Presentation Basel II 1

11

Capital Adequacy Capital Adequacy in line within line with

Basel IIBasel II

Presented by:Presented by:

Islami Bank Bangladesh Ltd.Islami Bank Bangladesh Ltd. Basel II Implementation UnitBasel II Implementation Unit

Financial Administration Division Financial Administration Division Head Office, Dhaka.Head Office, Dhaka.

22

What is Capital?What is Capital? The money contributed by the proprietors/ owners to an organization to The money contributed by the proprietors/ owners to an organization to

enable it to function. Example:enable it to function. Example:

-- Book CapitalBook Capital

-- Regulatory CapitalRegulatory Capital Minimum CapitalMinimum Capital Adequate CapitalAdequate Capital

Why A Bank Needs Capital?Why A Bank Needs Capital?

To get the bank started before deposit come flowing in;To get the bank started before deposit come flowing in; To absorb unanticipated losses with sufficient margin of safety to maintain To absorb unanticipated losses with sufficient margin of safety to maintain

public confidence;public confidence; To assure shareholders of bank solvency;To assure shareholders of bank solvency; To comply with regulators;To comply with regulators; To expand/ growth the business of the Bank.To expand/ growth the business of the Bank.

33

Asset CategoryAsset Category Amount in TakaAmount in Taka Risk WeightRisk Weight Risk Weighted Risk Weighted AssetsAssets

CashCash 10,00010,000 0%0% 00

InvestmentInvestment 1,00,0001,00,000 100%100% 1,00,0001,00,000

Fixed AssetsFixed Assets 50,00050,000 50%50% 25,00025,000

TotalTotal 1,60,0001,60,000 1,25,0001,25,000

Risk & Risk Weighted Assets (RWA)Risk & Risk Weighted Assets (RWA)

- - Risk is nothing but possibility of losing assets Risk is nothing but possibility of losing assets through through some activity.some activity.

Risk Weighted Assets (RWA): Example Risk Weighted Assets (RWA): Example

44

Market Risk(Risk of loss arising from

movements in market price in On-Balance Sheet positions)

Operational RiskRisk of loss resulting

from operation

Pillar-IMinimum Capital

Requirement

Risk Based Capital (Basel-II) Pillars & Approaches

Standardized Approach (*)(Based on external assessments of Investment (Credit) exposures’ risk

weights by Rating Agencies)

Comprehensive Approach (*)(Risk Weight is assigned by ECAIs.

Basic Indicator Approach (*)

(15% of average Gross Income of last 3 (three) years)

Standardized Approach (*)(the risks pertaining to Profit

(interest) rate related instruments, equities and foreign exchange in

the trading book)

Pillar-IIIMarket Discipline

Pillar-IISupervisory Review

Process

Investment (Credit)Risk

Simple Approach(calculation of risk weight on the basis of the countries risk scores

by OECD)

Internal Rating Based Approach

(Based on previous 5 (five) years data base)

Foundation Approach(It is derived from Probability of Default (PD), Loss given default (LGD), Exposure at Default (EAD) & maturity (M)

determined by Supervisor and concerned Bank)

Advanced Approach( It is derived from PD, LGD, EAD and M determined by

concerned Bank only)

Internal Models Approach(Value At Risk (VAR) models for

pricing of exposures in the trading book)

Standardized Approach(the risks pertaining to Profit

(interest) rate related instruments and equities in the trading book)

Advanced Measurement

Approach(Banks estimates of Expected

Loss (EL) and Unexpected Loss (UL))

(*) Approaches selected by the Bangladesh Bank

55

Minimum Capital Requirements (MCR) (1st Pillar)Minimum Capital Requirements (MCR) (1st Pillar)

a) a) No Scheduled Bank in Bangladesh shall commence and carry on its No Scheduled Bank in Bangladesh shall commence and carry on its business unless it has a minimum business unless it has a minimum Paid up CapitalPaid up Capital as fixed by BB as fixed by BB from time to time from time to time {currently Tk.200 crore (BRPD Circular No.12 dated 05.11.2007 & Tk.400 crore within 2011 (BRPD Circular {currently Tk.200 crore (BRPD Circular No.12 dated 05.11.2007 & Tk.400 crore within 2011 (BRPD Circular No.11 14.08.2008)}No.11 14.08.2008)} . .

b) b) Banks shall also maintain a minimum Capital Adequacy Ratio (CAR) at least Banks shall also maintain a minimum Capital Adequacy Ratio (CAR) at least 10% of Risk Weighted Assets10% of Risk Weighted Assets (RWA) with core capital (Tier-1) not less than (RWA) with core capital (Tier-1) not less than 5% (i.e. 5% (i.e. 50% of Core Capital) of RWA50% of Core Capital) of RWA. CAR would be derived dividing total Eligible . CAR would be derived dividing total Eligible Regulatory Capital by RWA and multiplied by 100. Regulatory Capital by RWA and multiplied by 100.

