The Bangladesh Bank board on Monday approved contingency planning guideline, prescribed by the International Monetary Fund, in a bid to take precautionary measures to ‘protect’ the banking sector from any unexpected crisis, said BB officials.
They said implementation of the guideline would ensure that money of the taxpayers would not be used to bailout a crisis bank.
Under the contingency planning, the BB will take a number of advance risk mitigating measures to save any bank from plunging into a problematic situation, they said.
The IMF included a condition of implementation of the contingency planning when the government signed with the lender organisation a deal to get $1 billion fund under its extended credit facility.
A number of BB officials, however, expressed doubt about the effectiveness of the IMF-prescribed move.
‘The central bank could not stop a number of large-scale scams in different banks even after taking IMF-prescribed measures like signing memorandum of understandings with the state-run commercial banks,’ said an official.
Another official said the guideline is a new concept to our country, but it was introduced in the major countries of North America and Europe after they had faced recession.
The countries of the two continents suffered major setback in their banking sectors because of the economical crisis and a number of banks were liquidated in the continents, he said.
The western countries plunged into an economical recession in 2007.
‘So the countries have implemented the contingency planning in a bid to take precautionary steps to save their banking sector from any unexpected crisis,’ he said.
Under the new guideline, BB has framed a roadmap that includes contingency planning, bank intervention and lender of last resort frameworks.
Under the bank intervention plan, the central bank will take precautionary measures for a crisis bank before it plunges into an ‘early warning’ situation under the CAMELS rating.
The BB will intervene directly into the bank to save it from worsening of its situation.
Under the contingency planning, the BB will set necessary measures in advance so that it could implement the steps when a bank plunges into a debacle situation.
As per policy of the lender of last resort framework, the BB will frame plans how to provide liquidity support to a crisis bank.
The BB has formulated the contingency planning guideline under the Bank Company Act-2013, the central bank official said.
The BB’s financial stability department will supervise the implementation of the guideline in the banking sector, he said.
Another BB official said that the central bank had already started to implement the guideline in the country’s banking sector.
As part of the move, the BB has selected the ‘domestic systemically important banks’ in the banking sector, he said.
The domestic systemically important banks are the crucial banks in the financial sector and the whole sector will face a dreadful situation if any bank under the category falls into debacle, he said.
The central bank will formulate a separate guideline for the ‘domestic systemically important banks’ to protect them from financial crisis, he said.
The BB will assess the coverage capacity of the existing deposit insurance fund to find out how many clients will get the fund against liquidation of banks, he said.
Under the new guideline, the central bank will formulate policies on how a problem bank will be liquidated, he said.
The BB will give plans when a bank will take decision that it will go into liquidation so that the bank’s decision would not put any adverse impact on the financial market, he said.
Besides, the BB will formulate another policy for merger of two banks when they are in trouble to run business individually.
For this reason, the BB will revise its merger and acquisition policy soon, the official added.
-With New Age input
