SUBMITTED TO

Nusrat Khan
Lecturer
Department of Finance
Faculty of Business Studies
University of Dhaka.

SUBMITTED BY
S
ID
L
1 14005
2 14007
3 14067
4 14141
5 14127
6 14111
7 14025
8 14035
9 14117

Group-05

NAME
Kazi
Mohammad
Selim
Md. Anisur Rahman
Tasfik Awal
Tafiz Mahmud
Khandaker Shohag
Sumit Chowdhury
Md.
Kutubuddin
Tanvir
Md. Biplob Tarafder
Md. Raihan Robin
2

1
0

14153

Santu Kundu

31 October 2010

LETTER OF TRANSMITTAL

31 October, 2010.
Nusrat khan
Lecturer
Dept. of Finance,
University of Dhaka.
Subject: Letter regarding submission of Report on Implementation of BASEL Accord
in Eastern Bank Ltd.

Dear Madam,
Its a great pleasure for us to have the opportunity to submit a report on Implementation of
BASEL Accord in Eastern Bank Ltd which had been a great experience for us to work
with such a practical & real life issue to analyze with. We tried utmost to make & let it look
like a professional one. Any shortcomings are expected to have a kind view for our
encouragement.
Thank you for your sincere & honest try to let us make easy & get familiar with the Basel
accord and its implementation in the banking sector specifically in the Eastern Bank ltd
to help us make the paper a successful one.
Our efforts will be valued if this report can serve for what its been meant for & our
assistance will be there for any queries.

Faithfully yours,
Students of Group-05

TABLE OF CONTENTS

Chapter

Topic
Acknowledgement
Executive summary

1
2

Page
4
5

Introduction
1.0Origin
1.1 Background
1.2 Objective
1.3 Scope of the study
1.4 Methodology & sources of data
1.5 Limitation

6
6
6
7
7
7

Basel Accord
2.0
2.1
2.2
2.3
2.4
2.5
2.6
2.7

What is Basel?
History of Basel
Objective behind Basel creation
Global acceptance of Basel
Application of Basel
Basel II
A summary of Basel iii update
Conclusion
Basel & Bangladesh

11
12
13
14
15
16
25
30

3.0 Preface of Bangladesh

3.1 Banking industry of Bangladesh
3.2 Implementation of Basel in Bangladesh

32
33
36
36
41

3.3 Challenges for Basel in Bangladesh

3.4 Current situation of Basel in Bangladesh

Basel Accord in EBL

4.0 Introduction to EBL
4.1 Basel program in EBL

45
46
47

4.2 Basel implementation in EBL

Concluding remarks
Findings
Reference

62
63
64

ACKNOWLEDGEMENT

Our work on preparing a report on Eastern Bank ltd is a great experience for us in light of
the course Law and practice of banking. EBL is one of the most successful banks in
Bangladesh serving the individual and corporate clientele alike with remarkable success
offering innovative banking services through a nationwide banking network. We strongly
believe works like this will surely help us to have a clear concept about Basel accord and its
implementation in banking sector.
All the praise belongs to Allah the all knower & best of the helpers to make our report a
practical one by providing us the mental & physical toughness in course of preparation of the
report.
5

Our next honest & heartiest gratitude goes to Nusrat khan, lecturer & our honorable course
teacher for his sincere and utmost guidance to prepare this report & to gather huge practical
and realistic knowledge, to make us understand the topics, terms & make us familiar with this
course.
Our special thanks also go to Soibal Paul an officer of credit risk department to maintain
Basel accord in EBL according to the direction of Bangladesh Bank.
Finally we also thank our entire group member to work with integrity in preparing this
report.

EXECUTIVE SUMMARY

The overall work & study has been done & focused on view to get & show a proper overview
of EBLs initiation, emergence & banking functions & its activities. This report has been
focused on the implementation of the Basel accord in this bank. But before we have also
presented an overview of our banking industry.
In the report the total overview of the Basel accord, its scope of application, the update of
Basel III, the implementation, scope and limitation of Basel accord in EBL have been
demonstrated.
As our main purpose of the report was to understand the ways of implementing Basel accord
in banking sector especially in the EBL have been the center of attention of our report. With
the varieties of products and services such as different loans, SME products, cards, deposits
6

EBL satisfying its customers and making a significant contribution in the banking sector of
Bangladesh.
The impact of Basel and the influence and significance of Basel in capital and risk
management is the most important part of our report. The impact of maintaining requirement
of Basel in the institution is enormous and vastly connected with other section of the
company as proper capital management is the root of success of any bank as well as Eastern
Bank Ltd.
Clearly Basel accord plays an important role in Convergence of Capital Measurement and
Capital Standards in EBL .So the proper implementation of Basel in any bank may take the
bank in a higher level in capital and risk management.

Chapter-1
Introduction
1.0 Origin
1.1 Background
1.2 Objective
1.3 Scope of the study
7

1.4 Methodology & sources of data

1.5 Limitation

1.0 ORIGIN
The preparation of this report is a requirement of the course on Law And Practice of
Banking (F-309) co-ordinated by Ms. Nusrat Khan, Lecturer of Finance Department at
Faculty of Business Studies, University of Dhaka, who is also the course teacher of course
titled Law And Practice of Banking, has assigned to the students of BBA 14 th batch to
prepare report on different topics & we are assigned with Is Basel Accord compatible?.

1.1 BACKGROUND
The world of banking is increasingly becoming more and more competitive. Banking services
are the main foundation of international financial system. Day by day, they are involving in
highly riskier activities to make higher profit. To protect the global financial market from
collapse, the BASEL ACCORD was introduced. For some of its limitation, BASEL II was
implemented. The proper implementation of this Basel Accord can make the financial world
more secured.
1.2 OBJECTIVE OF THE REPORT
8

The primary objective of this study is the partial fulfillment of the course requirement.
The main objectives of this report are as follows:

To fulfill the partial requirement of the course Law and Practice of Banking offered
in BBA program.
The collateral purpose of this report is to explore about Implication of BASEL in
Bangladesh.
The main objective of the report is to show BASEL practices by EBL.
It will also enable us to improve our skills on report writing. As corporate executives
put greater value on report writing as an important element in organizational success,
this part of the course will prepare us to face the future challenges of the corporate
world.
To meet the curiosity in this stated subject.

1.3 SCOPE OF THE STUDY

This report gives a narrative overview of BASEL practices in Bangladesh. It also gives a
descriptive study of the history of BASEL. We could not include every data with illustration
to prevent our report from verbosity. Our report focuses on the performance of Eastern Bank
Ltd. about the requirement of Basel accord.
1.4 METHODOLOGY & SOURCES OF DATA
The information for the report was collected from both primary and secondary sources.

Primary sources: All the data and information that are collected from primary sources
are acquired by interviewing the officials of the Eastern Bank Ltd.
Secondary sources: Secondary data have been collected from various sources like
website of these organizations. We have also visited these organizations physically.
We have also collected information from different journals, newspapers and

magazines. The data and information collected from interviews and secondary sources
have been analyzed properly.

1.5 LIMITATION
The major limitations encountered are:

The most elementary limitation of this study is the tendency of the employees to be
always alright attitude hindered us to realize the overall scenario of EBL about
BASEL. Time constraint of the required personnel in providing us with information
was also a limitation.

Lack of experience also acted as constraints in the way of exploration on the topic.
The organizations were also reluctant to give some important information for their
internal privacy.

Chapter-2
Basel Accord

10

2.0 What is Basel?

2.1 History of Basel
2.2 Objective behind Basel creation
2.3 Global acceptance of Basel
2.4 Application of Basel
2.5 Basel III
2.6 Conclusion

2.0 What is Basel?

Basel is an international business standard that requires financial institutions to maintain
enough cash reserves to cover risks incurred by operations. The Basel accords are a series of
recommendations on banking laws and regulations issued by the Basel Committee on
Banking Supervision (BSBS). The name for the accords is derived from Basel, Switzerland,
where the committee that maintains the accords meets.
Basel improved on Basel I, first enacted in the 1980s, by offering more complex models for
calculating regulatory capital. Essentially, the accord mandates that banks holding riskier
assets should be required to have more capital on hand than those maintaining safer
portfolios. Basel II also requires companies to publish both the details of risky investments
and risk management practices. The full title of the accord is Basel II: The International
Convergence of Capital Measurement and Capital Standards - A Revised Framework.

11

The three essential requirements of Basel II are:

1

Mandating that capital allocations by institutional managers are more risk sensitive.

Separating credit risks from operational risks and quantifying both.

Reducing the scope or possibility of regulatory arbitrage by attempting to align the

real or economic risk precisely with regulatory assessment.

Basel II has resulted in the evolution of a number of strategies to allow banks to make risky
investments, such as the subprime mortgage market. Higher risks assets are moved to
unregulated parts of holding companies. Alternatively, the risk can be transferred directly to
investors by securitization, the process of taking a non-liquid asset or groups of assets and
transforming them into a security that can be traded on open markets.
Basel I resulted from the aim of protecting banking business as well as whole economics
system of the world from unexpected collapse. But it had some shortcomings that failed to
detect some complicated banking risky investments modern banks make.
Basel II is the second of the Basel Accords, which are recommendations on banking laws and
regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II,
which was initially published in June 2004, is to create an international standard that banking
regulators can use when creating regulations about how much capital banks need to put aside
to guard against the types of financial and operational risks banks face. Advocates of Basel II
believe that such an international standard can help protect the international financial system
from the types of problems that might arise should a major bank or a series of banks collapse.

2.1 History of Basel

It is believed that generally the banks face credit, market, liquidity, foreign currency,
Strategic, compliance, reputation, country, legal, regulatory and operational risks. The
failures to identify and quantify the different sorts of risk entail a very high cost not only
for the whole banking industry, but for the entire economy as well. We know that
banking crises can threaten macroeconomic stability through their potential effects on
confidence, savings, financial flows, monetary control and the budgetary impact of bank,
rescue packages. Therefore, achieving an inclusive, efficient, sound, and stable financial
system is an important, complex and a multidimensional task.

12

In this context globalization and closed integration between different parts of the world, the
possibility of a particular banks collapse can shake the heart of the worlds economy. The
major event that led to the formation of the Basel Committee on banking supervision by the
group of ten nations in 1974, under the auspices of Bank of International Settlement (BIS),
was the liquidation of the German Harstatt Bank. The Basel committee published a set of
universal capital requirements for banks in 1988 which is known as Basel Accord or Capital
Accord. It emphasized the importance of adequate capital by categorizing it into two Tiers:
Tier 1, or core capital (the sum of common stock, retained earnings, capital surplus and
capital reserves); Tier 2 or supplementary Capital consisted of loan loss allowances,
preferred stock with maturity greater than 20 years, subordinated debt, unclosed capital
reserves and hybrid capital instruments.) The Accord requires banks to hold capital equivalent
to 80% of Risk weighted value of Assets. Basel I was adopted by many countries.

History of the Basel Committee and Its Membership

The Basel Committee on Banking Supervision was established as the Committee on Banking
Regulations and Supervisory Practices by the central-bank Governors of the Group of Ten
Countries at the end of 1974 in the aftermath of serious disturbances in international currency
and banking markets (notably the failure of Bankhaus Herstatt in West Germany). The first
meeting took place in February 1975 and meetings have been held regularly three or four
times a year since. The Committee's members come from Argentina, Australia, Belgium,
Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan,
Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South
Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.
Countries are represented by their central bank and also by the authority with formal
responsibility for the prudential supervision of banking business where this is not the central
bank. The first chairmen of the committee were Sir George Blunden (then Executive Director,
Bank of England).

Basel Committee at Present:

The Basel Committee on Banking Supervision provides a forum for regular cooperation on
banking supervisory matters. Its objective is to enhance understanding of key supervisory
issues and improve the quality of banking supervision worldwide. It seeks to do so by
exchanging information on national supervisory issues, approaches and techniques, with a
view to promoting common understanding.
The present Chairman of the Committee is Mr Nout Wellink, President of the Netherlands
Bank. The Committee encourages contacts and cooperation among its members and other
banking supervisory authorities. It circulates to supervisors throughout the world both
published and unpublished papers providing guidance on banking supervisory matters.
Contacts have been further strengthened by an International Conference of Banking
Supervisors (ICBS) which takes place every two years.
13

2.2 Objective behind Basel Creation

The final version aims at:

1

Ensuring that capital allocation is more risk sensitive;

Separating operational risk from credit risk, and quantifying both;

Attempting to align economic and regulatory capital more closely to reduce the scope
for regulatory arbitrage.
While the final accord has largely addressed the regulatory arbitrage issue, there are still areas
where regulatory capital requirements will diverge from the economic.
Basel II has largely left unchanged the question of how to actually define bank capital, which
diverges from accounting equity in important respects. The Basel I definition, as modified up
to the present, remains in place.