Eligible Regulatory CapitalEligible Regulatory Capital CAR =CAR = ×100×100

RWA RWA

c) c) Total Risk weighted Assets (RWA): Total Risk weighted Assets (RWA): Total RWA will be determined by Total RWA will be determined by multiplying capital charge for market risk and operational risk by 10 (i.e. the reciprocal multiplying capital charge for market risk and operational risk by 10 (i.e. the reciprocal of the minimum capital adequacy ratio of 10%) and adding the resulting figures to the of the minimum capital adequacy ratio of 10%) and adding the resulting figures to the sum of risk weighted assets for Investment (credit) risk i.e. sum of risk weighted assets for Investment (credit) risk i.e. Total RWA = RWA for Total RWA = RWA for Credit Risk + 10 × (Capital Charge for Market Risk + Capital Charge for Credit Risk + 10 × (Capital Charge for Market Risk + Capital Charge for Operational Risk)Operational Risk)

MCR = 10% of Total RWAMCR = 10% of Total RWA

66

Regulatory capitalRegulatory capital

Tier 1 Capital Tier 1 Capital

‘‘Core Capital’Core Capital’

Tier 2 Capital Tier 2 Capital ‘Supplementary Capital’‘Supplementary Capital’

Tier 3 Capital ‘Additional Tier 3 Capital ‘Additional Supplementary Capital’Supplementary Capital’

a. Paid up capital/capital deposited with BBa. Paid up capital/capital deposited with BB

b. Non-repayable share premium accountb. Non-repayable share premium account

c. Statutory Reservec. Statutory Reserve

d. General Reserved. General Reserve

e. Retained Earningse. Retained Earnings

f. Dividend Equalization Accountf. Dividend Equalization Account

g. Minority Interest in subsidiariesg. Minority Interest in subsidiaries

h. Non-Cumulative irredeemable h. Non-Cumulative irredeemable Preference Shares Preference Shares

a. General Provisiona. General Provision

b. Asset Revaluation Reservesb. Asset Revaluation Reserves

c. Revaluation Reserves for c. Revaluation Reserves for Securities Securities

d. Perpetual Subordinated Debtd. Perpetual Subordinated Debt

e. Investment Loss Offsetting e. Investment Loss Offsetting ReserveReserve

f. All other Preference Shares f. All other Preference Shares

g. Exchange Equalization g. Exchange Equalization AccountAccount

consisting of short-term consisting of short-term subordinated debt (original/ subordinated debt (original/ residual maturity less than residual maturity less than or equal to five years but or equal to five years but greater than or equal to two greater than or equal to two years). years).

77

Conditions for maintaining Regulatory CapitalConditions for maintaining Regulatory Capital

1) 1) Eligible Tier 2 plus Tier 3 capital shall not exceed total Tier 1 capital. Eligible Tier 2 plus Tier 3 capital shall not exceed total Tier 1 capital.

2) 2) Fifty percent (50%) of Asset Revaluation Reserves shall be eligible Fifty percent (50%) of Asset Revaluation Reserves shall be eligible for Tier 2 i.e. Supplementary Capital. for Tier 2 i.e. Supplementary Capital.

3) 3) A minimum of about 20% of market risk needs to be supported by Tier A minimum of about 20% of market risk needs to be supported by Tier 1 capital. Supporting of Market Risk from Tier 3 capital shall be limited up to 1 capital. Supporting of Market Risk from Tier 3 capital shall be limited up to maximum of 250% of a bank’s Tier 1 capital that is available after meeting maximum of 250% of a bank’s Tier 1 capital that is available after meeting credit risk capital requirement. credit risk capital requirement.

4) 4) Up to 50% of Revaluation Reserves for Securities shall be eligible for Up to 50% of Revaluation Reserves for Securities shall be eligible for Supplementary Capital. Supplementary Capital.

5) 5) Subordinated debt shall be limited to a maximum of 30% of the Subordinated debt shall be limited to a maximum of 30% of the amount of Tier 1 capital and shall also include rated and listed subordinated amount of Tier 1 capital and shall also include rated and listed subordinated debt instruments/bonds raised in the capital market. debt instruments/bonds raised in the capital market.

88

Investment (Credit) RiskInvestment (Credit) Risk

Credit risk means probability of violation of commitment by an obligor.Credit risk means probability of violation of commitment by an obligor.

