The Bangladesh Bank has updated its stress testing guidelines, mandating banks to disclose detailed information about their own portfolios and those of their subsidiaries, marking a significant shift from the previous requirement that limited disclosure to individual bank portfolios.
Issued on Monday (30 December) by the Financial Stability Department, the revised guidelines address gaps in the roles and responsibilities of senior management and board directors, providing explicit directives for the first time.
It also outlines proactive measures banks can adopt to navigate adverse economic and financial conditions, aiming to bolster resilience across the sector.
The revised guidelines introduce significant changes to how banks measure credit, market, operational, and liquidity risks.
Notably, a new component on climate shocks has been added under operational risks, reflecting the country's heightened vulnerability to climate change.
The central bank highlighted that natural disasters, such as floods, could adversely affect loan portfolios, particularly when investments are concentrated in high-risk areas without adequate mitigation strategies.
Under the revised guidelines, the shock scenarios assume that 3% (Minor), 6% (Moderate), and 9% (Major) of climate-vulnerable loans will be downgraded directly to the bad and loss category.
These loans will be identified using the district-wise Climate Vulnerability Index (CVI) developed by the United Nations Development Programme (UNDP).
It follows a recommendation from the International Monetary Fund (IMF), according to a senior official at the central bank.
For liquidity risks, the updated framework evaluates the impact of deposit withdrawals over a specified period, withdrawals by major depositors, and shocks to the Liquidity Coverage Ratio (LCR).
The shock scenario includes both demand and time deposit withdrawals over five consecutive working days, accounting for atypical withdrawal behaviours.
Under credit risks, the guidelines now incorporate bank-specific shock magnitudes, calculated using the average Non-performing Loan Inflow Ratio (NPLIR).
Banks with higher classified loans in recent quarters will face greater shock scenarios, ensuring a tailored and accurate risk assessment.
The central bank has revised the approach to market risk assessment, grounding it in real-world conditions and incorporating feedback from banks.
This refined methodology aims to provide a clearer picture of risk on a case-by-case basis.
According to the central bank official, the revised guidelines are aligned with international standards and best global practices.
By refining the risk measurement process on a bank-by-bank basis, the updated framework is expected to offer a more comprehensive assessment of the sector's resilience.
These updates signal the Bangladesh Bank’s commitment to addressing emerging risks, particularly those associated with climate change, and ensuring robust financial stability in an evolving economic landscape.