2.3 Global Acceptance of Basel

The initial capital accord of 1988 was hugely successful with more than 100 countries
accepting it as a benchmark. One of the major reasons for the success of this framework was
its being simple. It brought in uniformity and attempted to make regulatory capital
requirement consistent with the economic capital. Reserve Bank of India introduced risk
assets ratio system as a capital adequacy measure in 1992, in line with the Basel accord of
1988, which takes into account the risk element in various types of funded balance sheet
items as well as non-funded off balance sheet exposures.
14

Basel Is adaptation and implementation occurred rather smoothly in the Basel Committee
states. With the exception of Japan (which, due to the severity of its banking crisis in
the late 1980s, could not immediately adopt Basel Is recommendations), all Basel
Committee members implemented Basel Is recommendationsincluding the 8% capital
adequacy targetby the end of 1992. Japan later harmonized its policies with those if
Basel I in 1996.
The OECD countries: similar to the EU regime, the Basel Capital Accord was also adopted
throughout most of the OECD. However, detailed features of the rules were not always the
same with variations that responded to local conditions, while nonetheless observing the
spirit of the Accord. Australia, for example, set risk weights for banks' different exposures
that reflected a more favorable view of the creditworthiness of banks incorporated in nonOECD countries from its own region.
The Developing Countries: The widespread incorporation of the capital standards of the
1988 Basel Capital Accord in the regulatory regimes of developing countries was partly due
to emulation and to the promotion by the BCBS of its regulatory standards through its
contacts with supervisors throughout the world. But increasingly important has also been the
growing connection between the internationalization of banking and insistence on observance
of regulatory standards. As a developing country, Bangladesh, initiated steps to implement
Basel Accord. It has ordered all commercial banks to adopt the rules within 31 December,
2010.

2.4 Application of Basel

SECURITIES AND OTHER FINANCIAL SUBSIDIARIES

To the greatest extent possible, all banking and other relevant financial activities conducted
within a group containing an internationally active bank will be captured through
consolidation. Thus, majority-owned or-controlled banking entities, securities entities (where
subject to broadly similar regulation or where securities activities are deemed banking
activities) and other financial entities should generally be fully consolidated. Consolidation
with such banks may be too risky with great possibility of loss. Supervisors can assess the
15

appropriateness of recognizing in consolidated capital the minority interests that arise from
the consolidation of less than wholly owned banking.
INSURANCE SUBSIDIARIES
A bank that owns an insurance subsidiary bears the full entrepreneurial risks of the subsidiary
and should recognize on a group-wide basis the risks included in the whole group. When
measuring regulatory capital for banks, the Committee believes that at this stage it is, in
principle, appropriate to deduct banks investments in insurance subsidiaries. Alternative
approaches that can be applied should, in any case, include a group-wide perspective for
determining capital adequacy and avoid double counting of capital. Basel II calls for credit
rating of all kinds of financial institutions hence an insurance company to be subsidies
must be in good score of credit rating.
SIGNIFICANT INVESTMENTS IN COMMERCIAL ENTITIES
Significant minority and majority investments in commercial entities which exceed certain
materiality levels will be deducted from banks capital. Materiality levels will be determined
by national accounting and/or regulatory practices. Materiality levels of 15% of the banks
capital for individual significant investments in commercial entities and 60% of the banks
capital for the aggregate of such investments, or stricter levels, will be applied for calculation.
So any commercial entity with higher level of dependency on a individual investment will be
treated risky one.
Investments in significant minority- and majority-owned and controlled commercial entities
below the materiality levels noted above will be risk weighted at no lower than 100%for
banks using the standardized approach.

2.5 Basel II

The widely accepted new capital accord Basel II stands on three pillars:
The First pillar- Minimum Capital Requirements.
The Second Pillar- Supervisory Review Process.
The Third Pillar- Market Discipline.
There are separate and very elaborate rules and regulations under the title if each pillar
description about which requires many times and vast knowledge. So we are trying to present
a brief overview about the three pillars.
16

Part 1: The First Pillar Minimum Capital Requirements

Calculation of minimum capital requirements
This section discusses the calculation of the total minimum capital requirements for credit,
market and operational risk. The minimum capital requirements are composed of three
fundamental elements; a definition of regulatory capital, risk weighted assets and the
minimum ratio of capital to risk weighted assets. In calculating the capital ratio, the
denominator or total risk weighted assets will be determined by multiplying the capital
requirements for market risks and operational risk by 12.5 (i.e. the reciprocal of the minimum
capital ratio of 8%) and adding the resulting figures to the sum of risk-weighted assets
compiled for credit risk. The ratio will be calculated in relation to the denominator, using
regulatory capital as the numerator. The definition of eligible regulatory capital will remain
the same as outlined in the 1988 Accord and clarified in the 27 October 1998 press release on
instruments eligible for inclusion in Tier 1 capital. The ratio must be no lower than 8% for
total capital. Tier 2 capital will continue to be limited to 100% of Tier 1 capital.
Credit risk the standardized approach
The Committee proposes to permit banks a choice between two broad methodologies for
calculating their capital requirements for credit risk. One alternative will be to measure credit
risk in a standardized manner, the alternative methodology, which is subject to the explicit
approval of the banks supervisor, would allow banks to use their internal ratings systems.
THE STANDARDISED APPROACH GENERAL RULES
Under standardized approach, credit assessment will be conducted by external credit
assessment institutions (ECAI) as eligible for capital purposes by the national supervisors.
Risk-weight against each rating will be applied to individual credit exposure to arrive at riskweighted asset. Before allowing ECAIs such as the rating agencies, national supervisor will
have to ensure that they fulfill the following standards set by Basel Committee (2004).
The external credit assessment institutions (ECAI) must fulfill some Eligibility criteria:
Objectivity:
The methodology for assigning credit assessments must be rigorous, systematic, and subject
to some form of validation based on historical experience. Moreover, assessments must be
subject to ongoing review and responsive to changes in financial condition. Before being
recognized by supervisors, an assessment methodology for each market segment, including
rigorous back testing, must have been established for at least one year and preferably three.
Independence:

17

An ECAI should be independent and should not be subject to political or economic pressures
that may influence the rating. The assessment process should be as free as possible from any
constraints that could arise in situations where the composition of the board of directors or
the shareholder structure of the assessment institution may be seen as creating a conflict of
interest.
International access/Transparency:
The individual assessments should be available to both domestic and foreign institutions
with legitimate interests and at equivalent terms. In addition, the general methodology used
by the ECAI should be publicly available.
Disclosure:
An ECAI should disclose the following information: its assessment methodologies, including
the definition of default, the time horizon and the meaning of each rating; the actual default
rates experienced in each assessment category; and the transitions of the assessments, e.g. the
likelihood of AAA ratings becoming AA over time.
Resources:
An ECAI should have sufficient resources to carry out high quality credit assessments. These
resources should allow for substantial ongoing contact with senior and operational levels
within the entities assessed in order to add value to the credit assessments. Such assessments
should be based on methodologies combining qualitative and quantitative approaches
.
Credibility:
To some extent, credibility is derived from the criteria above. In addition, the reliance on an
ECAI is external credit assessments by independent parties (investors, insurers, trading
partners) is evidence of the credibility of the assessments of an ECAI. The credibility of an
ECAI is also underpinned by the existence of internal procedures to prevent the misuse of
confidential information. In order to be eligible for recognition, any ECAI does not have to
assess firms in more than one country.
The first pillar provides three methodologies to rate the riskiness of a banks assets. The
first of these methodologies, the standardized approach, extends the approach to
capital weights used in Basel I to include market-based rating agencies. Sovereign
claims, instead of being discounted according to the participation of the sovereign in the
OECD, are now discounted according to the credit rating assigned to a sovereigns debt by an
authorized rating institutionif debt is rated from AAA to AAA-, it is assigned a 0%
weight; if it is rated from A+ to A-, it is assigned a 20% weight; if it is rated from BBB+
to BBB-, it receives a 50% weight; if it is rated from BB+ to BB-, it receives a 100% weight;
and if it is rated below B-, it receives a 150% weight. Unrated debt is weighted at 100%. If
debt is denominated and funded in local currency, regulators can also assign a lower weight
to its relative riskiness.
18

For bank debt, authorities can choose between two risk weighting options. In the first
option, authorities can risk-weight this type of debt at one step less favorable than
the debt of the banks sovereign government. For example, if a sovereigns debt were
rated as A+, the risk weight of the banks under its jurisdiction would be 50%. Risk is
capped at 100% if the sovereigns rating is below BB+ or unrated. The other option for the
risk-weighting of bank debt follows a similar external credit assessment as sovereign bonds,
where AAA to AAA- debt is weighted at 20%, A+ to BBB- debt is weighted at 50%, BB+
to BB- debt is weighted at 100%, and debt rated below B- is risk-weighted at 150%. Unrated
debt is weighted at 50%. Short-term bank claims with maturities of less than three months
are weighted at one step lower than a sovereign bond, where BB+ debt is given a 50% weight
instead of a 100% value.
In the standard approach, corporate debt is weighted in the same manner as bank debt,
except the 100% category is extended to include all debt that is rated between BBB+
and BB-. All debt rated below BB-is weighted at 150%; unrated debt is risk-weighted
at 100%. Home mortgages are, in addition, risk-weighted at 35%, while corporate
mortgages are weighted at 100%.
Credit Riskthe Internal Ratings Based Approaches
Beyond the standardized approach, Basel II proposesand incentivizestwo alternate
approaches toward risk-weighting capital, each known as an Internal Ratings Based
Approach, or IRB. These approaches encourage banks to create their own internal systems
to rate risk with the help of regulators. By forcing banks to scale up their risk-weighted
reserves by 6% if they use the standardized approach, the Basel Committee offers banks
the possibility of lower reserve holdingsand thus higher profitabilityif they adopt these
internal approaches.
The first internal ratings based approach is known as the Foundation IRB. In this approach,
banks, with the approval of regulators, can develop probability of default models that
provide in-house risk weightings for their loan books. Regulators provide the
assumptions in these models, namely the probability of loss of each type of asset, the
exposure of a bank to an at-risk asset at the time of its default, and the maturity risk
associated with each type of asset.
The second internal ratings based approach, Advanced IRB, is essentially the same as
Foundation IRB, except for one important difference: the banks themselvesrather than
regulatorsdetermine the assumptions of proprietary credit default models. Therefore,
only the largest banks with the most complex modes can use this standard.
Both IRB approaches give regulators and bankers significant benefits. Firstly, they encourage
banks to take on customers of all types with lower probabilities of default by allowing these
customers lower risk weightings. These low risk weightings translate into lower reserve
requirements, and ultimately, higher profitability for a bank. Also, the IRB approaches allow
banks to engage in self-surveillance: excessive risk-taking will force them to hold more cash
on hand, causing banks to become unprofitable.
Moreover, if a bank does become illiquid, regulators will be less apt to close the bank if
it followed standard Basel II procedures. For regulators, self-surveillance also decreases
19

the costs of regulation and potential legal battles with banks. Furthermore, the tailoring of
risk weights allows additional capital to be channeled to the private sectorbecause
public debt is no longer more trusted by assumption, banks will be more apt to lend to
private sources. This, in turn, increases the depth of the banking sector in a countrys
economy, and in sum, encourages economic growth. Poor risks can no longer hide under a
rather arbitrary risk category, preventing the tendency of banks to wiggle risks around
category-based weights.
Operational Risk
Secondly, Basel II extends its scope into the assessment of and protection against operational
risks. To calculate the reserves needed to adequately guard against failures in internal
processes, the decision-making of individuals, equipment, and other external events,
Basel II proposes three mutually exclusive methods.
The first method, known as the Basic Indicator Approach, recommends that banks hold
capital equal to fifteen percent of the average gross income earned by a bank in the
past three years. Regulators are allowed to adjust the 15% number according to their
risk assessment of each bank.
The second method, known as the Standardized Approach, divides a bank by its
business lines to determine the amount of cash it must have on hand to protect itself
against operational risk. Each line is weighted by its relative size within the company to
create the percentage of assets the bank must hold. Following Figure displays the reserves
targets by business line. As shown in the Figure, less operationally risky business lines
such as retail bankinghave lower reserve targets, while more variable and risky
business linessuch as corporate financehave higher targets.