Measurement Methodology of RWA for Investment Risk (under SA)Measurement Methodology of RWA for Investment Risk (under SA)

According to the standardized approach of Basel II framework, the risk weight will be According to the standardized approach of Basel II framework, the risk weight will be based on the risk assessment made by External Credit Assessment Institutions (ECAIs) based on the risk assessment made by External Credit Assessment Institutions (ECAIs) duly recognized by BB. Risk weights are based on external rating or a fixed weight that is duly recognized by BB. Risk weights are based on external rating or a fixed weight that is broadly aligned with the likelihood of counterparty default.broadly aligned with the likelihood of counterparty default.

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Some Important Some Important DefinitionsDefinitions

Claims: Claims: All exposures such as deposit, placement, investments, loans and advances All exposures such as deposit, placement, investments, loans and advances underlying with counterparties. underlying with counterparties.

Claims on Government/ Public Sector Entities (PSE): Claims on Government/ Public Sector Entities (PSE): All exposures including loans and All exposures including loans and advances to and investments in all public corporations, statutory boards & authorities, local advances to and investments in all public corporations, statutory boards & authorities, local government bodies etc. owned or controlled by Government of Bangladesh or any entity is government bodies etc. owned or controlled by Government of Bangladesh or any entity is categorized by BB as PSE. categorized by BB as PSE.

Claims on Corporate:Claims on Corporate: This includes all exposures including loans and advances to and This includes all exposures including loans and advances to and investments in corporate. “Corporate” refers to any proprietorship, partnership or limited investments in corporate. “Corporate” refers to any proprietorship, partnership or limited company that is neither a PSE, Bank, Non bank financial Institutions (NBFIs) nor borrower company that is neither a PSE, Bank, Non bank financial Institutions (NBFIs) nor borrower within the definition of Retail Portfolio and Small Enterprises.within the definition of Retail Portfolio and Small Enterprises.

Claims secured by Residential Property: Claims secured by Residential Property: InvestmentInvestment (Lending) fully secured by mortgages (Lending) fully secured by mortgages on residential property that is or will be occupied by the borrower or that is rented.on residential property that is or will be occupied by the borrower or that is rented.

Claims secured by Commercial Real Estate: Claims secured by Commercial Real Estate: InvestmentInvestment (Lending) fully secured by (Lending) fully secured by mortgages on commercial real estate mortgages will be used for office and /or multipurpose mortgages on commercial real estate mortgages will be used for office and /or multipurpose commercial premises and/or multitenanted commercial premises etc. except residential commercial premises and/or multitenanted commercial premises etc. except residential property.property.

Past Due Claims:Past Due Claims: All claims including all exposures such as investments, loans and advances All claims including all exposures such as investments, loans and advances classified as per the prudential regulations issued by BB and as amended from time to time, classified as per the prudential regulations issued by BB and as amended from time to time, net of specific provisions should be considered as past due claims.net of specific provisions should be considered as past due claims.

1010

Some Important Some Important DefinitionsDefinitions Retail Portfolio:Retail Portfolio:

Qualifying Criteria for the Retail Portfolio are as follows:Qualifying Criteria for the Retail Portfolio are as follows:

Orientation criterionOrientation criterion: The exposure should be to an : The exposure should be to an individual person or personsindividual person or persons..

Product criterionProduct criterion : The exposure should be of one of the following product types: : The exposure should be of one of the following product types:

-- Revolving credit and lines of credit including overdrafts and credit cards;Revolving credit and lines of credit including overdrafts and credit cards;

-- Personal term Investment (loans) and leases {e.g. installment Investment (loans), vehicle Personal term Investment (loans) and leases {e.g. installment Investment (loans), vehicle Investment (loans) & leases, student & educational Investment (loans), personal finance}Investment (loans) & leases, student & educational Investment (loans), personal finance}

Granularity criterionGranularity criterion: In order to meet this criterion, no aggregate exposure without considering : In order to meet this criterion, no aggregate exposure without considering Credit Risk Mitigation (CRM), to one counterpart should exceed 0.2% of the overall retail portfolio Credit Risk Mitigation (CRM), to one counterpart should exceed 0.2% of the overall retail portfolio excluding any non-performing Investment (loans).excluding any non-performing Investment (loans).

Maximum value of individual exposuresMaximum value of individual exposures: 0.2% of the overall Retail or BDT 75,00,000 (Seventy : 0.2% of the overall Retail or BDT 75,00,000 (Seventy five lac), which ever is lower.five lac), which ever is lower.

l)l) Small and Medium Enterprises (SME):Small and Medium Enterprises (SME):

Small and Medium enterprise mean that enterprise which is ideally not any public limited company Small and Medium enterprise mean that enterprise which is ideally not any public limited company and fulfills the following criteria:and fulfills the following criteria:

Enterprise/ ConcernEnterprise/ Concern

Small EnterpriseSmall Enterprise

(Total fixed assets excluding land and (Total fixed assets excluding land and building) building)

