stress testing prime bank limited

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Welcome to The PresentationStress Testing : Prime Bank Limited(Year 2009-2011)

Department of Finance University of DhakaBanking Sector of Bangladesh 4 State Owned Commercial Banks (SCB), 4 government owned specialized banks, 30 domestic private banks, and9 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 riskHigh credit growth is inseparable from mounting credit risk, as reflected by nonperforming bank loans.Bangladesh Banking SectorIt 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.Stress Testing ConceptIt 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. Company Profile : PBL

Stress Testing in PBL 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 Banks guideline to --- assess the capacity of the Bank to manage unanticipated crises and management response to manage the crises7Interest Rate Risk Calculation

Settlement date = Present dateMaturity date = Settlement Date + Repricing PeriodCurrent market ratePV (rate, nper, pmt, [fv] )DURATION (settlement, maturity, coupon, yield, frequency)AssumptionInterest Rate Risk CalculationExcel File

Given in Annual ReportMarket Value weighted YTM and DurationInterest Rate Risk Calculation

Revised Regulatory Capital = Regulatory Capital Tax adjusted lossRevised RWA = RWA Tax adjusted lossRevised CAR (%) = (RRC/RRWA)Interest Rate Risk Calculation

Interest Rate Risk CalculationExchange Rate Risk Calculation

Equity Price Risk Calculation

Liquidity Risk Calculation

Total Liabilities Borrowings of more than one yearAll the deposits including the term deposits are assumed to be liquidCredit Risk Calculation 1: Increase In NPls

Credit Risk Calculation 2 : Shift In NPls Categories

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 Categories

Credit Risk Calculation 3: Fall In FSV Of Mortgage Collateral

Credit Risk Calculation 4: Increase In NPL In Particular 1 Or 2 Sectors

Credit Risk Calculation 5: Increase In NPL Due To Default Of Top 10 Large Loan Borrowers

Credit Risk Calculation 6: Increase In NPL Up to that Position in Which Whole Capital Will be Wiped Out

Cumulative Credit Risk Calculation

Cumulative All Shocks Calculation

Impact of Individual Risk

Reason for the highest risk Each Year

And The highest risk is caused by Fall in FSV of Mortgaged CollateralSummary?Thank You All


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