Figure: Standardized Approach Reserve Targets

(Source: Basel II Accords, 2006 Revision)

Business Line

% of Profits Needed
in Reserves

Corporate Finance

18%

Sales & Trading

18%

20

Retail Banking

12%

Commercial Banking

15%

Settlement

18%

Agency Services

15%

Asset Management

12%

Retail Brokerage

12%

The third method, the Advanced Measurement Approach, is much less arbitrary than
its rival methodologies. On the other hand, it is much more demanding for regulators and
banks alike: it allows banks to develop their own reserve calculations for operational risks.
Regulators, of course, must approve the final results of these models. This approach, much
like the IRB approaches shown in the last section, is an attempt to bring market discipline and
self-surveillance into banking legislation and a move to eliminate wiggle room where
banks obey regulations in rule but not in spirit.
Market Risk
The last risk evaluated in Pillar I of the Basel II accords attempts to quantify the reserves
needed to be held by banks due to market risk, i.e. the risk of loss due to movements in asset
prices. In its evaluation of market risk, Basel II makes a clear distinction between fixed
income and other products such as equity, commodity, and foreign exchange vehicles
and also separates the two principal risks that contribute to overall market risk: interest
rate and volatility risk. For fixed income assets, a proprietary risk measurement called
value at risk (VAR) is first proposed alongside the lines of the IRB approaches and
the Advanced Measurement Approach; banks can develop their own calculations to
determine the reserves needed to protect against interest rate and volatility risk for fixed
income assets on a position-by-position basis. Again, regulators must approve of such an
action.
For banks that cannot or chose not to adopt VAR models to protect their fixed income
assets against volatility or interest rate risk, Basel II recommends two separate risk
protection methodologies. For interest rate riskthe risk that interest rates may fluctuate
and decrease the value of a fixed-income assetreserve recommendations are tied to the
maturity of the asset. Following Figure provides an overview of the risk weights
assigned to each asset given its maturity. As seen to the right, depending on the time
to maturity of the fixed-income asset, Basel II recommends a bank hold anywhere
between 0% and 12.5% of an assets value in reserves to protect against movements in
interest rates.
Figure: Interest Rate Risk Weightings
21

(Source: Basel II Accords, 2006 Revision)

Time to Maturity

Risk Weighting

1 Month or Less

0.00%

6 Months or Less

0.70%

1 Year or Less

1.25%

4 Years or Less

2.25%

8 Years or Less

3.75%

16 Years or Less

5.25%

20 Years or Less

7.50%

Over 20 Years

12.50%

To
guard
against
the

volatility risk of fixed income assets, Basel II recommends risk weightings tied to the credit
risk ratings given to underlying bank assets. For assets rated by credit-rating agencies as
AAA to AA-, a 0% weighting is assigned, while for A+ to BBB rated fixed income
instruments, a 0.25% weighting is given. Furthermore, for instruments receiving a BB+ to Brating, an 8% weight is assigned, and for instruments rated below B-, a 12% weight is
allowed. Unrated assets are given an 8%
Risk weighting. For the final calculation of the total amount of reserves needed to protect
against market risk for fixed income instruments, the value of each fixed income asset is
multiplied against both risk weightings and then summed alongside all other fixed income
assets.
Basel IIs risk weightings for all other market-based assetssuch as stocks, commodities,
currencies, and hybrid instrumentsis based on a second, separate group of
methodologies. It would be exhaustive to provide a full summary of the methods used
for the calculation of reserves needed to protect against market risks, but this paper will
provide a short summary of the three main types of rating methodologies used to rate
these assets. The first group of methodologies is called The Simplified Approach, and
uses systems similar to the bucket approaches used in non-VAR fixed income reserve
calculations. This group looks to divide assets by type, maturity, volatility, and origin, and
assign a risk weights along a spectrum of values, from 2.25% for the least risky assets to
100% for the most risky assets.
The second group of methodologies for assigning the reserves needed to protect against
market risk inherent in stock, currency, commodities, and other holdings is called
Scenario Analysis. Here, risk weights are not grouped according to the cosmetic
features of an asset; instead, risk weights are allocated according to the possible
scenarios assets may face in each countrys markets. This approach, while much more
complex than the Simplified Approach, is much less conservative and therefore more
profitable for a bank.
22

The final methodological group outlined in Basel II that calculates the reserves needed to
guard against market risk is known as the Internal Model Approach, or IMA. Along the lines
of the VAR and IRB approaches, this methodology group encourages banks to develop
their own internal models to calculate a stock, currency, or commoditys market risk on a
case-by-case basis. On average, the IMA is seen to be the most complex, least
conservative, and most profitable of the approaches toward market risk modeling.

Total Capital Adequacy

Once a bank has calculated the reserves it needs on hand to guard against operational and
market risk and has adjusted its asset base according to credit risk, it can calculate the onhand capital reserves it needs to achieve capital adequacy as defined by Basel II.
Because of the wide range of methodologies used by banks and the diversity of bank
loan books, Basel II allows a great deal of variation in its calculated reserve
requirements. Additionally, no change is given to both the requirement that Tier 2 capital
reserves must be equal to the amount of Tier 1 capital reserves and the 8% reserve
requirement for credit-default capital adequacy, making these two regulations applicable in
Basel II. In sum, a banks needed reserves for capital adequacy is calculated as follows:
Reserves = .08 * Risk Weighted Assets + Operational Risk Reserves + Market Risk
Reserves
Part 2: The Second Pillar Supervisory Review Process
This section discusses the key principles of supervisory review, supervisor transparency and
accountability and risk management guidance produced by the Committee with respect to
banking risks, including guidance pertaining to the treatment of interest rate risk in the
banking book

Four Key Principles of Supervisory Review

The Committee has identified four key principles of supervisory review, which are discussed
in the Supporting Document Supervisory Review Process. This pillar is less much complicate
and lengthy than Pillar I. So we mentioned only the headings of these four principles without
describing the rules and guidelines under the headings.
Principle 1: Banks should have a process for assessing their overall capital adequacy in
relation to their risk profile and a strategy for maintaining their capital levels.
Principle 2: Supervisors should review and evaluate banks internal capital adequacy
assessments and strategies, as well as their ability to monitor and ensure their compliance
23

with regulatory capital ratios. Supervisors should take appropriate supervisory action if they
are not satisfied with the result of this process.
Principle 3: Supervisors should expect banks to operate above the minimum regulatory
capital ratios and should have the ability to require banks to hold capital in excess of the
minimum.
Principle 4: Supervisors should seek to intervene at an early stage to prevent capital from
falling below the minimum levels required to support the risk characteristics of a particular
bank and should require rapid remedial action if capital is not maintained or restored.
Part 3: The Third Pillar Market Discipline
Generally, the Committee is introducing disclosure recommendations. In some instances,
however, disclosure requirements are attached to the use of a particular methodology or
instrument, and as such form pre-conditions for the use of that methodology or instrument for
regulatory capital purposes. Pillar 3 contains disclosure recommendations and requirements
for banks.
Core and Supplementary Disclosure Recommendations:
Core disclosures are those which convey vital information for all institutions and are
important to the basic operation of market discipline. All institutions will be expected to
disclose this basic information. Categories of supplementary disclosures are also defined.
These disclosures are important for some, but not all, institutions, depending on the nature of
their risk exposure, capital adequacy and methods adopted to calculate the capital
requirement. The division between core and supplementary disclosures reduces the disclosure
burden on institutions.

Materiality:
Materiality will drive the decision on which disclosures are made. Information is regarded as
material if its omission or misstatement could change or influence the assessment or decision
of a user relying on that information. The materiality concept should not be used to manage
disclosures. The reasonable investor test, i.e. in the light of particular circumstances, a
reasonable investor would consider the item to be important, is a useful benchmark for
ensuring that sufficient disclosure is made.
Frequency:
24

Generally, the disclosures set out in this paper should be made on a semi-annual basis.
Information is expected to be subject to a proper verification process on at least an annual
basis, probably in the context of the annual report and financial statements. In certain
categories of disclosure that are subject to rapid time decay, for instance risk exposure, and in
particular for internationally active banks, quarterly disclosures are expected.
Templates:
A suggested format for reporting, in the form of templates, is provided in the
Supporting Document Pillar 3: Market Discipline. Banks are invited to make use of the
templates in their disclosures to encourage comparability.

2.6 A SUMMARY OF BASEL III UPDATE

Basel III
Banking is a business, all over the world, where the contribution of capital becomes very
insignificant in the volume of total business thereof. Balance sheet of almost all the banks
must stand as the primary evidence of the comment. In a balance sheet, capital of most of the
banks is seen as a small part of the sources of fund which build the properties and assets as
shown therein. General equation of any balance sheet or the affairs of any concern is that total
of capital and outsiders' liabilities always become equal to its properties and assets. In other
words internal liability (capital/equity) and external liability equate the total properties and
assets thereof. In modern terms it also may be equated as 'sources of fund vis--vis
25

application of fund'. For banks, sources of fund substantially consist of shareholders' and
depositors' fund and both are applied or invested in properties and assets thereof. So the
major category of sources of fund is divided into two: i) capital and ii) depositors' fund. In
other words, it is share holders' money versus depositors/ outsiders' money. All funds are then
applied in bank's assets of different forms. Assets are again mostly represented by the loans,
advances, investment and other fixed assets. It is also notable that in case of banks, most of
the initial capital is exhausted for office premises and other fixed assets like electronic
equipment, furniture, fixture, car for executives and other pre-operative/ preliminary
expenses etc. As a result, a small part of capital remains available for investment. So the very
truth for a bank is that most of the loans and advances are financed by depositors' money. The
amount of capital/ shareholders' money weighs too light as compared to others' fund. Bank is
rich with others' (dominated by depositors') money. As the vital source of blood circulation of
a bank is the depositors' money, a global standard has been designed in the Bank for
International Settlements (BIS). This discipline or agreement is known as International
Convergence of Capital Measurement and Capital Standards. The standard was born in Basel
of Switzerland. It has got a nickname as Basel accord or just Basel a much talked about issue
now-a-days in the banking industry all over the world. Again after updating, a Revised
Standard known as Basel-II has now been prevailing. For further updating, particularly in the
backdrop of the latest financial meltdown, resulting in fall of many, too big to fall' like
Lehman Brothers, AIG and many a bailout program to save the drowning ones, Basel-III is
being cooked with more stringent regulations. Appreciation for this great and giant work, to
make financial institutions safer, knows no bounds. None could deny that Basel accord has
vibrated the banking world to turn its eyes towards banking/bank's health.
Designing three pillars as foundation of Basel to withstand against anticipated and
unanticipated financial storms obviously deserves credit. Extension of the purview of risk,
segregation of different risk components, prescription of different approaches to measure
them, suggesting different principles, and processes for supervisory review and requirement
of transparency through market discipline/public disclosure are all for a safer global financial
industry. All these steps are meant for keeping the confidence of the stakeholders and interest
of the depositors through a systematic and constant follow up. This measure is comparable to
regular/ routine human medical checkup' for good health. There remains no doubt that in the
detail of the Basel, there are so many noble prescriptions for checking the health of a bank
along with the different techniques to diagnose through sophisticated pathological test like
VaR (Value at Risk) technique and stress testing, including sensitivity analysis and so on. The
issues of difficulty of implementation or technicality of the process or the larger volume of
works or need of expertise to arrange such a technical Medicare system or other usual
limitations of Basel are not the subject matters of the article. Rather this writing raises the
finger towards relative emphasis on the issues or areas of concentration clustering the Basel
accord.
It appears from the vibration of the concerned corners of the industry that maintenance of
minimum capital has become the burning area of concentration in Basel. Here is the point of
dissent in light of the facts portrayed in the beginning of the writing in respect of scenario of
a bank's balance-sheet. As already stated, usually capital of a bank is insignificant as amount
26

in the total business volume of any bank. Depositors as a whole are the substantial
contributor. On the other hand, the earning asset of a bank is mostly represented by its loans
and advances as a whole. Thus the portion that deserves more importance in the liabilities
side should have been the 'depositors money' (as opposed to capital) and in the asset side it is
the 'loans and advances'. Then in respect of importance, the desired equilibrium should have
been 'depositors money' versus loans and advances', not 'capital versus loans and advances'.
It is the board of directors of a bank as representative of the equity holders, who to look after
their capital and sound return thereof? What the supervisor (central bank) is mostly concerned
about? Of course it is the interest of the outsiders, dominated by the depositors.