Medium EnterpriseMedium Enterprise

(Total fixed assets excluding land (Total fixed assets excluding land and building) and building)

Trading ConcernTrading Concern Tk.50,000/- to Tk.50,00,000/- Tk.50,000/- to Tk.50,00,000/- Tk.50,00,000/- to Tk.10,00,00,000/- Tk.50,00,000/- to Tk.10,00,00,000/-

Service SectorService Sector Tk.50,000/- to Tk.50,00,000/- Tk.50,000/- to Tk.50,00,000/- Tk.50,00,000/- to Tk.10,00,00,000/- Tk.50,00,000/- to Tk.10,00,00,000/-

ManufacturingManufacturing Tk.50,000/- to Tk.1,50,00,000/- Tk.50,000/- to Tk.1,50,00,000/- Tk.1,50,00,000/- to Tk.20,00,00,000/- Tk.1,50,00,000/- to Tk.20,00,00,000/-

Working ManpowerWorking Manpower Not exceeding 25 persons (In all cases) Not exceeding 25 persons (In all cases) Total 50 persons for Trading & Service Total 50 persons for Trading & Service and 150 persons for Manufacturing and 150 persons for Manufacturing

1111

External Credit Assessment Institutions (ECAIs)External Credit Assessment Institutions (ECAIs)

Six criteria for recognition of ECAI :Objectivity – rating methodology is rigorous and systematic.Independent - from political or economic pressure, conflict of interest.Transparency - available to both domestic and foreign institutions. Rating Methodology is made publicly available. Disclosure – Information related to definition of default, actual default rate, rating transition, etc.Resources - sufficient to carry out high quality rating .Credibility - Confidence of investors, reputation, etc.

Market Segments: Sovereign (Government, PSE & Autonomous Bodies)Financial Institutions (Banks, Insurance & Other FI)Corporate Others

Finally, supervisors will map as to which assessment category corresponds to which RW.

1212

ECAIs’ Rating Category (Assumed)ECAIs’ Rating Category (Assumed)

BB Rating Grade BB Rating Grade Equivalent Rating of Equivalent Rating of

CRISL CRISL

Equivalent Rating of Equivalent Rating of

CRABCRAB11 AAA, AA+, AA, AA-AAA, AA+, AA, AA- AAA, AA1, AA2, AA3AAA, AA1, AA2, AA3

22 A+, A, A-A+, A, A- A1, A2, A3A1, A2, A3

33 BBB+, BBB, BBB-BBB+, BBB, BBB- BBB1, BBB2, BBB3BBB1, BBB2, BBB3

44 BB+, BB, BB-BB+, BB, BB- BB1, BB2, BB3BB1, BB2, BB3

55 B+, B, B-B+, B, B- B1, B2, B3B1, B2, B3

66 C, DC, D C, DC, D

Short-Term Rating Category Mapping Short-Term Rating Category Mapping

S1S1 ST-1ST-1 ST-1ST-1



S4S4 OthersOthers OthersOthers

Table 1 (*)

CRISL: Credit Rating Information Services Limited CRAB: Credit Rating of Bangladesh Limited

(*) Recognition of ECAIs is not yet finalised by the Bangladesh Bank.

1313

Sl.Sl.

NoNo

Exposure TypeExposure Type BB’s BB’s

RatingRating

GradeGrade

RiskRisk

WeightWeight

(%)(%)

a)a) Cash and Cash EquivalentsCash and Cash Equivalents 00

b)b) Claims on Bangladesh Government (other than PSEs) and BB Claims on Bangladesh Government (other than PSEs) and BB 00

c)c) Claims on other Sovereigns & Central Banks Claims on other Sovereigns & Central Banks

d)d) Claims on Bank for International Settlements, International Claims on Bank for International Settlements, International Monetary Fund and European Central Bank Monetary Fund and European Central Bank

00

e)e) Claims on Multilateral Development Banks (MDBs) Claims on Multilateral Development Banks (MDBs)

i) IBRD , IFC, ADB, AfDB, EBRD, IADB, EIB, EIF, NIB, CDB, IDB, i) IBRD , IFC, ADB, AfDB, EBRD, IADB, EIB, EIF, NIB, CDB, IDB, CEDB CEDB

00

ii) Other MDBs ii) Other MDBs

{e.g. (i) Central American Bank for Economic Integration {e.g. (i) Central American Bank for Economic Integration (CABEI) (ii) East African Development Bank (EABD) (iii) (CABEI) (ii) East African Development Bank (EABD) (iii) International Fund for Agricultural Development (IFAD)}International Fund for Agricultural Development (IFAD)}

1 1 2020

2,3 2,3 5050

4,5 4,5 100100

6 6 150150

Unrated Unrated 5050

Table 2Risk Weighted Asset (RWA) for Balance Sheet Exposure

1414

Sl.Sl.

