To Whom It May Concern This is to officially state that Md.

Taufiq us Samad Tonmoy has completed his Internship program from Bangladesh Bank, at Bangladesh Bank Training Academy (BBTA). To meet the requirement of MBA program of the Institute of Business Administration, University of Dhaka; he has prepared the Project paper on "Implementation of Basel II : A Case Study On Comprehensive Risk Assessment & Capital Adequacy Through SRP " by using his knowledge and practical experience from his internship experience. We wish him every success in life.

Supervisors Certificate This is to certify that the Internship Report on Implementation of Basel II: A Case Study on Comprehensive Risk Assessment & Capital Adequacy through SRP" is the bona fide record and the report is done by Md. Taufiq us Samad Tonmoy, as a partial fulfillment of the requirement of M.B.A degree from the Institute of Business Administration (IBA), University of Dhaka. The report has been prepared under my guidance & is a record of the bona fide work carried out successfully.

Dear Madam,

I am highly pleased to submit my report on "Implementation of Basel II: A Case Study on Comprehensive Risk Assessment & Capital Adequacy through SRP". In preparing this report, I tried my best to make it a complete one and sincerely look forward to any possible correction. By preparing this report I have gathered vast knowledge on the present scenario of our banking arena in implementing the Basel II framework. During the preparation of the report I faced some problems that had been erased out with your propound suggestion. Finally, I want to give thanks for your supportive thoughts and kind consideration for formulating an idea and developing the structure of this report. Thank You Sincerely Yours

Md. Taufiq us Samad Tonmoy Roll 16 Batch 44D MBA

Preface

The report is a requirement for the partial fulfillment of the MBA degree from the Institute of Business Administration (IBA), University of Dhaka, which arranges internship program in attachment with different organizations for its students after the completion of theoretical courses of M.B.A. program. Individual internee must carry out a specific project, which is assigned by the concerned organization and approved by the Internship and placement committee of the Institute of Business Administration (IBA), University of Dhaka. Consequently a report based on the project is to be submitted to the committee. One problem commonly cited by employers is that many graduates lack professionalism and do not have the practical skills necessary to excel in the job market. It is apparent that enhanced levels of education are not enough to prepare students for a real world environment. Internships are known for giving students the opportunity to apply their knowledge in real world environments and make the graduates much more effective in their careers. This fact seemed very authentic to me after I worked with Bangladesh Bank, the Central bank of our country. In this particular report, the author is the internee of the previously mentioned program and the concerned organization is Bangladesh Bank (BB) which is the central bank in Bangladesh. This internship report has been prepared on the basis of my practical experience regarding the Implementation of Basel II. While the internship at BB the time I spent was particularly exciting and equally motivating. I have tried my best to utilize my practical experience and knowledge on banking sector and incorporate it with the theoretical course.

Acknowledgement

All praises to the Almighty Allah for giving me physical & mental strength, and blessings to successfully carrying out the Internship Report. I would like to convey my heartiest gratitude to my Internal Supervisor Ms. Syeda Mahrufa Basher for giving me the opportunity to conduct my internship report on "Implementation of Basel II :A Case Study On Comprehensive Risk Assessment & Capital Adequacy Through SRP" and for her continuous support in preparing this report. It would be difficult for me to prepare my internship report without her continuous and untiring support. I am also thankful to all the faculty members and teachers of the Institute of Business Administration (IBA), Dhaka University for equipping me with the knowledge and tools for the preparation of such a report. I would like to thank my external supervisor Mr. Ruhul Amin, Joint Director, BBTA, Bangladesh Bank. I am deeply indebted to Mr. Nazrul Islam, Deputy Director (Basel II implementation cell), Bangladesh Bank, his assistance and guidance made me able to utilize my capability completely in the internship period. I would like to express my sincere gratitude to all the knowledgeable deputy directors and Assistant Directors of Bangladesh Bank (Basel II implementation cell) who provided valuable information in preparing the report. Finally, my gratitude goes toward my parents and specially friends for their enthusiastic co-operation and constant encouragement. Without them the initiative of preparing this report may not have been a successful one.

Executive Summary

The report is intended to focus on the historical developments of risk management for banks in Bangladesh and the implications of newly developed risk management framework. Being the central bank of the country, Bangladesh Bank exercises the authority to provide all the guidelines and instructions to all other banks operating in this country. Bangladesh bank has been continually improving guidelines and regulations that can help banks to minimize their risk exposures. Yet, these steps often have been faced with numerous impediments to come into implementation. Looking into the chronological order of bank risk management policies, it has been found that Bank Company Ordinance, 1991 was followed in past which provided guidance to banks on risk management. Before 1996, risk management was related to only the regulatory capital. Components of risks were not addressed separately. Rather, one common risk was considered and regulatory capital was determined based on that. In 1996, Bangladesh Bank introduced Capital-to-liability approach to risk management which was a great event in the history of bank risk management in Bangladesh. Then gradually, new arrangements were adopted for assessing the capital adequacy of banks on the basis of Risk weighted Assets replacing the capital-to-liabilities approach. The revised policy on capital adequacy takes account of different degrees of credit risk and focuses both on-balance sheet and off-balance sheet transactions. According to the new approach, capital is categorized into two tiers: Tier 1; Core Capital comprising the highest quality capital elements and Tier 2 i.e., 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. In Bangladesh, Standardized Approach is used for calculating Risk Weighted Amount (RWA) against Credit Risk supported by External Credit Assessment Institutions (ECAIs). Standardized Rule Based Approach is used against Market Risk and Basic Indicator Approach is used against Operational Risk. There should be migration from Standardized Approach to IRB (Internal Rating based) Approach for assessing minimum capital requirement for credit risk within 2012. Despite the new array of flexible and time-relevant approaches; Basel II created a dilemma regarding the timeline of implementation. While countries remained on Basel I for a longer period of time before migrating to Basel II so this will be very much difficult for banks to fulfill every criteria of Basel II provided by Bangladesh Bank in a limited time framework. Smaller banks might not be able to hold up to the additional required capital expenditure implied by new Basel II approaches. In addition to that, Bangladesh still lacks the market readiness and necessary level of skill workforces to make proper uses of new Basel II disclosure and approaches. Sophisticated IT platform proved to be rather an important issue in sustaining the new spectrum of competition. Under the new accord, risk of assets of a bank client must be rated by external credit rating agencies, otherwise provision will be higher; at 125% instead of 50% which is for rated ones. This has created a new perspective in market competition and thus benefits quality loan portfolio and strong internal risk management.

Most of the forty-seven commercial and specialized banks have successfully maintained their capital adequacy (even if just barely). The central bank set a mandatory timeframe for the banks to maintain their capital against 8% of risk weighted assets by June 2010 and 9 percent by June 2011. This fell to the lowest level since 2004 in FY2010. However, if capital market faces further correction, CAR will decline, and additional provision would be taken in profit and loss account. This will depend on the loan book, own investments and margin lending of the banks. It is expected that, larger banks will be hedged in this regard, while weaker banks may feel the brunt. According to BB statistics, on December 31, 2010 two specialized banks and one private commercial bank had their capital in the negative, and one specialized and one private commercial bank's capital was below the required 8%.