Compiled By: Md.

Abu Zafar Shamsuddin

What is a Bank? Bank is a highly regulated and highly professional Financial Intermediary, channel funds from people who have extra money to those who do not have enough money to carry out a desired activity. Bank deals with money through Financial Product as a active player of Financial market, Mitigate risk involve their on and create money by transferring it in different economic activities, contribute to maintain supply chain management, Industrialization and save unemployment problem.

What is CRR? Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with Bangladesh Bank.I. If BB decides to increase the percent of this,

the available amount with the banks comes down. BB is using this method (increase of CRR rate), to drain out the excessive money from the banks.At present schedule bank have to deposit 5.5% of their demand and time deposit at the average fortnight basis.It is a tool of credit control.

What is SLR? Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). Present SLR is 18.5%. .

What are Repo rate and Reverse Repo rate? Repo (Repurchase) rate is the rate at which the BB lends shotterm money to the banks. When the repo rate increases borrowing from BB becomes more expensive. Therefore, we can say that in case, BB wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate
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Compiled By: Md. Abu Zafar Shamsuddin

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the BB. The BB uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI What is Bank rate? Bank Rate is the rate at which central bank of the country allows finance to commercial banks. Bank Rate is a tool, which central bank uses for short-term purposes. Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Prime Lending Rate. This any revision in the Bank rate indicates could mean more or less interest on your deposits and also an increase or decrease in your EMI. Bank regulation Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines. Objectives of bank regulation The objectives of bank regulation, and the emphasis, vary between jurisdictions. The most common objectives are: 1. Prudential -- to reduce the level of risk bank creditors are exposed to (i.e. to protect depositors) 2. Systemic risk reduction -- to reduce the risk of disruption resulting from adverse trading conditions for banks causing multiple or major bank failures 3. Avoid misuse of banks -- to reduce the risk of banks being used for criminal purposes, e.g. laundering the proceeds of crime 4. To protect banking confidentiality 5. Credit allocation -- to direct credit to favored sectors General principles of bank regulation Banking regulations can vary widely across nations and jurisdictions. This section of the article describes general principles of bank regulation throughout the world. Minimum requirements
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Compiled By: Md. Abu Zafar Shamsuddin

Requirements are imposed on banks in order to promote the objectives of the regulator. The most important minimum requirement in banking regulation is maintaining minimum capital ratios. Supervisory review Banks are required to be issued with a bank license by the regulator in order to carry on business as a bank, and the regulator supervises licenced banks for compliance with the requirements and responds to breaches of the requirements through obtaining undertakings, giving directions, imposing penalties or revoking the bank's licence. Market discipline The regulator requires banks to publicly disclose financial and other information, and depositors and other creditors are able to use this information to assess the level of risk and to make investment decisions. As a result of this, the bank is subject to market discipline and the regulator can also use market pricing information as an indicator of the bank's financial health.

Instruments and requirements of bank regulation Capital requirement The capital requirement sets a framework on how banks must handle their capital in relation to their assets. Internationally, the Bank for International Settlements' Basel Committee on Banking Supervision influences each country's capital requirements. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accords. The latest capital adequacy framework is commonly known as Basel II. This updated framework is intended to be more risk sensitive than the original one, but is also a lot more complex. Reserve requirement The reserve requirement sets the minimum reserves each bank must hold to demand deposits and banknotes. This type of regulation has
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lost the role it once had, as the emphasis has moved toward capital adequacy, and in many countries there is no minimum reserve ratio. The purpose of minimum reserve ratios is liquidity rather than safety. An example of a country with a contemporary minimum reserve ratio is Hong Kong, where banks are required to maintain 25% of their liabilities that are due on demand or within 1 month as qualifying liquefiable assets. Reserve requirements have also been used in the past to control the stock of banknotes and/or bank deposits. Required reserves have at times been gold coin, central bank banknotes or deposits, and foreign currency.