NoNo


RatingRating

GradeGrade

RiskRisk

WeightWeight

(%)(%)

f)f) Claims on Public Sector EntitiesClaims on Public Sector Entities (other than Government) (other than Government) in Bangladeshin Bangladesh

1 1 2020

2,3 2,3 5050

4,5 4,5 100100

6 6 150150


g)g) Claims on BanksClaims on Banks

i) Maturity over 3 months i) Maturity over 3 months 1 1 2020

2,3 2,3 5050

4,5 4,5 100100

6 6 150150


ii) Maturity less than 3 months ii) Maturity less than 3 months 20 20

h)h) Claims on CorporateClaims on Corporate (excluding equity exposures) (excluding equity exposures) 1 1 2020

22 5050

3,4 3,4 100100

5,6 5,6 150150


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Fixed Risk Weight GroupsFixed Risk Weight Groups SN.SN. Exposure TypeExposure Type RW (%)RW (%)

i) Claims as Retail Portfolio & Small Enterprise (excluding consumer finance) 75 75

j) Consumer Investment (Finance) 100 100

k) Claims fully secured by Residential Property 50 50

l) Claims fully secured by Commercial Real Estate 100 100

m) Past Due Claims

1. The claim (other than claims secured by eligible residential property) 1. The claim (other than claims secured by eligible residential property)

that is past due for more than 90 days, where specific provisions are:that is past due for more than 90 days, where specific provisions are:

-- less than 20% of the outstanding amount of the past due claim ; less than 20% of the outstanding amount of the past due claim ;

-- no less than 20% of the outstanding amount of the past due claim. no less than 20% of the outstanding amount of the past due claim.

-- more than 50% of the outstanding amount of the past due claim. more than 50% of the outstanding amount of the past due claim.

150150

100100

5050

2. Claims fully secured against residential property past due for more than 90 days 2. Claims fully secured against residential property past due for more than 90 days and/or impaired specific provision is less than 20% of outstanding amount.and/or impaired specific provision is less than 20% of outstanding amount.

100100

3. Claims fully secured against residential property past due by 90 days and /or impaired 3. Claims fully secured against residential property past due by 90 days and /or impaired & specific provision held is more than 20% of outstanding amount. & specific provision held is more than 20% of outstanding amount.

7575

n) Investments in venture capital 150150

o) Investments in premises, plant and equipment and all other fixed assets 100100

p) Claims on all fixed assets under operating lease 100100

q) All other assets 100100

1616

Risk Weighted Assets for Off-Balance Sheet Risk Weighted Assets for Off-Balance Sheet (OBS) Exposures(OBS) Exposures

The risk-weighted amount of the OBS transaction is The risk-weighted amount of the OBS transaction is generally calculated by means of a two-step process:generally calculated by means of a two-step process:

(a)(a) FirstFirst, the notional amount of the transaction is converted into , the notional amount of the transaction is converted into a balance sheet equivalent (i.e. credit equivalent amount) by a balance sheet equivalent (i.e. credit equivalent amount) by multiplying the amount by a specified Credit Conversion multiplying the amount by a specified Credit Conversion Factor (CCF). Factor (CCF).

(b)(b) SecondSecond, after conversion of the contingencies the resulting , after conversion of the contingencies the resulting credit equivalent amount will be multiplied by the risk-weight credit equivalent amount will be multiplied by the risk-weight associated with that counterparty Credit Rating.associated with that counterparty Credit Rating.

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Non-Market Related OBS TransactionsNon-Market Related OBS Transactions

Sl. Sl. NoNo. .

Nature of transaction Nature of transaction

Credit Credit Conversion Conversion

Factor (CCF) Factor (CCF)

11 Direct Credit Substitutes Direct Credit Substitutes 100% 100%

22 Performance-related Contingencies Performance-related Contingencies 50% 50%

33 Trade-related Contingencies Trade-related Contingencies 20% 20%

44 Lending of securities or posting of securities as collateral Lending of securities or posting of securities as collateral 100% 100%

55 Other Commitments Other Commitments

Commitments with certain drawdown.Commitments with certain drawdown.

Commitments (e.g. undrawn formal standby facilities and credit lines) with Commitments (e.g. undrawn formal standby facilities and credit lines) with an original maturity of: an original maturity of:

(i) one year or less. (i) one year or less.

(ii) over one year. (ii) over one year.

(c) Commitments that can be unconditionally cancelled at any time without (c) Commitments that can be unconditionally cancelled at any time without notice (e.g. undrawn overdraft and credit card facilities providing 0% notice (e.g. undrawn overdraft and credit card facilities providing 0% that any outstanding unused balance is subject to review at least that any outstanding unused balance is subject to review at least annually) or effectively provide for automatic cancellation due to annually) or effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness. deterioration in a borrower’s creditworthiness.