Now comes the question of the reason for which interest of the depositors need be specially
taken care of. The simple reply is that because the lion's share of the money, injected to the
borrowers, belongs to them (depositors). Credit or lending offered to the borrowers has got
inherent risk of not coming back to the bank to return to the actual source i.e. to the
depositors (on demand or at maturity). All the steps to assess risk of non-recovery of credit as
prescribed in the Basel standard is its real strength. The lower the risk, the higher is the
probability to recover money. The higher the recovery, the higher is the Bank's ability to pay
off the depositors as and when required. Thereafter comes the question of protection of the
depositors' money, when recovery is not sufficient. In that case there must be fund from
elsewhere to pay off the depositors. It is nothing but the money or fund which is required for
meeting crisis or on demand. It is irrelevant whether it comes from capital or otherwise.
Whatever might be the proportion (between capital and outsiders' money), lent money
consists of both the sources, internal and external (unless capital is exhausted earlier for say
preliminary expenses etc). It is also irrelevant whether the size of capital is small or big.
Important is the availability of fund. Capital does never mean availability of fund. Capital
does not have any such provision that it must be available in the bank's vault. So capital does
not necessarily mean liquidity to meet demand for fund. While lending, bank is rather
constrained to lend the whole of the deposit (by way of stipulation of mandatory maintenance
provision of CRR as well as SLR); but no such restriction is there against lending the full
amount of capital. There is no rule that the bank must lend only the depositors money
keeping the capital intact. In case of need, as the capacity in terms of liquidity becomes the
dire concern, primary precaution must be to ensure liquidity/convertibility of loans and
advances of the bank i.e. the health of the loans and advances. So making stringent regulation
for selecting good clients, processing and maintaining health of the credit are more important
than insisting on raising equity by 1.0 per cent or say 5.0 per cent even. Because, if loan
repayment is sound, depositors interest is protected by ensuring availability of fund. An
increased capital is never a guarantee for making fund available for the depositors. So it is
again the quality of utilization of fund which is important; not the amount of capital or the
proportion of capital structure per se.
Now comes the question of bearing the burden of loss, if any, despite all the measures for
maintaining good health of the assets. It is clear that the pressure of loss at first hits the
27

capital. A loss up to the tune of capital is a loss of capital itself because of limited company's
rule. A loss beyond the amount of capital is the loss of the depositors or other outsiders. So
again it is the amount of capital (obviously not necessarily the ratio with the Risk Weighted
Asset) which determines whether the risk of loss is also to spread over the depositors. No
doubt higher the capital, the higher is the capacity to absorb loss. But this capacity, in other
words, is the 'mandatorily foregone claim' of the shareholders on the asset of the bank. It is
never the cash available by virtue of capital fund. Capital, be it core, supplementary or even
conservation buffer (as going to be imposed under ensuing Basel-III), matters very little if it
is not encashable in time of need. Capital is not enough without liquidity. Both are to be
ensured; rather liquidity is a must for facing insolvency for loss resulting from nonperforming loans (NPL) and/or from market/operational risk of the bank.
Equilibrium between profitability and liquidity needs to be ensured prudently. Amount of
capital alone is not the major constrained. This refers to the latest financial meltdown which
has caused global recession and is still leading to closure of many financial institutions even
today. It is important to note that the key reason for failure of financial institutions is always
attributable to NPL and liquidity crisis, never was it for the lower capital. Enough is enough.
Crisis triggered by non-recovery of loans, widened for the same and caused death of many for
the same. This is not owing to small capital.
Liquidity or availability of fund is totally different from the concept of equity or capital.
Reckless lending with unscrupulous super rating, biased appraisal and processing of loans
created by way of so-called derivatives, having no real asset backing, going beyond means
tempted by greed etc. are the key contributors for the red light. Could a bit higher capital save
them without available fund? Capital and fund in terms of financial management are not
synonymous.
So quality of asset, parties concerned with the process of assessment of risk including the
external rating companies are to be taken into account for the good health of any bank. It is
fair to maintain a proportion between the capital and other liabilities and again between
capital and assets. It obviously makes sense. But without maintaining the asset-quality,
invested capital has a very little role to play in the course of action meant for 'salvation'.
Because both deposit and capital have been invested for earning.
For a safer banking industry, it needs to maintain good health of asset and the availability of
fund to absorb losses in crisis. It is true that the higher the capital, the higher is the capacity to
absorb loss. This is the only relevance of the capital to the interest of the depositor. But the
relative term of high capital to be compared not only to the RWA (risk weighted asset), but
also to deposit and above all that must have a relationship with the liquidity. Capital without
liquidity is no capital at all as coverage in need of fund. Fund becomes available under two
situations: i) When they are kept fully unutilized/liquid, ii) When they are invested/ injected
in assets qualified for routine/ quick encashment without any loss. The former does not at all
mean business as usually it earns nothing/ or the least; it rather gets the risk of decay in value,
for inflation. The latter (loans, advances and investment) earns and stands well provided it is
not classified. So, which to ensure is quality of asset, not the amount of capital. Capital may
28

not make fund available. A powerful vaccine for hepatitis is not supposed to protect TB and
so on. Overemphasis on the ratio of capital amid being blind to the quality/reality of assets is
tantamount to vigorous labor pain of the Mountain giving birth to a mouse or at the best mice.
Again trial and error introduction of subordinated bonds in the name of Tier-2 & Tier-3
capital does not make any sense in terms of relevance to its purpose. The very purpose of
capital coverage is to protect the interest of the outsiders; depositors and other creditors. But
bond or other debt-holders themselves are never shareholders or contributors to capital or
equity (except some Islamic products under Mudaraba or Musharaka mode where 'quasi
equity' treatment is allowed). Equity is internal liability of the company whereas debt-holders
are externals. So bond/debt itself does not make sense of imitated capital even. Yet,
convertibility of bonds into shares is a different thing. Collecting billions of money through
so-called derivative of capital to satisfy regulatory capital requirement and subsequent
exclusion (prescribed for Basel-III) of such items from the components of capital is like 'Tom
& Jerry' game. Such a game, in an aristocrat industry like banks, is not desirable. To fight
consequence of so- called derivative loan products (through excessive financial engineering),
another derivative of capital, is introduced which in turn again increases the volume of
outsiders' claim against the bank. They would also seek regulators' intervention for honoring
their claims. Unless the subordinate debts are converted into shares, they will be in the same
platform with other creditors to ask the bank to settle their debts duly, failure of which on the
part of the bank would again chase them to look for bailout at the cost of society.
To protect the interest of the depositors, it is rather better to impose discriminating SLR on
the basis of quality of bank's assets. The higher the rate of NPL (non-performing loans), the
higher is to be the SLR and vice versa. SLR means liquidity, SLR means fund to absorb the
shock. Capital might be invisible when invited for absorbing shock of loss. But CRR and
SLR would not flee. Capital of Tk.100 may once worth less than Tk.10 in terms of liquidity
to address crisis but SLR of Tk.100 need not be depreciated in this way. Of course all the
measures to guard against entering ill-credit or failing of credit ill must be ensured and
sharpened more as the most effective suggestion of Basel accord. Moreover, in the present
context of Bangladesh it would be more effective and reasonable to contain/ restrain the
banks from over-investment in the unfairly extremely volatile bourses than to insist on
increasing of 1.0 per cent or 2.0 per cent capital on risk weighted amount of its asset leaving
the substantial amount of its balance-sheet fraught with severe risk. Besides, as a rule,
speculation should not be the banking business.
BASEL III (sometimes "Basel 3") refers to a new update to the Basel Accords that is under
development. While the Bank for International Settlements (BIS) does not currently specify
this work as "Basel III", the term appeared in the literature as early as 2005 and is now in
common usage anticipating this next revision to the Basel Accords.
The draft Basel III regulations include:

29

 "Tighter definitions of Tier 1 capital; banks must hold 4.5% by January 2015, then a
further 2.5%, totaling 7%.
the introduction of a leverage ratio,
a framework for counter-cyclical capital buffers,
measures to limit counterparty credit risk,
And short and medium-term quantitative liquidity ratios.

New Proposed Ratios to measure and monitor Liquidity Risk

Liquidity Coverage Ratio

Introduction of a Liquidity Coverage Ratio - to promote the short-term resiliency of the
liquidity risk profile of institutions by ensuring that they have sufficient high quality liquid
resources to survive an acute stress scenario lasting for one month.
Net Stable Funding Ratio
To promote resiliency over longer-term time horizons by creating additional incentives for
banks to fund their activities with more stable sources of funding on an ongoing structural
basis. The Net Stable Funding Ratio has been developed to capture structural issues related to
funding choices.

2.7 Conclusion
Implementation of Basel II has been described as a long journey rather than a destination by
itself. Undoubtedly, it would require commitment of substantial capital and human resources
on the part of both banks and the supervisors. RBI has decided to follow a consultative
30

process while implementing Basel II norms and move in a gradual, sequential and cocoordinated manner. As envisaged by the Basel Committee, the Finance profession too, will
make a positive contribution in this respect to make Bangladesh banking system stronger. In
this context, it should be noted that appointment and permission of External Credit rating
Agencies must be authentic.

31

Chapter-3
Basel & Bangladesh

3.1 Preface of Bangladesh

3.2 Banking Industry of Bangladesh
3.3 Implementation of Basel in Bangladesh
3.4 Challenges for Basel II implementation in
Bangladesh
3.5 Current Situation of Basel in Bangladesh

32

3.0 Preface of Bangladesh

The Country: The Peoples Republic of Bangladesh
Area : 147,570 square km. (Territorial water - 12 nautical miles)
Capital City: Dhaka Metropolitan Area 1528 sq.km
Population : 16 core 40 lack
Population Growth Rate : 1.39 percent
Population Density : 979 Person per sq km
Currency : Taka (Tk.)
GDP at Current Price : Tk. 6149.43 billion (US$ 89.04 billion)
Annual per capital GDP : US$ 621
GDP growth rate at (1995/96) constant price : 5.88 per cent
Agricultural growth rate at constant price : 4.81 per cent
Industrial/Mfg growth rate (% of GDP) : 5.92 per cent

33

 Large & Medium scale Industry: 5.65 percent

Small scale Industry : 6.59 percent
Service sector growth rate of GDP at current price: 49.67 per cent
Inflation rate (12 month average) : 7.69 per cent
Domestic savings rate of GDP: 20.00 per cent
National savings rate of GDP: 32.40 per cent
Investment rate of GDP: 24.20 per cent
Foreign Exchange Reserve : US$ 6,562.93 mn
Remittances : US$ 8,770.16mn
Foreign Investment
Direct: US$ 900 mn
Portfolio: US$ -123 mn
Bank rate: 5.0 per cent
Broad Money (M2): 281,902.00 Tk.crores
Total No. of Limited Co.
Public Limited Co : 35,000
Private Limited Co. : 23,000
Principle Industries :
Garments, Pharmaceuticals, Textiles, Paper, Manufacturing, Newsprint,
Fertilizer, Leather and Leather goods, Sugar, Cement, Fish processing, Steel &
Chemical industries etc.
Major export items:
Garments, Tea, Jute, Frozen shrimps, Leather products, Newsprint, paper,
Naphtha, Urea, etc.
Principle imports:
Fuel, Rice, Wheat, Cotton & Textile, Petroleum products, Fertilizer, Staple fibers,
yarn etc.

3.1 Banking Industry of Bangladesh

34

To be secured one needs security. To get financial security one needs bank. This is a proved
truth in the present world. Now banking sector is one of the largest & important sectors in
any economy specially a developing country like ours. Although Bangladeshi banks are doing
inelastic business, our banking sector is one of the fastest growing sectors. Bangladeshi
banking system was started mainly by two Pakistani banks & its 151 branches that were
established during Pakistani period. At that time there were 1094 branches of various
schedules banks & foreign banks. Bangladesh Bank is the Central Bank of Bangladesh and
the chief regulatory authority in the sector. Pursuant to Bangladesh Bank Order, 1972 the
Government of Bangladesh reorganized the Dhaka branch of the State Bank of Pakistan as
the central bank of the country, and named it Bangladesh Bank with retrospective effect from
16 December 1971.Now the financial system of Bangladesh consists of Bangladesh Bank as
the central bank, 4 State Owned Commercial Banks, 5 governments owned specialized banks,
30 domestic private banks, and 9 foreign banks. Bangladesh follows branch banking system.

