BB proposes new limit for banks' exposure to stock market

Express (August 24, 2011)


The central bank has proposed to amend the existing regulations relating to capital market investment by the country's commercial banks to minimise risks, officials said Tuesday.

Under the proposal, the commercial banks should not be allowed to invest more than 25 per cent, in any form, of their total equity capital in the share market.

A bank is now allowed to invest in capital market up to an amount, not exceeding 10 per cent of its total liabilities.

"We've taken the latest move to protect the depositors' interest," a senior official of the Bangladesh Bank (BB) told the FE, adding that the central bank has released a 32-page amendment proposal of the Bank Company Act 1991 for seeking opinions from the members of the public.

He also said any interested individual can submit his/her opinions to the general manager of Banking Regulation and Policy Department (BRPD) of the central bank through e-mail or by normal post by September 15.

"We'll submit a complete proposal incorporating the public opinions to the ministry of finance (MoF) for taking necessary measures in this connection," the central bank official added.

Currently, the banks are allowed to invest 10 per cent of their liabilities (deposits) in the share market in line with the section 26 (2) of the Bank Company Act 1991.

Under the existing rules, holding of equity share in any form should not exceed the approved limit under section 26(2) of the Bank Company Act. Additional or unauthorised amount of holding will be deducted at 50 per cent for Tier-1, generally known as core capital and 50 per cent from Tier-2, generally known as supplementary capital.

In April last, the International Monetary Fund (IMF) suggested for an amendment to the regulations relating to investment in stock market by the banks to minimise their risks.

A five-member Money and Capital Market (MCM) team of the IMF had submitted its report in this connection to the MoF and the central bank for taking necessary measures.

The central bank has estimated that if any bank invests 10 per cent of its deposits and if the share price slides by 25 per cent from its purchase price, the bank's capital adequacy ratio will decline by a minimum of 2.0 per cent.

The BB has already informed all commercial banks of the results of such stress test for taking necessary measures in this connection, another BB official said adding the IMF provided technical support for conducting stress test for the banks in 2009.