100%100%

20%20%

50%50%

0% 0%

1818

Risk Weighted Amount for Off-Balance Sheet ExposuresRisk Weighted Amount for Off-Balance Sheet Exposures

Sl.Sl.

NoNo


RatingRating

GradeGrade

RiskRisk

WeightWeight

(%)(%)

Exposure

RiskRisk

Weighted Weighted AssetsAssets

a)a) Cash and Cash EquivalentsCash and Cash Equivalents 00

b)b) Claims on Bangladesh Government (other than Claims on Bangladesh Government (other than PSEs) and BB PSEs) and BB

c)c) Claims on other Sovereigns & Central Banks Claims on other Sovereigns & Central Banks 00

d)d) Claims on Bank for International Settlements, Claims on Bank for International Settlements, International Monetary Fund and European Central International Monetary Fund and European Central Bank Bank

e)e) Claims on Multilateral Development Banks (MDBs) Claims on Multilateral Development Banks (MDBs)

i) IBRD , IFC, ADB, AFDB, EBRD, IADB, EIB, EIF, i) IBRD , IFC, ADB, AFDB, EBRD, IADB, EIB, EIF, NIB, CDB, IDB, CEDB NIB, CDB, IDB, CEDB

00

ii) Other MDBsii) Other MDBs 1 1 2020

2,3 2,3 5050

4,5 4,5 100100

6 6 150150


1919

Risk Weighted Amount for Off-Balance Sheet ExposuresRisk Weighted Amount for Off-Balance Sheet ExposuresSl.Sl.

NoNo


RatingRating

GradeGrade

RiskRisk

WeightWeight

(%)(%)

Exposure

RiskRisk

Weighted Weighted AssetsAssets

f) Claims on Banks

(i) Maturity over 3 months 1 20

2,3 50

4,5 100

6 150

Unrated 50

(ii) Maturity less than 3 months 20

g) Claims on Corporate 1 20

2 50

3,4 100

5,6 150

Unrated 125

h) Claims as Retail Portfolio & SE 7575

i) Consumer Finance 100100

j) All Other Assets 100100

2020

Credit Risk Mitigation (CRM)Credit Risk Mitigation (CRM)

Eligible financial Collateral:Eligible financial Collateral:i) Cash (Fixed Deposit or comparable instruments of the same bank) i) Cash (Fixed Deposit or comparable instruments of the same bank)

ii) Goldii) Gold

iii) Debt securities rated by a recognized ECAI iii) Debt securities rated by a recognized ECAI

iv) Debt securities not rated by a recognized ECAI iv) Debt securities not rated by a recognized ECAI

v) Equities (including convertible bonds) included in a DSE/CSE-20. v) Equities (including convertible bonds) included in a DSE/CSE-20.

vi) Undertakings for Collective Investments in Transferable Securities vi) Undertakings for Collective Investments in Transferable Securities (UCITS) and mutual funds; and (UCITS) and mutual funds; and

vii) Equities (including convertible bonds) which are not included in a vii) Equities (including convertible bonds) which are not included in a DSE/CSE-20 but which are listed on a recognized exchange;DSE/CSE-20 but which are listed on a recognized exchange;

2121

E* = maxE* = max [0, E x (1 + He) - C x (1 - Hc - Hfx)] [0, E x (1 + He) - C x (1 - Hc - Hfx)] Where: E* = the exposure value after risk mitigationWhere: E* = the exposure value after risk mitigationE = current value of the exposure for which the collateral qualifies as a risk mitigateE = current value of the exposure for which the collateral qualifies as a risk mitigateHe = haircut weight appropriate to the exposureHe = haircut weight appropriate to the exposureC = the current value of the collateral receivedC = the current value of the collateral receivedHc = haircut weight appropriate to the collateralHc = haircut weight appropriate to the collateralHfx = haircut weight appropriate for currency mismatch between the collateral & exposureHfx = haircut weight appropriate for currency mismatch between the collateral & exposure

HaircutsHaircuts

Where transactions secured by eligible collateral, banks need to first calculate the net Where transactions secured by eligible collateral, banks need to first calculate the net exposure amount by taking into account the effect of collateral. The net exposure amount exposure amount by taking into account the effect of collateral. The net exposure amount (if positive) is then weighted according to risk weight of the counterparty to obtain the risk (if positive) is then weighted according to risk weight of the counterparty to obtain the risk weighted asset amount for the collateralized transaction.weighted asset amount for the collateralized transaction.

In calculating the adjusted exposure amount after risk mitigation, adjustments are applied In calculating the adjusted exposure amount after risk mitigation, adjustments are applied to both the collateral and the exposure to take into account possible future price to both the collateral and the exposure to take into account possible future price fluctuations.fluctuations.

