(Year 2009-2011)

Department of Finance

University of Dhaka

4 State Owned Commercial Banks (SCB),

4 government owned specialized banks,

30 domestic private banks, and

9 foreign banks are

Regulated and monitored by Bangladesh Bank (BB)

Direct impact comes from three major components of market

risk which includes interest rate risk, exchange rate risk and

equity price risk.

Risk weighted assets of this sector comprise credit risk,

market risk and operational risk

High credit growth is inseparable from mounting credit risk,

as reflected by nonperforming bank loans.

It has set a mandatory timeframe for the banks to

maintain their capital against 9% of risk weighted assets

by June 2011.

BB has designed a stress testing framework for banks and

FIs to manage risks in line with Basel-II framework.

Under the framework, majority of our banks are trying to

maintain the minimum required Capital Adequacy Ratio

(CAR).

Again to minimize equity risk, the total holdings of banks

in shares cannot exceed 10% of their total liabilities

according to Bank Company Act, 1991.

It provides an indication how much Capital Adequacy Ratio

(CAR) might be needed to absorb losses if any large shocks

occur.

‘Stress testing’ is a range of quantitative techniques to

assess the potential risks to the individual institutions as

well as financial system for any adverse unexpected

outcomes related to variety of risks.

It can be done by simple sensitivity Analysis, Scenario

Analysis or Maximum Shock Analysis.

All banks and FIs are ordered to carry out stress testing on

half-yearly basis i.e. on June 30 and December 31 each

year and reporting the results to Bangladesh Bank.

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.

PBL has a strong capital base and capital adequacy stands at

12.49% of the risk weighted assets.

Risk Management Unit (RMU) of the bank prepares stress testing model in line with the Bangladesh Bank’s guideline to ---

assess the capacity of the Bank to manage unanticipated crises

and management response to manage the crises

Settlement date = Present date

Maturity date = Settlement Date + Repricing Period

Current market rate

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

DURATION (settlement, maturity,

coupon, yield, frequency)

Assumption

Excel

File

Given in Annual Report

Market Value weighted YTM and Duration

Revised Regulatory Capital = Regulatory

Capital – Tax adjusted loss

Revised RWA = RWA – Tax adjusted loss

Revised CAR (%) = (RRC/RRWA)

Total Liabilities – Borrowings of more than one year

All the deposits including the term deposits are

assumed to be liquid

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

Reason for the highest

risk Each Year

And The highest risk is caused by Fall

in FSV of Mortgaged Collateral