Corporate Governance Corporate governance requirements are intended to encourage the bank to be well managed, and is an indirect way of achieving other objectives. Requirements may include: 1. To be a body corporate (i.e. not an individual, a partnership, trust or other unincorporated entity) 2. To be incorporated locally, and/or to be incorporated under as a particular type of body corporate, rather than being incorporated in a foreign jurisdiction. 3. To have a minimum number of directors 4. To have an organizational structure that includes various offices and officers, e.g. corporate secretary, treasurer/CFO, auditor, Asset Liability Management Committee, Privacy Officer etc. Also the officers for those offices may need to be approved persons, or from an approved class of persons. 5. To have a constitution or articles of association that is approved, or contains or does not contain particular clauses, e.g. clauses that enable directors to act other than in the best
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interests of the company (e.g. in the interests of a parent company) may not be allowed.

Financial reporting and disclosure requirements Banks may be required to:

reporting standard, have them audited, and to register or publish them 2. Prepare more frequent financial disclosures, e.g. Quarterly Disclosure Statements 3. Have directors of the bank attest to the accuracy of such financial disclosures 4. Prepare and have registered prospectuses detailing the terms of securities it issues (e.g. deposits), and the relevant facts that will enable investors to better assess the level and type of financial risks in investing in those securities.

Credit rating requirement Banks may be required to obtain and maintain a current credit rating from an approved credit rating agency, and to disclose it to investors and prospective investors. Also, banks may be required to maintain a minimum credit rating.

Large exposures restrictions Banks may be restricted from having imprudently large exposures to individual counterparties or groups of connected counterparties. This may be expressed as a proportion of the bank's assets or equity, and different limits may apply depending on the security held and/or the credit rating of the counterparty.

Compiled By: Md. Abu Zafar Shamsuddin

Related party exposure restrictions Banks may be restricted from incurring exposures to related parties such as the bank's parent company or directors. Typically the restrictions may include:

Exposures to related parties must be in the normal course of business and on normal terms and conditions Exposures to related parties must be in the best interests of the bank Exposures to related parties must be not more than limited amounts or proportions of the bank's assets or equity.

Tier 1 capital Tier 1 capital called Core Capital comprises of highest quality of capital elements that consists of : a) Paid up capital b) Non-repayable share premium account c) Statutory reserve d) General reserve e) Retained earnings f) Minority interest in subsidiaries g) Non-cumulative irredeemable preference shares h) Dividend equalization account . Tier 2 capital Tier 2 capital called Supplementary Capital represents other elements which fall short of some of the characteristics of the core capital but contribute to the overall strength of a bank and consists of: a) General provision2 b) Revaluation reserves c) All other preference shares d) Subordinated debt5 Tier 3 capital Tier 3 capital called Additional Supplementary Capital, consists of short-term
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subordinated debt (original maturity less than or equal to five years but greater than or equal to two years) would be solely for the purpose of meeting a proportion of the capital requirements for market risk.. For foreign banks operating in Bangladesh, Tier 1 capital consists of the following Items :a) Funds from head office b) Remittable profit retained as capital c) Any other items approved by BB for inclusion in Tier 1 capital Tier 2 capital consists of the following items: a) General provision b) Borrowing from head office in foreign currency in compliance with the regulatory requirement as specified in Annex A. c) Revaluation reserve for securities d) Any other items approved by BB for inclusion in Tier 2 capital Conditions for maintaining regulatory capital The calculation of Tier 1 capital, Tier 2 capital, and Tier 3 capital shall be subject to the following conditions: a) The amount of Tier 2 capital will be limited to 100% of the amount of Tier 1 capital. b) 50% of revaluation reserves for fixed assets and securities eligible for Tier 2 capital. c) 10% of revaluation reserves for equity instruments eligible for Tier 2 capital.d) Subordinated debt (definition and qualification is stated in Annex A) shall be limited to a maximum of 30% of the amount of Tier 1 capital.e) A minimum of about 28.5% of market risk needs to be supported by Tier 1 capital.Supporting of Market Risk from Tier 3 capital shall be limited up to maximum of 250% of a banks Tier 1 capital that is available after meeting credit risk capital requirement6. Eligible regulatory capital In order to obtain the eligible regulatory capital for the purpose of calculating Capital Adequacy Ratio (CAR), banks are required to make following deductions from their
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Tier-1 capital; a) Intangible asset e.g., book value of goodwill and value of any contingent assets, etc. which are shown as assets b) Shortfall in provisions required against classified assets c) Shortfall in provisions required against investment in shares d) Remaining deficit on account of revaluation of investments in securities after netting off from any other surplus on the securities.