Central bank
Bangladesh Bank
State-owned Commercial Banks
1. Sonali Bank
2. Janata Bank
3. Agrani Bank
4. Rupali Bank
Private Commercial Banks
1. AB Bank Ltd
2. BRAC Bank Limited
3. Eastern Bank Limited
4. Dutch Bangla Bank Limited
5. Dhaka Bank Limited
6. Islami Bank Bangladesh Ltd
7. Pubali Bank Limited
8. Uttara Bank Limited
9. IFIC Bank Limited
10. National Bank Limited
11. The City Bank Limited
12. United Commercial Bank Limited
13. NCC Bank Limited
14. Prime Bank Limited
15. SouthEast Bank Limited
16. Al-Arafah Islami Bank Limited
17. Social Islami Bank Limited
18. Standard Bank Limited
19. One Bank Limited
35

20. Exim Bank Limited

21. Mercantile Bank Limited
22. Bangladesh Commerce Bank Limited
23. Mutual Trust Bank Limited
24. First Security Islami Bank Limited
25. The Premier Bank Limited
26. Bank Asia Limited
27. Trust Bank Limited
28. Shahjalal Islami Bank Limited
29. Jamuna Bank Limited
30. ICB Islami Bank
Foreign Commercial Banks
1. Citibank na
2. HSBC
3. Standard Chartered Bank
4. Commercial Bank of Ceylon
5. State Bank of India
6. Habib Bank
7. National Bank of Pakistan
8. Wo Bank
9. Bank Alfalah
Development Banks
1. Bangladesh Krishi Bank
2. Rajshahi Krishi Unnayan Bank
3. Bank of Small Industries & Commerce Bangladesh Ltd.
4. Bangladesh Development Bank Ltd
Other
1. Ansar VDP Unnayan Bank
2. Bangladesh Samabai Bank Ltd (BSBL)
3. Grameen Bank
4. Karmasansthan Bank
5. The Dhaka Mercantile Co-operative Bank ltd

SLR & CRR

Now SLR is 18.5% & CRR is 5.5%. The SLR for Islamic bank is 10.5%.

36

 Deposit & Lending Rate

Year

Bank Rate

2010
2009

5%
5%

Call
money
market
Weighted Average Rates
on
Borrowing
Lending
6.62%
6.62%

Schedule
Banks Spread
Weighted Average Rates
on
Deposits
Advances
6.35%

11.49%

5.14%

Value of bank in the capital market

30 commercial banks are enlisted with DSE & 29 are enlisted with CSE. Here ICB Islami
bank is excluded. Among the 30 listed banks Rupali, UCBL & First security banks are Z
category banks while all other banks are A category. Among 22 sectors of our capital
market, banking sector is the largest sector after NBFI. A short brief is given here to consider
the importance of banking sectors. The data is taken from Prothom Alo on 5th August 2010.
Transaction, EPS & PE based on sector
Sector
Bank

DSE
Million tk.
3653.48

Bank

Audited EPS
DSE
15.98

Total%
18.44%

CSE
Million tk.
265.82

Total%
18.73%

Audited PE
CSE
15.96

Audited EPS
DSE
42.47

Audited PE
CSE
42.47

3.2 Implementation of Basel in Bangladesh

The recent Global Financial Crisis has forced many banks to take a more critical look at how
they conduct their business in terms of the risks they accept and how they manage and are
compensated for these. The collapse of several high profile banks are the signs that something
had gone very badly wrong with Banks' risk management practices.
37

The latest version of capital standards for banks worldwide is BASEL II developed by the
Basel Committee on Banking Supervision (BCBS). The new BASEL II accord has been
prepared on the basis of three pillars: minimum capital requirement (determined by credit
risk, operation risk and market risk), supervisory review process and market discipline.
Bangladesh Bank has recently directed all scheduled banks to implement capital adequacy
ratio (CAR) and minimum capital requirement (MCR) in three phases that started from the
first of January this year. The scheduled banks will maintain CAR not less than eight percent
between January 01, 2010 and June 30. The CAR will have to increase at least to nine percent
between July 2010 and June 2011 and 10 percent in July 2011 to onwards. The MCR must be
eight percent of a bank's risk weighted asset by June 30, 2010, nine percent by June 2011 and
10 percent from July 2011 to onwards.

3.3 Challenges for Basel II implementation in

Bangladesh
Some of the major issues and challenges that might arise for the Bangladeshi banking
system from the adoption of the Basel II framework are being outlines below.
Pre-implementation considerations -- Timing of Implementation: Although there is a
widespread recognition of Basel II as more sophisticated than Basel I, there has been
considerable debate around the appropriate timing of Basel II even among developed
countries. While most European Union (EU) countries have followed a "2007 parallel - 2008
live" timeline, the US regulators have deferred implementation to a "2008 parallel - 2009
live" timeline.
The scenario in developing world is also mixed. The implementation plans in regard to Basel
II, as far as Asia-Pacific is concerned, may be broadly divided into four ranges - one, where
the simplest approaches and the most advanced approaches are available at the time of first
implementation (Australia, Korea, Singapore, New Zealand); second, where the simplest
approaches are available initially and at least one of the most advanced approaches is
available within a year or two thereafter (Hong Kong, Japan, Indonesia, Thailand); third,
where the simplest approaches are allowed initially and the date of availability of the most
advanced approaches is yet to be announced or are available after more than two years
(India, Malaysia, and Philippines); and fourth, where countries may remain on Basel I for a
longer period before migrating to Basel II (China, Bangladesh, Vietnam).
Premature adoption of Basel II in countries with limited capacity could inappropriately
divert resources from the more urgent priorities, ultimately weakening rather than
strengthening supervision. In one of its publications, the International Monetary Fund (IMF)
agreed that countries should give priority first to strengthening their financial systems
comprising institutions, markets and infrastructure and focus on achieving greater level of
compliance with the Basel Core Principles.
With that view in mind, the Bangladesh Bank needs to decide whether the timeline that it is
contemplating is an appropriate one for Basel II implementation. At a minimum the
following may be recommended to be implemented before Bangladesh moves into Basel II:
38

 Implement "Market Risk Capital" as an addition to Basel I first;

Automation of regulatory return submission - developing IT infrastructure for the
local bank
Capacity building for Central bank
Developing robust External Credit Rating Agencies (ECAIs)
Selection of approaches: As Basel II offers a range of approaches, it is important to
understand the difference between them and select the right approach for initial introduction
in the Bangladesh market. Bangladesh Bank has already announced that it would intend to
implement simpler approaches of Basel II (i.e. Standardized for Credit Risk,
Basic/Standardized for Operational Risk and Simplified approach for Market Risk), which is
probably the right choice. However it is important to recognize the limitations of simpler
approaches.
Standardized Credit Risk approach is heavily dependent on credit ratings from external
rating agencies. Simpler approaches of operational and market risk do not effectively
attempt to quantify the risk of the bank - they are more ballpark addition to the capital based
on Bank's size of operation. Implementation of these simpler approaches can only generate
the true benefit of Basel II if the quantitative capital assessment is coupled with qualitative
measures of containing risk through better risk management practices. To ensure this,
regulatory supervision needs to be strengthened. Wherever banks would be found deficient
in their risk management practices, there is provision in Basel II for supervisors to require
additional capital as part of Pillar 2. This supervisory role needs to be executed prudently.
The advanced approaches have their limitations and issues as well, and they may be more
problematic for Bangladesh. When most of the international banks with the state-of-the art
banking practices are struggling to comply with the requirements of advanced approaches
and the supervisors in even developed countries are struggling with the task of reviewing
and approving advanced models, the Bangladesh Bank has appropriately decided not to
venture that route in the immediate future. Hence, challenges of simplified approaches only
will be discussed later.
Implementation Consideration - The Industry -- External Credit Rating Agencies (ECAIs):
The Standardized Approach for credit risk leans heavily on the external credit ratings. While
there are a few rating agencies operating in Bangladesh, the rating penetration in Bangladesh
is rather low. It is doubtful without a solid base of ECAIs operating in country how effective
the implementation will be.

There is also a consideration whether the ratings of International Credit Rating Agencies
would be accepted in capital calculations. International ECAIs like Moodys, S&P usually
rate the head-office of the multinational corporations. Whether that rating would be
acceptable for their Bangladesh subsidiaries is a point to ponder. Furthermore, there would
39

always be a wide gap between the rating of an International agency and a local agency. In
general, International agencies have much stricter rating practices, which, if accepted as a
norm, would generally result in a capital requirement significantly higher than Basel I for
the Bangladeshi banks! This creates an incentive for some of the bank clients to remain
unrated since such entities receive a lower risk weight of 100 per cent vis--vis 150 per cent
risk weight for a lower rated client. This might specially be the case if the unrated client
expects a poor rating.
Market Readiness:
The disclosure requirements under the Pillar 3 of Basel II are quite extensive in nature.
They are probably designed to suit advanced markets where there are numerous analysts to
analyze and understand the disclosures and take investment decisions based on that. It is
doubtful whether the market of Bangladesh is at all ready to take benefit such extensive
disclosures. If not, then requiring banks to adhere to of such disclosure requirements would
overburden the banks without any practical benefit.
Banking vs. non-banking financial institutions (NBFIs): Since only banking institutions are
subject to Basel II requirements, banks may find themselves in competitive disadvantage
against specialized financial institutions, especially, leasing companies, microfinance
institutions, foreign exchange remittance facilitating institutions and mutual funds. More
specifically where banks provide services similar to these organizations, they may find it
difficult to compete due to additional capital requirement which NBFIs would not have. This
may create an asymmetry in the industry.
Implementation Consideration - For the regulator: Resource adequacy; Implementing even
the simpler approaches of Basel II requires significant involvement of the regulators, to
ensure that the banks are not misusing the new rules. Several activities may require
considerable involvement of the central bank:
1) Issuing detailed Basel II Guidance, including all national discretions carefully evaluating
their impact on the industry.
2) Evaluating and continuously monitoring approved ECAIs.
3) Educating banks
4) Monitoring and taking decisions on Home-Host issues for international banks through
continuous dialogue with supervisors in other countries.
5) Human Resource and IT Infrastructure to review and evaluate banks' capital calculations.
6) Supervising banks under Pillar 2 of Basel II.
7) Deciding Pillar 3 disclosure requirements and monitoring practices.
Without adequate capacity building in the central bank to perform all these tasks in a timely
fashion, Basel II Implementation would definitely be hampered.
Implementation Consideration - For the banks: Possible higher capital requirement; The new
accord might, in some cases, lead to an increase in the overall regulatory capital
requirements for the banks, particularly under the simpler approaches to be adopted in
Bangladesh, if the additional capital required for the operational risk is not offset by the
capital relief available for the credit risk. This would, of course, depend upon the risk profile
40

of the banks' portfolios and also provide an incentive for better risk management but the
banks would need to be prepared to augment their capital through strategic capital planning.
Increased competition for better rated clients: The new framework could also intensify the
competition for the best clients with high credit ratings, which attract lower capital charge.
This could put pressure on the margins of the banks. The banks would, therefore, need to
streamline and reorient their client acquisition and retention strategy.
Changes in banking practices:
The use-test requirement of Basel II dictates that banks must use the capital calculations in
their management decisions like selection of clients, pricing banking products etc. This
would require changes in banking practices often resulting in over-dependence on the
external ratings of the clients. The larger local banks including the nationalized banks may
have a very difficult time implementing changes.
Increased competition in the labor market: Most countries implementing Basel II have
experienced a shortage of skilled people in the industry who can understand and implement
the sophisticated Basel II requirements. So, there is an almost certain likelihood that the
banks in Bangladesh may also face a similar constraint. A good number of trainings and
conferences can help ease this pressure.
Expensive software:
Software solutions for Basel II calculations available in the international market are quite
expensive. While international banks can probably take advantage of software solutions
procured by their head office, the local banks may find it burdensome to procure or develop
such software.
Competitive disadvantage for smaller banks: Smaller banks with a concentration on higher
risk client group may find it to their further competitive disadvantage to implement Basel II
as this may require them to maintain relatively higher capital than bigger banks with less
risky client base. While this is a strong incentive to improve bank's risk management
practices, some of the smaller banks in the Bangladesh industry, which are already finding it
challenging to operate, may be further marginalized due to Basel II requirements.
Implementation Consideration - For the society: Higher cost of banking services; The
possible increased capital requirement and the significant cost of implementation may
ultimately result in higher cost of banking services for the society. This may be especially
true for corporate clients with weaker risk profile. Since the capital requirement on such
clients will be several times higher than a larger, less risky client, banks will be inclined to
charge them a significantly higher price for loan-type products.
Definition of SMEs and Retail: The new accord does provide some benefit for retail client
base and Small & Medium Enterprises (SMEs). A lower risk weight is applicable for these
clients as they provide diversification for the bank. However, the definitions suggested by
BIS may not be applicable for Bangladesh and hence the Bangladesh Bank, like almost all
other supervisors of the world, has to redefine the thresholds of definition of SME and retail
- especially the size and the granularity criteria.
41

These definitions should be carefully thought out since qualifying the SME definition will
mean an organization's access to lower cost credit. At the same time the definitions should
also be designed such that banks cannot misuse the special rule to define their significant
exposures as SME and evade capital requirement.
Unique market practices:
Basel II accord may not be adequate to cover some special type of banking practices seen in
Bangladesh. In the Bangladesh market, banks are encouraged to provide credit to agrarian
industries and agricultural farms as well as export oriented firms.
The regulators should be careful that these firms don't get at disadvantageous position due to
the new accord. If necessary, special "regulatory-segment" should be defined to allow
preferential risk weights to these industries.
Another unique practice is Islamic Banking. While Basel Accord is silent about this
important banking product, some regulators (e.g. the Malaysian Regulator-BNM) have
already defined Basel II rules for Islamic Banking. The Bangladesh Bank can follow this
precedence.
While it is important that we move ahead with the world by implementing Basel II, it may not
be a very bad idea to go slow in this regard to allow the industry more time to prepare itself
for the new accord. Especially the development of local ECAIs should be a top priority
before abruptly adopting the Standardized approach of Credit Risk - which is fully dependent
on external rating. At the time of the implementation, the impact on the banks, the industry
and the society should be carefully evaluated.
Bangladesh Bank has given utmost concentration and best possible effort through
consultative approach for implementing Basel II. Bangladesh will make possible parallel run
of Basel II to current regulation from early 2009. We think the new accord would provide a
level playing field for banking organizations meeting in international competition.

