IMF recommends tighter control over banks' exposure to stocks
The International Monetary Fund (IMF) has urged the government to intensify supervision of banks and the mechanism to oversee the stockmarket.
IMF has warned that the exposure of the banks in Bangladesh to the stockmarket is more than the regional norm and that it deepens risks. It further recommended strict licensing criteria for the approval of new banks.
IMF released a report last week which contained its observation on banks, stockmarket, current economic condition and the budget.
An IMF mission visited Bangladesh in September and after meetings with government high-ups, including the finance minister, over a period of about two weeks, placed the report before the IMF board in Washington on October 28.
IMF recommended stepping-up of efforts to improve stockmarket governance and regulation. It said the advisory board set up after the high-level probe of market irregularities should possess the necessary expertise, backed by sufficient capacity building.
Besides containing risks posed by merchant bank subsidiaries, reforms should concentrate on strengthening the book building method and listing and reporting requirements, and providing clear sanctions for trading violations and a stable set of margin lending requirements, according to the report.
Most banks are currently within the overall shareholding limit of 10 percent of total liabilities. However, the limit is more relaxed than the regional norm, which is typically around 25 percent of bank regulatory capital.
Recent stress tests suggest that state owned commercial banks' capital would suffer depletion in case stock prices fall a further 25 percent.
The commercial banks have been allowed to set up subsidiaries since October 2010. IMF observed that these newly created institutions remain under supervised, with the possibility of parent institutions off-loading risk.
Supervisory weaknesses in the Securities and Exchange Commission (SEC), which are directly responsible for overseeing these subsidiaries, also remain an issue.
It said rapid credit expansion has put liquidity pressure on some banks, exacerbated by the December 2010 stockmarket correction, heavy funding needs of government, and weak secondary market development.
IMF also said Bangladesh Bank should continue to strengthen its supervision and overseeing of the banking system, focusing on improving the governance and finances of the public banks and ensuring all banks compliance with new capital adequacy requirements.
It also said, due to weak capacity at the SEC and lack of a consolidated supervisory framework, merchant bank subsidiaries fall under the supervisory and reporting framework of BB, to protect parent banks' capital and limit operational risks.
IMF commented that the recently announced new stockmarket exposure limits for banks (25 percent of capital) could provide added protection if implemented in a timely manner.
IMF also urged the government to ensure timely finalisation of the draft amendments to the Banking Companies Act and submission to parliament by the end of 2011 for improving bank governance and performance.
IMF recommended that the government defer approving new banking licences until supervisory capacity is strengthened, liquidity pressure eased, and strict licensing criteria are in place, following a decision by BB to lift the ban in September.
IMF suggested the government refrain from interfering in the operations of the public banks, as it could undermine their profitability, limit proper provisioning, and exacerbate recapitalisation needs.
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