Most of the banks have sufficient capital buffer to absorb adverse shocks and still maintain the sector’s overall capital adequacy ratio (CAR) above the minimum requirement, the central bank’s most recent stress tests found.
The exercise, conducted by the Financial Stability Department on data from the April-June quarter of this year, looked at the impact of different stressed situations on banks’ capital.
The minimum capital requirement for scheduled banks is the greater of the two: 10 percent of risk-weighted assets or Tk 400 crore, reports the Daily Star.
At the end of June, the sector’s CAR stood at 10.68 percent, above the minimum regulatory requirement of 10 percent.
The tests found that if each of the banks’ top three borrowers defaults, the banking sector CAR may drop 2.69 percent. Individually, one state-owned commercial bank, 18 private commercial banks and four Islamic banks’ CAR will fall below 10 percent due to this shock.
If 3 percent of the highest sectoral loans become default, the banking sector CAR may slip 0.07 percent, but it would still be above the minimum requirement.
Likewise, in the scenarios of negative shifting of classified loans, the banking sector CAR may fall 0.53 percent but would still be above the 10 percent floor.
Individually, two state banks, four private banks and one Islamic bank will see their CARs fall below 10 percent due to the shock.
If the forced sale value of collateral is lowered by 10 percent, the banking sector CAR may be decreased by 0.43 percent, but it would still be above the 10 percent threshold. One state-owned commercial, two private and one Islamic banks’ CARs will fall below 10 percent.
A 3 percent increase of non-performing loans may decrease the sectoral CAR by 0.72 percent, the tests found. One state-owned commercial, seven private and two Islamic banks’ CARs will go below the minimum regulatory requirement.
If the market interest rate changed by 1 percent, the banking sector CAR may slip 0.02 percent and take the CARs of two state-owned and nine private banks below the 10 percent floor.
A change in market exchange rate by 5 percent will lower the sector’s CAR by 0.03 percent, but none of the bank’s CAR will go below the threshold.
If the price of the equities that the banks hold drops by 10 percent, the banking sector CAR may decrease 0.35 percent. Individually, two state-owned commercial, one private and one Islamic banks’ CARs will go below the threshold.
“The stress tests based on June 2014 data exhibit that the banking sector remains resilient to adverse scenarios,” Md Anwarul Islam, deputy general manager of Bangladesh Bank’s Financial Stability Department, told The Daily Star.
Zahid Hussain, lead economist of the World Bank’s Dhaka office said the results of the stress tests were reassuring.
However, most of the tests have experimented with adverse changes whose order of magnitude is somewhat small, he said, adding that it would be useful to examine what magnitude of adverse changes would put the system at risk of major insolvency from a CAR point of view.
“Already, this analysis shows if loans of top three borrowers are adversely classified, 23 banks will fall below the 10 CAR threshold. So collection from the top borrowers must be put under close surveillance,” Hussain added.