Professional Documents
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091-11-852
decline in economic condition etc. Hence the Bank's risk management has been designed to address all these issues. In 2007
Credit Risk = Provision for loan & loss / Total loan & advances = 91000 000 / 57, 68302000
=0.0158
In 2008
Credit Risk = Provision for loan & loss / Total loan & advances
=1, 38350000 / 75, 15621000 =.0184 2) Market Risk: Market risk is defined as the potential change in earnings due to changes in rate of interest, foreign exchange rate and equity prices. Treasury Division manages the market risk and ALCO monitors the activities of Treasury division in managing the risk.
In 2007
per share)
= (2275000 * 341.25) / (2275000*924) =0.3693
In 2008
Market Risk = (No. of share*book value of per share) / (No. of share* market value of per share) = (2844000 * 235.49) / (2844000 * 539.75) =.4362 3) Interest Rate risk: Treasury division reviews the trend analysis of market movement particularly peer group analysis and economic outlook closely and prepares the gap position for proper management of interest rate movement. The estimated impact of 1 percent change in interest rate was within the tolerable limit of the Bank. The bills held for maturity had positive PV as such it had favorable affect in Bank's equity position. As per policy of Bangladesh Bank the revaluation gain/loss are shown against changes in equity. The strong liquidity gave positive nil from money market operation due to seasonal fluctuation in interbank rate. In 2007
In 2008
4) Liquidity Risk: The object of liquidity risk management is to ensure that all foreseeable funding commitments and deposits withdrawals can be met when due. To this end, PBL
maintains diversified and stable funding base comprising of core retail, corporate and institutional deposits. It maintained sufficient liquid assets for meeting the funding requirements. The principle responsibility of the liquidity risk management of the Bank rests with Treasury Division. Treasury Division maintains liquidity based on historical requirements, current liquidity position, anticipated future funding requirement, sources of fund, options for reducing funding needs, present and anticipated asset quality, present and future earning capacity, present and planned capital position. ALCO monitors the liquidity management of Treasury Division by i) setting tolerance limit for cumulative cash flow mismatches ii) setting limit on loan to deposit ratio, iii) setting limits on dependence on institutional deposits which are volatile in nature. In 2007 Liquidity Risk =Purchase Fund / Total asset
= 98,975,606 / 8,178,114,104 =0.0121
In 2008 Liquidity Risk = Purchase Fund / Total asset = 308,815,654 / 9,620,942,281 =.0320
Principles for the management of credit risk in PBL: The sound practices set out in this document specifically address the following areas: 1) Establishing an appropriate credit risk environment; 2) Operating under a sound credit granting process; 3) Maintaining an appropriate credit administration; 4) Ensuring adequate controls over credit risk.
Prevention of money Laundering: Money laundering risk is defined as the loss of reputation and expenses incurred as penalty for being negligent in prevention of money laundering.
Internal Control and Compliance: Internal Control and Compliance is a management process designed to achieve: 1) Effectiveness and efficiency of operations 2) Reliable financial reporting 3) Compliance with laws and regulations.
Risk Governance:
Eastern Bank Limited has a system of check and balance through its risk management structure to manage the core risks efficiently. The basic principles of risk management followed by the bank include:
Credit Risk Management: Credit risk is the risk that counterparty will not settle its obligations in
accordance with agreed terms. Credit exposures include both individual borrowers and groups of affiliated /connected counterparties. The Head of Credit Risk Management (HoCRM) has clear responsibility for management of credit risk. Policies/instructions in this respect are approved by the Board of Directors or authorities acting on their delegation.
In 2007
Credit Risk =Provision for loan & loss / Total loan & advances
=1,175,621,872 / 30,961,802,828 =0.0379 In 2008
Credit Risk = Provision for loan & loss / Total loan & advances
=1,419,570,642/ 39,662,162,813 =0.0358 Market Risk: The bank recognizes market risk as the exposure created by potential changes in market
prices and rates. The management of market risk will be more effective under the Basel II agreement. Guidelines prescribed by Bangladesh Bank for Basel II implementation covers both trading and nontrading books of a commercial bank. Eastern Bank Limited also encourage stress testing to foresee potential risks that may arise from extreme market events, which are rare but plausible. The bank performed a stress test / impact study on the impact of global financial crisis on its portfolio. In 2007
Market Risk = (No. of share*book value of per share)/ (No. of share* market value of per share) = (856,600* 369.91) / (856,600*1,070.75) =0.3454
In 2008
Market Risk = (No. of share*book value of per share) / (No. of share* market value of per share)
= (944,600* 341.25) / (944,600*589.30) =0.5791
Interest Rate Risk: Structural interest rate risk arises from the re-pricing characteristics of banking
assets and liabilities. ALCO is mainly responsible for establishing guidelines for the management of assets and liabilities, monitoring and minimizing interest rate risks at an acceptable level. These guidelines and actions are taken in adherence to the policies issued by Bangladesh Bank from time to time.