3.6 Current situation of Basel in Bangladesh

42

To meet the global financial crisis, about a year ago, the Conference on Global Banking in
Mumbai announced safe guarding financial stability through regulation and supervision with
a note on 'altruism driven self discipline.' Bangladesh Bank governor Dr. Atiur Rahman, in
his keynote address said that the on-going reforms in financial sector regulation and
supervision in Bangladesh aims at convergence with the global best practice standard set by
the Basel Committee/BCBS for effective bank supervision. These are financial statements of
the banks in internationally accepted accounting standard. Good corporate governance should
be practiced by the banks. These would consist of proper tests for directors and chief
executives, their role and responsibilities and the accountability for directors prior to central
bank clearance for appointment and removal of CEOs.
Recently the four state-owned commercial banks have been converted to public limited
companies as steps towards privatization. For sound risk management Bangladesh Bank has
issued a set of guidelines for management of core risks by the banks. Limits have been set on
large single borrower, limits and disclosure on loans and facilities to directors, senior
management and connected interests. Further support to risk management is provided through
internal control and compliance units reporting to audit committees of boards, annual external
audits, on and offsite Bangladesh Bank supervision. From 2009 onwards banks are to work
out their capital requirement according to Basel II capital regime along with continuing
compliance of current Basel I minimum plus two percent capital requirement on risk
weighted assets.
Upgraded regulatory and supervisory capacities would cover CAMELS rating of banks on a
set of performance indicators. Introduction of intense stress testing routine would cover the
shortfalls of the commercial banks trend towards engagement in capital market activities.
Banks are engaged in major program of up gradation of IT platform to enable further the
process of analyzing and reporting to Bangladesh Bank. To encourage the financial sector in
underserved priority areas Bangladesh Bank is engaged in supporting and promoting 'deeper
engagement of financial sector in agriculture, SMEs, low cost housing, renewable energy,
environmental sustainability, solar/biogas, effluent treatment plants with provision for
refinance if need be.'
It is significant to note that the financial return on these activities when below par will be
compared with greater socio-economic benefit such as employment, more assured livelihood.
'Such long term economic engagement will be preferred over risky speculative investment in
the short term.'
The governor's address ended on the resounding note that ' smaller developing economies
should have opportunities for representation in these global consultationGlobal dialogue
for new global financial architecture should have voice of smaller economies. The new
financial order should have tethering global liquidity.'
This end note is significant, for the members of the Basel Committee of Banking Supervision
come from all over the world including India, Indonesia and not from Bangladesh, Nepal,
Myanmar, SriLanka, Pakistan,Saudi Arabia or any of the Middle eastern countries.
43

Basil II is an improvement in 1988, International Bank Capital Accord on Basil I 1980. It

offers more complex models for calculating regulatory capital. In other words banks holding
riskier assets should have more capital at hand than those maintaining safer portfolios. Basel
II standard requires that financial institutions maintain enough cash reserve to cover risks
incurred by operations. Also requires banks to publish details of risks investments and risk
management practices. It is mandatory for institutional managers to make capital allocation
more risk sensitive. It requires the separation of credit risks from operational risks, thereby
reducing the scope or possibility of regulatory arbitrage by attempting to align the real or
economic risk precisely with regulatory assessment.
According to the Credit Rating Information and Services Limited/CRISL, Bangladesh will
have to follow the roadmap of Basel implementation to remain in line with the
international banking system. Briefly, Bangladesh financial system consists of Bangladesh
Bank as the central bank, four nationalized commercial banks, and five government owned
specialized banks, 30 private banks, ten foreign banks and 28 non-bank financial institutions.
The country's 28/29 non-banking financial institutions have for long demanded that the
central bank allow foreign bank borrowing. The average cost of fund of an NBFI is much
higher compared to a banking company. Under the Financial Institution Act 1993 direct
foreign transaction is prohibited for the NBFI. To raise their capital nearly 20 NBFIs have
issued initial public offering/IPO.
Recently Bangladesh Bank decided that NBFIs would come under Basel II from January
2012 aiming at consolidation of financial base of the institutions. NBFIs would calculate
minimum capital requirement under Basel II on test basis from 2011 and on the draft
guideline. Next would be to develop risk adjusted assets and liability portfolio and capital
structure.
According to Bangladesh Bank risk is the vital issue to be addressed. Basel II will be
implemented under three approaches. These consist of: standardized approach for calculating
risk weighted amount against credit. Second is the standardized approach to measure market
risks and the third approach is the basic indicator approach for operational risk. Feedback
meeting between April-August will finalize the guideline.
Bangladesh Bank circular 14, 2007 Roadmap to Basel II: For implementation of Basel II the
Quantitative Impact study showed that steps are needed to strengthen the capacity building of
the supervisory officials who would then be prepared to implement the Basel II the new
capital accord.
The initial steps are standardized approach, which is that all banks need to have the same
method to calculate risk weighted amount against credit risk supported by external credit
assessment institutions/ ECAIs. There is to be standardized rule to assess market risk and
basic indicator approach for operational risk.

44

Risks then are of three types: weighted, market and operational. There are standard measures
for risk management. To follow the roadmap of Basel II implementation, it is necessary to
remain in line with international banking system.
On February 9, 2009 Sameer Dossani interviewed Noam Chomsky about the global
economic crisis and its roots: Double Standard: part of the question was ' Can you talk a
little about the international implications of the financial crisis ' Chomsky's answer, partly,
was 'It is rather striking to notice that the consensus on how to deal with the crisis in the
rich countries is almost the opposite of the consensus on how the poor should deal with
similar economic crisis. When the so-called developing countries have a financial crisis the
IMF rules are: raise interest rates, cut down economic growth, tighten the belt, pay off your
debts (to us) privatize and so on. That's the opposite of what is prescribed here. What's
prescribed here is lower interest rates, pour government money into stimulating the economy,
nationalise (but don't use the word) and so on. So yes, there is one set of rules for the weak
and a different set of rules for the powerful. There is nothing novel about that.'
My own thoughts on the global financial crisis take me back to my school days. I recollect a
passage for prcis writing, thus: Upon a hill site there was a clear cool stream of flowing
water. A huge, fearful animal, probably a lion, was drinking water in the upstream region.
Quite far away from him, a timid docile creature was also drinking water from the
downstream region. Suddenly the big animal pounced upon the small animal and said that he
had polluted the water by drinking from the same stream. The smaller creature disagreed and
said this was not possible from the downstream position. The big animal then said that then it
was the father of the small animal who had polluted the water for 'he drank water before you.'
shouted the big animal. For me the current crisis bears a strong semblance to the content of
this passage.

45

Chapter-4
Basel Accord & EBL

4.0 Introduction to EBL

4.1 Basel Program in EBL
4.2 Basel Implementation in EBL

4.0 Introduction to EBL

46

Eastern Bank Limited was founded in 1992 and is headquartered in Dhaka, Bangladesh
through a network of branches & centers countrywide. Eastern Bank has its presence in major
cities/towns of the country including Dhaka, Chittagong, Sylhet, Khulna and Rajshahi.
Tracing its origin back to 1992, EBL is serving the individual and corporate clientele alike
with remarkable success offering innovative banking services since then. The company
commenced its banking operation on 16 August 1992. It listed with DSE on 20 March, 1993.
First online banking operation was started on 17 July, 2003. It listed with CSE on September
11, 2004.
Financial Aspects
Total assets TK 74864 million.
Total cash and short term investments TK 9836.6 million.
Total current assets TK 12622.2 million.
Total equity TK 8,455.7 million.
Common stock TK. 2920.8million.
Retained earnings TK.2909.3 million.
Gross profit TK. 1,149.7 million.
Net income TK. 455.6 million.
Share price 724.75 (as of the closing price of 7th August, 2010.)
Consumer Banking Products
Loan products
Deposit products
SME products
Card products
Others
Minimum requirement to open a savings account is TK. 1000.
Deposit rate for savings less than 500 million is 6.00%
Deposit rate for savings more than 500 million is 7.25%
Number of ATM Booths: 61

4.1Basel Program in EBL

47

Countrys banking industry has entered into the Basel II era in 2009 with the objective of
aligning capital requirement of a bank with the effectiveness of risk management & internal
control practices. Bangladesh Bank has set guidelines for parallel reporting of regulatory
capital (Basel I & Basel II) in 2009 under standardized approach of Basel II & made it
mandatory from 1st January 2010. Credit rating of the borrowers of the banks is to be done by
the external credit assessment institutions (ECAIs) duly recognized by BB. These ratings will
be the primary input for the banks in calculating RWA against credit & market risk.
EBL has invested considerable effort & money so far to instill required set of skills in the
relevant people, to develop awareness among corporate & mid segment borrowers &
contemplated for implementation of IRB approach in the line with BB road map. EBL is
already in the process of appointing a world renowned consulting firm to do a Gap Study to
gauge the status of our readiness (soft & hard factors) in comparison to the requirements by
the central bank both under standard & IRB approach. EBL is regularly reporting its capital
adequacy to central bank under Basel II framework & maintaining required capital adequacy
comfortably.
EBL has already formed a SRP committee comprising people with adequate knowledge of
risks (credit, market & ops), measurement & monitoring of risk methodologies & our policy
& strategy in maintaining adequate capital commensurate with level of risks. Their scope of
works, reporting lines & frequency are in the process of finalization.
EBLs SRP is critically based on the philosophy of Basel II & that is, we will ensure better
risk mgt & internal control process not adequate capital for compensating weak &/or flawed
risk mgt & control environment. It will be worthy to mention here that, EBLs capital
requirement will be far less than existing requirement once our unrated borrowers get their
actual rating from approved ECAIs. So, our minimum capital requirement can be adequate
given the strong risk mgt & internal control process.
EBL has no committee to implement Basel ii. But its operation department works hard to
cope with BB rules.

4.2Basel Implementation On EBL

48

Background: These disclosures under Pillar III of Basel II are made following Guidelines
on Risk Based Capital Adequacy (RBCA) for banks issued by Bangladesh Bank
(Central Bank of Bangladesh) in December 2008. These quantitative and qualitative
disclosures are intended to complement the Minimum Capital Requirement (MCR) under
Pillar I and Supervisory Review Process (SRP) under Pillar II of Basel II. The purpose of
these disclosures is to present relevant information on adequacy of capital in relation to
overall risk exposures of the Bank so that the market participants can assess the
position and direction of the Bank in making economic decisions.
Scope of Application: The Risk Based Capital Adequacy framework applies to Eastern Bank
Limited (EBL) on Solo Basis as there was no subsidiary of the Bank as on the
reporting date i.e. 31 December 2009.
Consistency and Validation: The quantitative disclosures are made on the basis of
audited financial statements as at and for the year ended 31 December 2009 prepared under
relevant international accounting and financial reporting standards as adopted by the Institute
of Chartered Accountants of Bangladesh (ICAB) and related circulars/instructions issued by
Bangladesh Bank from time to time. So, information presented in the Quantitative
Disclosures section can easily be verified and validated with corresponding information
presented in the audited financial statements 2009 available on the website of the Bank.
Disclosure Framework: The quantitative and qualitative disclosures are made on the
following areas as per guidelines issued by Bangladesh Bank:
Assets
Credit Risk on Banking Book
Market Risk in Trading Book
Operational Risk
Specific Provisions
Regulatory Capital and
Capital Adequacy.

Assets: Classified on the basis of business or management intent, assets of EBL

are broadly categorized into two groups:
Banking Book Assets: These are assets which are not intended to be traded in the market. All
the assets on EBL Balance Sheet are classified in this category except investments under
Held for Trading (HFT) and Cash in Foreign Currency (FCY) and FCY Balance with
Bangladesh Bank and Nostro Accounts.

