‘Environmental and Social Risk Management Guidelines’, focusing more on the concept of environmental and social risk management rather than only environment risk management and exemplify the sources of both environmental risks and social risks.
Bangladesh Bank issued the ‘Risk Management Guidelines for Banks’ in 2012 as a supplement to the core risk management guidelines issued earlier. This document promotes an integrated, bank-wide approach to risk management covering the other most common risks in banking companies in Bangladesh; namely- Strategic Risk, Interest Rate Risk, Price Risk, Operational Risk, Compliance Risk and Reputation Risk. Very recently, in September this year, banks were asked to set up a separate Risk Management Division with an organogram prescribed by BB for stronger and timely/updated risk management activities.
The banking industry has changed the way of providing services to their customers and processing of information in recent years. Information and Communication Technology has brought this momentous transformation. Electronic banking is becoming more popular and enhancing the adoption of financial inclusion. Security of Information for financial institutions has therefore gained much importance and it is vital for us to ensure that the risks are properly identified and managed. In this backdrop, the revised version of Guideline on ICT Security for Banks and NBFIs to be used as a minimum requirement and as appropriate to the level of technology adoption of their operations issued in May 2015.
To keep pace with international initiatives and newly promulgated acts on prevention of money laundering and terrorism financing, there has been a tremendous need to review the Guidance Notes on Prevention of Money Laundering’ issued in 2003. In September 2015, Bangladesh Financial Intelligence Unit issued ‘Money Laundering and Terrorist Financing Risk Assessment Guidelines’ for banking sector and instructed banks to assess their own ML & TF risk considering their customers, products, delivery channels and geographical positions. They were also instructed to assess regulatory risk i.e. risk arises from non-compliance of AML & CFT measures. Rests of the Core Risk Management Guidelines i.e. Asset Liability Management, Credit Risk, Foreign Exchange, and Internal Control and Compliance are also currently being revisited for necessary updating to cope with changing scenarios.
At the Bangladesh Bank, we commit a tremendous amount of time and resources to identifying, assessing, and communicating emerging risks of all kinds, allowing bank managers to develop and implement strategies to mitigate the risks at an early stage. In addition to Annual Financial Stability Report (FSR), publication of which commenced in 2011, Bangladesh Bank is preparing and publishing Financial Stability Assessment Reports from late 2014 with an aim to convey its assessment about key trends in the major segments of the financial system on a quarterly basis. The Report contains trends in macroeconomic indicators, banking and NBFIs sectors’ performances including their liquidity and capital adequacy, major risks to which they are exposed to and their resilience to plausible adverse events, in addition to the capital market developments.
The ongoing earnings pressure due to sluggish business in the country may cause some banks to reach for yield and take on additional strategic risk that could contribute to future vulnerability. We also noticed competition for the limited lending opportunities that exist in the current market environment is intensifying and resulting in weaker collateralization standards, particularly in commercial and industrial loans.
The shift towards digital banking strikes at the heart of the banking distribution model that has served the industry in the past. Consumers are increasingly using online and mobile to meet their banking needs. Increased business flow through the digital channel will result in the attraction of new customer segments with a higher fraud risk profile and also a potential behavioral shift within the existing customer base. Rapidly evolving cyber threats and information technology vulnerabilities requires heightened awareness and appropriate controls to identify and mitigate the associated risks. The same is true for confidentiality breach and money laundering risks that remain prevalent across the industry as money-laundering methods evolve and electronic bank fraud grows in sophistication and volume.
As a consequence of the financial crisis and its contagion affects throughout the globe, banking regulations are getting increasingly globalized. The recent regulatory reforms is a response to the severity of the crisis, and the changes are intended to make the financial system more resilient. But, in the current sluggish economic context, the issue of whether banks are able to absorb all these regulations while at the same time generate sufficient resources to continue their activities is a big question. As a result, many banks elsewhere are re-evaluating their business models and risk appetites and are seeking new ways to generate returns. As members of the international financial community, Bangladesh Bank also is committed to implement these regulations in our jurisdictions. However, it is crucial to the sutation that we ensure that banks and financial institutions establish and follow appropriate risk management processes as they explore new products, partnerships, and opportunities.