2222

Market RiskMarket Risk

Market riskMarket risk is the possibility of losing assets in balance is the possibility of losing assets in balance sheet and off-balance sheet positions arising out of volatility in sheet and off-balance sheet positions arising out of volatility in

market variables i.e. interest rate, exchange rate and price.market variables i.e. interest rate, exchange rate and price.

The total capital requirement for banks against their market The total capital requirement for banks against their market risk shall be the sum of capital charge against risk shall be the sum of capital charge against

i.i. interest rate risk interest rate risk

ii.ii. equity position risk (trading book) equity position risk (trading book)

iii.iii. foreign exchange position risk throughout the bank’s foreign exchange position risk throughout the bank’s balance sheet.balance sheet.

2323

Market RiskMarket Risk

I) Capital Charges for Interest Rate RiskI) Capital Charges for Interest Rate RiskA. Capital charges for Specific risk A. Capital charges for Specific risk B. Capital charge for General market riskB. Capital charge for General market risk

II) Capital Charges for Equity Position RiskII) Capital Charges for Equity Position Risk(a) As with debt securities, the minimum capital standard for equities is (a) As with debt securities, the minimum capital standard for equities is expressed in terms of two separately calculated charges the “specific expressed in terms of two separately calculated charges the “specific risk” and the “general market risk” for the holdings.risk” and the “general market risk” for the holdings.(b) The capital charge for specific risk will be 10% and the general (b) The capital charge for specific risk will be 10% and the general market risk charge will be 10%.market risk charge will be 10%.

III) Capital Charges for Foreign Exchange Risk III) Capital Charges for Foreign Exchange Risk The capital charge for foreign exchange risk will be 10% of bank’s The capital charge for foreign exchange risk will be 10% of bank’s overall foreign exchange exposure. overall foreign exchange exposure.

2424

Operational RiskOperational Risk

Operational Risk: Operational Risk: Operational Risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

Gross income:Gross income: Gross Income (GI) is defined as “Net Investment (interest) income” (i.e. Investment Income – Profit Paid on Deposits) plus “net Non-Investment

(non-interest) income” (i.e. Commission, Exchange, Others).

Under BIA, the capital charge for operational risk is a fixed percentage of average positive annual gross income of the bank over the past three years. Figures for any year in which annual gross income is negative or zero, should be excluded from both the numerator and denominator when calculating the average. The capital charge may be expressed as follows:

K = [(GI1+GI2+GI3) x α] / n

2525

Operational RiskOperational Risk

Type of Risk:

Losses from employee fraud Accounting error Computer breakdowns Natural disasters

To meet the Risk: Knowledgeable & capable BoD & skilled Management Require constructive plan, policy & effective oversee Functional check list to establish accountability of operations Audit (Internal & External)

2626

Supervisory Review Process (2nd Pillar)Supervisory Review Process (2nd Pillar)

Importance of supervisory review: i) Better risk management techniques in monitoring and

managing their risks.ii) Developing an internal capital assessment process and

setting capital targets that are commensurate with the bank’s risk profile and control environment.

iii) Establishing relationship between the planning of adequate capital against all risks and the strength and effectiveness of the bank’s risk management and internal control processes.iv) The process will consider three main areas of risks i.e.

a) Risks covered under minimum regulatory capital, b) Other risks which are not captured by minimum

regulatory capital, and c) Risk factors external to the bank.

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Supervisory RiskSupervisory Risk

Possibility of losses due to lacking of:Possibility of losses due to lacking of:

• Effective supervisory activityEffective supervisory activity• Skilled overseeSkilled oversee• Control operationControl operation• Losing integrationLosing integration

To meet the risk:To meet the risk:

• Require compliance of regulations & instruction of regulatory & Require compliance of regulations & instruction of regulatory & supervisory supervisory authorityauthority

• Effective own supervisionEffective own supervision• To meet unforeseen lossesTo meet unforeseen losses• Regulatory capital (MCR & Adequate)Regulatory capital (MCR & Adequate)

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Supervisory Review ProcessSupervisory Review Process

Banks should have a process for assessing their capital adequacy in Banks should have a process for assessing their capital adequacy in relation to their risk profile and a strategy for marinating their capital levelsrelation to their risk profile and a strategy for marinating their capital levels

Main features of a rigorous review process:Main features of a rigorous review process: 1. Board and senior management oversight;1. Board and senior management oversight;

2. Sound capital assessment;2. Sound capital assessment;

3. Comprehensive assessment of risks;3. Comprehensive assessment of risks;

4. Monitoring and reporting;4. Monitoring and reporting;

5. Internal control review.5. Internal control review.

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Market Discipline (3rd Pillar)Market Discipline (3rd Pillar)

1) Scope & purpose1) Scope & purpose

a) a) The aim of introducing Market discipline is to establish more The aim of introducing Market discipline is to establish more transparent and more disciplined financial market so that stakeholders can transparent and more disciplined financial market so that stakeholders can assess the position of a bank regarding holding of assets and to identify assess the position of a bank regarding holding of assets and to identify the risks relating to the assets and capital adequacy to meet probable loss the risks relating to the assets and capital adequacy to meet probable loss of assets.of assets.