49

Trading Book Assets: in Equities which are traded in the secondary market and FCY Cash
and Bank Balances (These are assets held and intended to be traded in the secondary
market.HFT Investments in Treasury Securities occupy the major part of the Trading
Book Assets in EBL Balance Sheet. Besides, investments Bangladesh Bank & Nostro
Accounts) are also categorized as Trading Book assets in EBL Balance Sheet.
Disclosures on Assets of EBL: As detailed below, total assets of EBL stood at BDT
69,870.74 million (Of which Loans BDT 47,668 million) as on 31 December 2009
which were funded by Deposits (70.40%), Borrowings (12.64%), Other Liabilities
(4.89%) and Shareholders Equity (12.07%). Credit operations and risk management of
EBL is governed by the Credit Policy Manual duly approved by the Board of
Directors (BOD) which is supported by Credit Instruction Manual a procedural
guide for credit and related functionaries. Expansion of credit is constrained by two major
considerations: Maintenance of Credit to Deposit Ratio (CDR) and Credit Concentration
Ratio (CCR) within suggestible limits set by Bangladesh Bank and internal credit policy of
the Bank.
Nature of Assets: Based on earning capacity of assets, assets of EBL are categorized into two
groups i.e. Earning Assets and Non-Earning Assets.

Earning Assets include the following:

Interest bearing placements with banks (including Bangladesh Bank) and financial
institutions.
Money at call and on short notice.
Investment in securities.
Loans and advances.
Non-Earning Assets include the following:
Cash.
Non-interest bearing placements with banks (including Bangladesh Bank) and other
financial institutions.
Fixed assets and Non-banking assets. Other assets.

Classified Assets: For definition of default and classified assets Eastern Bank Limited
follows the guidelines given by Bangladesh Bank in their BRPD Circular No.05 dated
June 05, 2006 titled Master Circular - Loan Classification and Provisioning.
As per circular No. 05/2006 a Demand or Continuous Loan becomes SMA (Special Mention
Account) after 90 days of overdue, SS (Substandard) after 6 months overdue, DF (Doubtful)
after 9 months overdue and BL (Bad/Loss) after 12 months overdue. Likewise a Term Loan
(up to 5 years tenor) becomes SS, DF, BL after 6, 12 and 18 months overdue respectively and
a Term Loan (more than 5 years tenor) becomes SS, DF, BL after 12, 18 and 24
months overdue respectively. A loan can also be classified at any time if the capital of
48

the borrower is impaired due to adverse condition or if the value of the securities
decreases or if the recovery of the loan becomes uncertain due to any other
unfavorable situation. According to Bangladesh Bank Circular a loan is considered as
Default when it is classified as substandard or worse. During the year 2009, newly classified
loans amounted to BDT 464.69 million leading to total classified loans to BDT 1,171.68
million as on 31 December 2009. Non Performing Loan (NPL) or classified assets of
EBL has been continuously on a decreasing trend from 5.41% in 2005 to 2.46% at the
yearend 2009. We have a specialized unit namely Special Assets Management Unit
entrusted with management, monitoring and collection of classified loans. Flight to asset
quality from quantity, effective credit risk management and sustained collection efforts
of this unit continue to play pivotal roles in containing the Banks NPL ratio within
target. The targeted NPL ratio of the Bank is 2.25% in 2010 ALCO is responsible for
managing Market Risk, Credit Risk Management (CRM) Department is responsible for
protecting assets from Credit Risk and Internal Control & Compliance (ICC)
Department is responsible for protecting assets against Operational Risk. Besides these,
there are two committees i.e. Bank Risk Management Committee (BRMC) and Bank
Operations Risk Committee (BORC) at EBL. BRMC is constituted as per Bangladesh Bank
directive to oversee and supervise identifying, measuring and monitoring all types of
risks the Bank is exposed to whereas BORC acts in identifying and monitoring all
the elements of operational risks.

49

50

Credit Risk on Banking Book: The Bank is exposed to credit risk in its lending
operations. Credit risk is the risk of financial loss arising from the failure of any counterparty
in making required payments in accordance with agreed terms and conditions. Management
of credit risk in the bank is governed by a Credit Policy Manual and Credit Instructions
Manual which contain the core principles for identifying, measuring, approving, and
managing credit risk. These policies are approved by the Board of Directors and are
designed to meet the organizational requirements that exist today and to provide
flexibility for future. These policies represent the minimum standards for credit
extension by the bank and are not a substitute for experience and good judgment. The
policy covers corporate, small and medium enterprise, retail exposures. Policies and
procedures together have structured and standardized credit risk management process both in
obligor and portfolio level. There is a comprehensive credit appraisal procedure that
covers Industry/Business risk, management risk, financial risk, facility structure risk,
security risk, environmental risk, reputational risk and account performance risk. In general
terms, the Board of Directors has the lending authority for any exposure above BDT
100.00 million and the Board has delegated the authority to accept exposure up to BDT
100.00 million or below to the Managing Director & CEO of the bank who is also authorized
to sub delegate such authority.
Credit risk management: The Bank has adopted a framework for credit risk management by
setting up an independent Credit Risk Management (CRM) team to establish better
control
and check and to reduce conflict of interest in the business units. The Head of Credit
Risk Management (HoCRM) has clear responsibility for management of credit risk.
Policies/instructions in this respect are approved by the Board of Directors or
authorities acting on their delegation. Besides subjective appraisal of credit application, the
Bank uses a numerical grading system for quantifying risk associated with a borrower
which is not a decision making tool but a general indicator to compare risk perception about
the borrowers. The grading is based on Credit Risk Grading Matrix (CRGM) that
analyzes a borrower against a range of quantitative and qualitative measures. Retail and
small loans are managed under separate Product Program Guidelines (PPG).
Credit
exposure of the Bank is measured and monitored by quarterly MIS on portfolio, which is
submitted to MD & CEO. Bank complies with related norms on exposure stipulated by
Bangladesh Bank and its self-made sector wise and product wise exposure capping. Bank can
automatically generate daily reports on borrower wise limits, utilizations, overdue,
repayments, etc.
Credit Risk Mitigation and types of collateral: Collateral as a tool for risk mitigation
is defined as the assets or rights provided to the Bank by the borrower or a third party in order
to secure a credit facility. EBL determines the appropriate type of collateral for each
facility based on the nature of product and level of commitment of the counterparty.
In case of corporate and medium enterprises, fixed assets are generally taken as security for
long tenor loans and current assets for working capital finance. For project finance, present
and future assets of the underlying project are generally accepted. In addition, in some cases,
51

additional security such as mortgage of other land and building, pledge of shares, cash
collateral, and charge on receivables is also accepted. For consumer and small enterprise
products, the security has been taken as defined in the Product Program Guideline (PPG) for
the respective products. Housing loans and automobile loans are secured by the
property/automobile being financed. Acceptable collateral for loans are cash or cash
equivalent (i.e., FDs, other deposits, etc.), equity/stock of listed companies traded in
major stock exchanges, mutual funds, unit certificates, permissible government bonds,
real estate, bank guarantees, Stand by Letter of Credit, Assignment of Insurance
benefits and other credit guarantees. In certain circumstances, other collateral may be
accepted through approval of a specific Business Policy Document, e.g., trade
receivables, receivables against work orders, etc. Hypothecation of machinery, stock and all
fixed and floating assets are also taken as security. In order to be recognized as an eligible
security, any item liened/pledged/hypothecated/assigned/mortgaged must have value and we
must have physical control and/or legal title thereto together with necessary documentation to
enable us to realize the asset without the cooperation of the asset owner.
Collateral valuation: The valuation of the property is carried out by the recognized
and approved valuation agency (ies). The decision on the type and quantum of collateral for
each transaction is taken by the credit approving authority as delegated by the Board of
Directors. The Bank has to obtain an independent valuation of property being mortgaged and
revaluation of the same should be done at least once in every three years by nominated
surveyor. Respective relationship manager should also inspect the property at least once in
every three years.
Relationship managers (RM) must visit collateral property before sending fresh credit
application to the Credit Risk Management (CRM) department. Objective of such visit is to
see location, possession, usage, approach road, utility connections, future demand,
current value, quality of construction etc. Demarcation is the most important criteria that need
to be checked carefully. A visit report signed by the person visited the property and
his/her supervisor is to be submitted along with credit application. Periodic inspection of
stock in trade is conducted at least once in every quarter by official of Credit Administration
Department or by the Relationship Manager/Officer depending on the nature of the
complexity of the business.
The Bank while calculating regulatory capital under Basel II framework, credit
exposure to counterparty is reduced to the extent of risk mitigation provided by the eligible
collateral after applying haircuts as directed by Bangladesh Bank. The Bank recognizes
only specific types of financial collateral to be eligible for providing capital relief in line with
Basel II guidelines. This includes cash or deposit with the bank, gold, approved debt
securities, and equities etc.
EBL uses standard supervisory haircuts as instructed by Bangladesh Bank for both the
exposures as well as the collateral.

52

Credit Concentration Risk (CCR): In order to limit obligor wise concentration risk,
the Bank strictly follows the central bank guidelines in allowing credit facilities to a
single borrower or group. Product and industry wise concentration is capped vide banks
internal policy.
In general, the loan portfolio of the Bank is diversified across a wide range of
products, industries, and customer segments as portrayed in the following table. There
is no single exposure on industry or business segment with 20% or more of total loans.
Prudent liquidity management has allowed the Bank to take advantage of low interbank rate, as well as maintaining satisfactory advance to deposit ratio.

Quantitative Disclosures on Credit Risk: Following table discloses details credit risk of
Banking Book of EBL:

53

Market Risk on Trading Book: Market risk is the risk of loss of asset value and
therefore earnings and capital caused by changes in market interest rates, foreign
currency (exchange) conversion rates and security prices. Bank has an Investment
Committee approved by the Board to oversee and monitor the wholesale investment
activities of the Bank. EBL uses the Standardized Approach to measure market risks for
trading book assets which have three components as per Bangladesh Bank guidelines:
Interest rate related instruments (Govt. Treasury Bonds with coupon rates of 3% or
more and categorized as HFT)
Equities (Investment in shares traded in secondary markets)
Foreign Exchange Position
The total capital requirement in respect of market risk is the sum of capital
requirement calculated for each of the above sub categories. Risk Weighted Assets
(RWA) will be the reciprocal of the minimum requirement of capital charge percentage. For
example, if required capital charge against market risks (3 components) comes to BDT 100
million applying 8% minimum capital requirement, then RWA for these market risks
will be BDT 1,250 million calculated as {12.5 (100% divided by 8%) multiplied by capital
charge i.e. BDT 100 million}.
Interest rate related instruments: Two pronged approaches are applied in measuring capital
charge for Interest Rate Risk under Standardized Approach. These are Capital charge for
specific risk and Capital charge for general market risk.
Capital charge for specific risk against interest related instruments is designed to
protect against an adverse movement in the price of an individual security owing to
factors related to the individual issuer. Issuer category (Government, Qualifying and
Others) wise rate of capital charge provided by Bangladesh Bank is used by the Bank. As on
the reporting date, we had only Govt. Treasury Bonds that carries 0% risk weight and
therefore the capital charge of EBL for specific risk was zero.
54

Capital charge for general market risk against interest related instruments is
designed to capture the risk of loss arising from changes in market interest rates.
Capital charge is calculated using Maturity Method where market value of the
securities are multiplied by Bangladesh Bank prescribed Risk Weight percentage
derived on the basis of Residual Maturity of the fixed rate instruments of the Bank.
Equity Position Risk: Investment in securities (other than govt. treasury securities) traded in
the secondary market carries the risk on Equity Position. Like debt securities, capital charge
is calculated for Specific Risk and General Market Risk on investment in equities.
As per Bangladesh Bank guidelines, 10% capital charge was applied on the market
value of the equities for both the specific and general market risk as on the reporting date
(31 December 2009).
Foreign Exchange Risk: Foreign Exchange risk is the risk of losses a bank might suffer as a
result of adverse exchange rate movements during a period in which it has an open position,
either spot or forward or a combination of the two, in an individual foreign currency.
The required capital charge for foreign exchange risk was 10% of banks overall
foreign exchange exposure as on the reporting date. The banks net open position (as
prescribed by Bangladesh Bank) in each currency is calculated by summing:
Net spot position
Net forward position
The overall foreign exchange exposure is measured by aggregating the sum of the net short
positions or the sum of the net long positions, whichever is greater; regardless of the sign i.e.
absolute value is taken. 10% capital charge was applied on the greater of net long or
short position regardless of the sign.
Bank has a comprehensive Core Risk Management policy for identification, monitoring and
management of the above stated market risks. The policies, processes and risk management
framework for market risks are governed by the ALM policy and FX risk management policy
of the Bank under supervision of ALCO.
Quantitative Disclosure on Market Risks: Following table summarizes required capital
charge for market risk on trading book of the Bank as on reporting date: Risk weighted
assets (RWA) for market risk was BDT 6,260.01 million (Capital charge multiplied by
10, the reciprocal of MCR 10%).
(Figures are in BDT)
Market Risk on Trading Book
Amount
The capital requirements for
Interest rate risk
242.86
Equity position risk
354.01
Foreign exchange risk
29.14
Commodity risk
Total capital charge required for meeting
626.01
Market Risks

