BB tightens stress testing rules, mandates banks to disclose subsidiary portfolios
The revised guidelines, issued by the Bangladesh Bank’s Financial Stability Department on Monday, also specify the roles and responsibilities of a bank’s senior management and board directors – an area that lacked clear guidance previously
Highlights
- Banks must report on both their own and subsidiaries' portfolios.
- Includes impact analysis of climate shocks on loans in vulnerable areas
- Assesses effects of deposit withdrawals and shocks to LCR over five days
- Tailored shocks based on Non-performing Loan Inflow Ratio (NPLIR)
- Aligns with IMF recommendations for better risk measurement
To properly assess the banking sector's resilience, the central bank has updated its stress testing guidelines, requiring banks to disclose information about both their own portfolios and those of their subsidiaries – a shift from the previous rule that only mandated disclosure of banks' portfolios.
The revised guidelines, issued by the Bangladesh Bank's Financial Stability Department on Monday, also specify the roles and responsibilities of a bank's senior management and board directors – an area that lacked clear guidance previously.
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Additionally, the new guidelines outline the types of measures or preventive actions that banks can take in adverse economic and financial scenarios.
Revised sensitivity analysis approach
Several modifications have been introduced to the method for measuring a bank's credit, market, operational and liquidity risks.
A new component, the impact of climate shocks, has been added to the operational risk section, allowing the central bank to assess how the country's climate vulnerability affects bank assets.
The guidelines specify that natural disasters, such as floods, could negatively impact banks' loan portfolios, particularly if investments are made in flood-prone areas without proper mitigation strategies.
The shock scenario assumes that 3% (Minor), 6% (Moderate), and 9% (Major) of climate-vulnerable loans will be directly downgraded to the bad and loss category. Climate-vulnerable loans will be calculated by using the district-wise Climate Vulnerability Index (CVI) developed by UNDP.
A senior central bank official told TBS that this clause has been added to the guidelines in response to a recommendation from the International Monetary Fund (IMF).
Under liquidity risk, the revised guidelines will assess the impact of deposit withdrawals over a specified period, withdrawals by top depositors, and shocks to the Liquidity Coverage Ratio (LCR).
The guidelines specify that the shock scenario will include the withdrawal of both demand and time deposits, in addition to normal withdrawals, over five consecutive working days.
In the case of credit risk, bank-specific shock magnitude has been introduced by considering the average Non-performing Loan Inflow Ratio (NPLIR). Higher shock will be applied for banks with higher classified loans in the latest quarters.
The central bank official said that the new guidelines – formulated after reviewing international standards and aligning them with best global practices – will provide a more accurate picture of risk by measuring it on a bank-by-bank basis, resulting in some adjustments to the risk measurement process.
The revision aims to better assess market risk shocks based on actual conditions and feedback from several banks, he said.