For the said purpose, banks will develop a set of disclosure containing the For the said purpose, banks will develop a set of disclosure containing the key pieces of information on the assets, risk exposures, risk assessment key pieces of information on the assets, risk exposures, risk assessment processes, and hence the capital adequacy to meet the risks.processes, and hence the capital adequacy to meet the risks.

b) b) Banks should have a formal disclosure framework approved by Banks should have a formal disclosure framework approved by the Board of Directors/CEO. The process of their disclosures will include the Board of Directors/CEO. The process of their disclosures will include validation and frequency.validation and frequency.

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Market Discipline (3rd Pillar)Market Discipline (3rd Pillar) 2) Relations with accounting disclosures2) Relations with accounting disclosures

a) It is expected that the disclosure framework does not conflict with a) It is expected that the disclosure framework does not conflict with requirements under accounting standards as set by Bangladesh Bank requirements under accounting standards as set by Bangladesh Bank from time to time. from time to time.

b) Banks will use specified approaches/methodologies for measuring the b) Banks will use specified approaches/methodologies for measuring the various risks they face and the resulting capital requirements and inform various risks they face and the resulting capital requirements and inform the stakeholders about those risks and provides a consistent and the stakeholders about those risks and provides a consistent and comprehensive disclosure framework of risks.comprehensive disclosure framework of risks.

c) The disclosures should be subject to adequate validation. Since c) The disclosures should be subject to adequate validation. Since information in the annual financial statements would generally be audited, information in the annual financial statements would generally be audited, the additionally published with such statements must be consistent with the additionally published with such statements must be consistent with the audited statements. the audited statements.

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3) Materiality of Disclosure3) Materiality of Disclosure

Any information which will consider as material and its omission or Any information which will consider as material and its omission or misstatement is very crucial for economic decision making by the user. misstatement is very crucial for economic decision making by the user. To set specific thresholds is difficult for disclosures can be open to To set specific thresholds is difficult for disclosures can be open to manipulation and are difficult to determine, as it can the user who will manipulation and are difficult to determine, as it can the user who will think over the sufficiency of disclosure.think over the sufficiency of disclosure.

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4) Frequency of disclosures4) Frequency of disclosures

a) Banks should provide all required disclosures in both qualitative and a) Banks should provide all required disclosures in both qualitative and quantitative, as at end March of each year along with the annual financial quantitative, as at end March of each year along with the annual financial statements. Banks may make their annual disclosures both in their annual statements. Banks may make their annual disclosures both in their annual reports as well as their respective web sites. reports as well as their respective web sites.

b) The disclosure on the websites should be made in a web page titled b) The disclosure on the websites should be made in a web page titled “Disclosures on Risk Based Capital (Basel II)” and the link to this page “Disclosures on Risk Based Capital (Basel II)” and the link to this page should be prominently provided on the home page of the bank’s website. should be prominently provided on the home page of the bank’s website. Each of these disclosures pertaining to a financial year should be Each of these disclosures pertaining to a financial year should be available on the websites until disclosure of the 4th subsequent annual (as available on the websites until disclosure of the 4th subsequent annual (as on March 31) disclosure is made. on March 31) disclosure is made.

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Market Discipline (3rd Pillar)Market Discipline (3rd Pillar) 5) Disclosure framework5) Disclosure framework

The following components set out in tabular form are the The following components set out in tabular form are the disclosure disclosure requirements under:requirements under:

1. Assets1. Assets2. Credit Risk on Banking Book2. Credit Risk on Banking Book3. Market risk in Trading Book3. Market risk in Trading Book4. Operational Risk4. Operational Risk5. Specific Provisions5. Specific Provisions6. Regulatory Capital6. Regulatory Capital7. Capital Adequacy7. Capital Adequacy

6) Effective date of disclosures6) Effective date of disclosuresThe first of the disclosures as per these guidelines shall be made as on The first of the disclosures as per these guidelines shall be made as on the effective date viz. March 31, 2010. Banks are, however, encouraged to the effective date viz. March 31, 2010. Banks are, however, encouraged to make the disclosures at an earlier date. make the disclosures at an earlier date.

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Thanks For Your Patience Hearing

Documents

Presentation Basel II 1