55

Operational Risk: Operational Risk is the risk of direct or indirect loss of the Bank due to an
event or action causing failure of technology, processes, infrastructure, personnel and other
risks having an operational impact. Legal risk is included but strategic or business risk and
reputational risks are excluded.
The Basel Committee has, for the first time, proposed an explicit capital charge for
operational risk through implementation of Basel II. In compliance with Bangladesh
Bank instruction, the Management Committee of EBL has approved Operational Risk
Policy which explains how operational risk is identified, measured, monitored and
mitigated to comply with the regulatory requirements.
Under this policy, EBL has established an Operational Risk Management Committee
(BORC) comprising all heads of business and support functions/units that are responsible for
operational risk management of the Bank. The committee is responsible to identify
operational risk irrespective of business or support functions and its mitigations and refer the
high risk issues to Management Committee (MANCOM) and Bank Risk Management
Committee (BRMC) for taking necessary measures.
The key objectives of operational risk measurement and management include:
Ensuring continued solvency of the Bank through capital adequacy and
enhanced understanding and management of significant operational risk exposures.
Ensuring that customer impact is minimized through proactive and focused risk
management practices.
Ensuring senior management attention on significant operational risk exposure areas
and adequate measures to mitigate risks are prioritized and focused.
Ensuring that staffs are sufficiently trained and having knowledge to perform their
risk management roles and responsibilities diligently.
The Bank uses the Basic Indicator Approach (BIA) to calculate its operational risk.
Capital charge is 15% of the last three years average positive Gross Income or GI
(Net Interest Income or NII plus Non-interest income) with few adjustments. RWA will be
calculated by multiplying capital charge with the reciprocal of MCR percentage (12.5 if MCR
is 8% or 10 if MCR is 10% etc.).
Quantitative Disclosures on Operational Risks: Following table summarizes calculation of
capital charge under BIA for Operations Risk:
(Figures are in million BDT)
Average of last 3 years Gross Income (GI)
3,712.89
Capital charge @ 15% on average GI
556.93
So, Risk weighted assets will be the capital charge multiplied by 10 (the reciprocal of MCR
10%) i.e. BDT 5,569.30 million as on reporting date i.e. 31 December 2009.
Maintenance of Specific Provision: Classification and Credit Loss Recognition Policy is
outlined in the Credit Policy Manual of the Bank. Relationship Managers primarily identify
the requirement of maintaining specific provision on their respective accounts if they
(loan accounts) become adversely classified. Credit Administration Department confirms
the provision calculation as per Bangladesh Bank guidelines which are duly approved by the
56

Head of Credit Risk Management.

EBL strictly follows Bangladesh Bank Circulars and Guidelines for loan classification, write
offs, provisioning and any other issues related to Non Performing Loans (NPL). EBL has its
own policy as well to deal with issues related to loan classification, specific
provisioning which sometimes appear to be stricter than Bangladesh Bank guidelines
on qualitative grounds. However on objective criteria, we strictly follow BRPD circular
05 dated 05 June 2006. NPL ratio of EBL was 2.46% as on the reporting date (31 December
2009) against 3.30% at the yearend 2008. Following is the comparative status of loan
classification of the Bank as on the reporting date i.e. December 31, 2009:

Coverage ratio (provision against classified loans/total classified loans) at the year end 2009
was 64.56% against 52.90% in 2008. Due to varying rate of required provision against
classified (SS, DF and BL) loans, total required provision against classified loans was BDT
636.20 million As on year end 2009 against which provision has been kept BDT 756.41
million. Therefore, we have excess provision of BDT 120.21 million as on year end 2009.
Quantitative Disclosures on Specific Provision: Following table summarizes details of
specific provision and Non-performing loans (NPL) of the Bank as on the reporting date i.e.
31 December 2009:
(Figures are in million BDT)
Maintenance of Specific Provision
A. Gross Non Performing Loans (NPLs):
NPLs to Outstanding Loans and Advances
B. Movement of Non Performing Loans (NPLs):
1. Opening balance (01-01-2009)
2. Addition during the year
3. Reduction during the year
4. Closing balance (31-12-2009)
C. Movement of specific provisions for NPAs
1. Opening balance (01-01-2009)

2.46%

1308.85
220.00
357.17
1171.68
692.37
57

2. Provisions made during the period

3. Write-offs during the period
4. Write-back of excess provisions
5. Closing balance (31-12-2009)

130.96
(55.00)
(11.93)
756.41

Maintenance of Regulatory Capital: Regulatory capital, as stipulated by Bangladesh Bank

guidelines, is categorized into three tiers according to the quality of capital (Tier I, II & III).
Tier I or Core Capital comprises the highest quality capital components, Tier II or
Supplementary Capital comprises capital elements that fall short of some of the
characteristics of core capital but contribute to overall strength of the Bank and Tier
III or Additional Supplementary Capital comprises short term subordinated debt with
maturity of two to five years. Following were the Bangladesh Bank recognized
components of capital as on the reporting date i.e. 31 December 2009.
Capital components as per Basel II
Tier I Capital/Core capital:
Paid up capital/capital deposited with
Bangladesh Bank (for foreign banks).
Non-repayable share premium account
Statutory reserve
General Reserve
Retained earnings
Minority interest in subsidiaries
Non-cumulative irredeemable preference
shares
Dividend equalization account
Tier II Capital/Supplementary capital:
General provisions
Assets revaluation reserves (50%)
All other preference shares
Subordinated debt (>5 years)
Exchange equalization account
Revaluation reserve for securities (50%)
Tier III Capital/Additional
supplementary capital:
Short term subordinated debt
Capital Structure of EBL: As on the reporting date (31 December 2009), the Bank had total
capital of BDT 8,316.53 million comprising Tier I capital of BDT 6,441.15 million and Tier
II capital of BDT 1,875.38 million (EBL had no Tier III element in its capital structure) as on
the reporting date.
The Bank complied with all the required conditions for maintaining regulatory capital
58

as stipulated in the RBCA guidelines by Bangladesh Bank as per following details:

Eligible Tier II plus Tier III capital shall not exceed total Tier I capital: Complied.
Fifty percent (50%) of Assets Revaluation Reserves shall be eligible for Tier II
or Supplementary Capital: Complied.
A minimum of about 20% of market risk needs to be supported by Tier I
capital.
Supporting of Market Risk from Tier III capital shall be limited up to a maximum of 250% of
a banks Tier I capital available after meeting credit risk capital requirements:
Capital required for meeting credit risks was BDT 6,149.05 million and so the core
capital after meeting credit risk was BDT 292.10 million (BDT 6,441.15 million minus
BDT 6,149.05 million). Capital required for meeting 20% of market risks was BDT 125.20
million as on the reporting date. So, this condition is complied.
Up to 50% of Revaluation Reserves for securities shall be eligible for Supplementary
Capital.
Subordinated Debt shall be limited to a maximum of 30% of the amount of
Tier I capital: EBL did not have any Subordinated Debt as on reporting date.
Quantitative Disclosures on Regulatory Capital: Following table presents component
wise details of capital (Tier I & II) as on reporting date i.e. December 31, 2009:
(Figures are in million BDT)
Maintenance of Regulatory Capital
Amount
Amount
A. Amount of Tier-1 Capital (Component wise)
Paid-up Capital
Statutory Reserve
General Reserve
Reserve for Building Fund
Reserve against pre-take over loss (BCCI)
pre-take over loss
Retained Earnings
Dividend Equalization Reserve
Tier 1 capital before deduction
B. Amount deducted from Tier 1 capital
Goodwill
Short fall of provisions
Others
Total Tier 1 Capital
C. Amount of Tier 2 capital (Component wise)
General provision against unclassified loans and
contingent assets
Exchange equalization account
Assets revaluation reserve (50%)
Reserve against non-banking assets (50%)
Reserve for revaluation/amortization of govt. treasury
securities (50%)

2,496.42
1,927.04
100.00
60.00
1,554.76
(997.32)
944.21
356.04
6441.15
6441.15
858.75
22.63
456.84
116.76
420.40

59

D. Total amount of Tier-2 capital (net of deductions from

Tier-2 capital)
E. Total eligible capital

1875.38
8316.53

Capital Adequacy: EBL focuses on strengthening and enhancing its risk management
culture and internal control environment rather than increasing capital to cover up weak risk
management and control practices. EBL has been generating most of its incremental capital
from retained profit (stock dividend, right share issue and statutory reserve transfer
etc.) to support incremental growth of Risk Weighted Assets (RWA). Therefore, the Banks
Capital Adequacy Ratio (CAR) remains consistently within the comfort zone under Basel II
during 2009 (Ranging from 10.53% to 11.34% against required MCR of 10.00%) as well as
in the first quarter 2010 (10.44% against required MCR of 8.00%).
The above CAR has been maintained applying 125% risk weight (under Unrated category)
to the exposures of most of the Banks Corporate customers who are yet to do credit rating
of their entities by Bangladesh Bank approved ECAIs. Once the customers, especially those
having superior credit worthiness, do their credit rating, EBLs RWA will get down
due to lower RW percentage. Since volume of Unrated loans in EBL book occupies most
part of the Banks total loan portfolio, required minimum capital of EBL will decrease once
rating is done by the corporate customers of EBL having good repute.
Assessing regulatory capital in relation to overall risk exposures of a bank is an integrated
and comprehensive process. EBL, through its SRP team, is taking active measures to
identify, quantify, manage and monitor all risks to which the Bank is exposed to.
Assessment of Regulatory Capital will be in alignment with the findings of these exercises.

Quantitative Disclosures on Capital Adequacy: Following table shows component wise

allocation of capital to meet three risks and an amount of additional capital maintained over
MCR i.e.10% of Risk Weighted Assets (RWA). As on the reporting date i.e. December 31,
2009, we maintained a Capital Adequacy Ratio (CAR) of 11.34% which was 1.34%
higher than the MCR. In absolute terms, we had an excess capital of BDT 984.53
million after meeting all three risks as shown in the following table:

Following table summarizes the capital adequacy status of EBL as on the reporting date 31
December 2009
60

Conclusion
Bangladesh Bank has prescribed a standardized approach to managing the credit risk as per
Basel II guidelines out of the three alternative approaches via, Standardized Approach,
Internal Rating Based Approach (IRB) and Advanced Internal Rating Based Approach
(AIRB). Almost all the South Asian countries adopted the same approach, especially due to
its simplicity as well as initial preparation towards the IRB approach. Although the system
61

has some inherent limitations, globally it is recognized as the best cost effective approach
among the bankers.
The standardized approach suggests use of recognized External Credit Assessment Institute
(ECAI)/ Credit Rating Agencies in assessing the risk profile of the bank clients. A specified
risk mapping is being formulated by the Bangladesh Bank to address the different risk grades
of the recognized credit rating agencies having relation with Bangladesh Bank Risk Grade.
And based on the risk grade for each exposure of the bank clients, capital requirement is
being assessed by the banks against each of the rated exposures.
It is said to implement Basel ii from 1st January 2009.Many banks of Bangladesh has already
implemented Basel ii. 2009 was a year of full blown global recession which adversely
affected countrys export, domestic investment demand, commodity markets & GDP growth
but EBL has challenged market turbulences by bringing more discipline in risk management.

Findings
BIS is the central bank of all central bank of the world. It is also called Basel bank
According to Basel a bank has to keep provision 10% of RWA or 100 core taka which is
larger
Solution may not possible by keeping only reserve
Loan receiver can also be rated
Two new credit rating agencies has already inaugurated in Bangladesh
NBFIs will start Basel implementation from 2012.
To increase reserve many bank are going to issue right share or sub ordinate debt.
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Appendices
BB- Bangladesh Bank
RWA- Risk Weighted Asset
ECAI- External Credit Assessment Institute
EBL- Eastern Bank Limited
IRB- Rating Based Approach
AIRB-Advanced Internal Rating Based Approach
MGT- Management
63

GDP- Gross domestic product

BORC-Operational Risk Management Committee
MANCOM-Management Committee
BRMC-Bank Risk Management Committee
BIA-Basic Indicator Approach

www.ebl.bd.com
www.financialexpress.bd.com
www.bangladeshbank.bd

The End

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