In 2007 Interest Rate Risk = Interest sensitive asset / Interest sensitive liability = (30,895,706,294+ 3, 45700000+ 1,511,426,000+ 70,866,892) / (25,958,579,503+ 3, 79300000)
=1.246
(d) Liquidity Risk: Liquidity risk is defined as the risk that the bank either does not have sufficient
financial resources available to meet all its obligations and commitments as they fall due, or can access them only at excessive cost. It is the policy of the bank to maintain adequate liquidity at all times. Liquidity risk management is governed by ALCO and responsible for both statutory and prudential liquidity. Since liquidity have inverse relationship with profitability, prudential management of liquidity is important. A substantial portion of the banks assets are funded by customer deposits made up of current, savings, fixed, and other deposits. The bank also maintains significant levels of marketable securities usually or for compliance with statutory requirements. Credit to Deposit ratio of the bank as on 31 December 2008 was 95.40 percent, and the bank maintained statutory liquidity in 2008 in all cases.
In 2007
Liquidity Risk =Purchase Fund/Total asset
=66,096,535/72,460,352 =0.9122 In 2008
per share)
Particular Prime Bank Eastern Bank 2007 36.93% 34.54%
4 3.5 3 2.5 2 1.5 1 0.5 0 2007 2008 Prime bank Eastern bank
One year net liquidity gap of the Prime bank & Mutual Trust Bank (Amounts are rounded and expressed in million TK.) Year Prime Bank-2007 Eastern Bank -2007 Net liquidity Gap Net liquidity Gap 1001.14 525.49 Up to 1 Month 301.75 4862.61 1-3 Month 34.62 2947.15 3-12 Month 3053.77 9443.67 1-5 Year 881.99 2602.50 Over 5 Year 5273.28 3710.91 Total
10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Up to 1 Month 1-3 Month 3-12 Month 1-5 Year Over 5 Year Prime Bank Eastern Bank
In the above table, we have calculated 2007 year net liquidity gap of the two banks basis of maturity. From the analysis, we have the following information we are findings: a. The PBL was appropriate up to 1 month maturity assets to a greater then the EBL at the same maturity period in the liquidity gap. b. In case of 1-3 month and 3-12 month maturity liquidity gap, the EBL performed better than the PBL. That is, during the period under analysis, the EBL managed liquidity situation of these two durations more efficiently than the PBL. c. Again, in 1-5 year maturity the EBL handled the liquidity situation more effectively than the PBL, whereas, in More than 5 year maturity situation, the EBL liquidity performance was better.
we consider single years, we see that only in the year 2007, the PBL experienced Negative liquidity gap and The EBL is also negative liquidity gap in 2007. The PBL long term liquidity gap was higher then the short term liquidity gap. Other side EBL also same thing happened in there liquidity gap. So, we can say that the both bank should focus more on managing long-term assets to satisfy short-term.
14000 12000 10000 8000 Eastern Bank 6000 4000 2000 0 Short-term Long-term Prime Bank
One year net liquidity gap of the Prime bank & Eastern Bank (Amounts are rounded and expressed in TK.) Year Prime Bank - 2008 Eastern Bank - 2008 (Net liquidity Gap) (Net liquidity Gap) 7437.44 3767.43 Up to 1 Months 3649.32 313.84 1-3 Months 14232.47 5880.57 3-12 Months 10974.70 144.67 1-5 Year 4203.02 3409.75 Over 5 Year 4733.36 6696.77 Total
16000 14000 12000 10000 8000 6000 4000 2000 0 Up to 1 Months 1-3 Months 3-12 Months 1-5 Years Over 5 Years Prime Bank - 2008 Eastern Bank - 2008
30000 25000 20000 15000 10000 5000 0 Short-term Long-term Prime Bank Long-term
Liquidity Statement: Prime Bank 2007 (Page- 144) Prime Bank 2008 (Page- 170)