1.

0 Stress Testing
Extreme market movements or crises in the past reveal the inadequacy of managing risks based only on normal business conditions and historical trends. In particular, crises in the 1990s (e.g. Asian Crisis) and current financial turmoil have augmented the importance of better understanding of potential vulnerabilities in the financial system and the measures to assess these vulnerabilities for both the regulators and the bankers. The regulators and managers of the financial system around the globe have developed a number of quantitative techniques to assess the potential risks to the individual institutions as well as financial system. A range of quantitative techniques that could serve the purpose is widely known as stress testing. IMF and Basel Committee on banking supervision have also suggested for conducting stress tests on the financial sector. Stress testing is a simulation technique, which are used to determine the reactions of different financial institutions under a set of exceptional, but plausible assumptions through a series of battery of tests. At institutional level, stress testing techniques provide a way to quantify the impact of changes in a number of risk factors on the assets and liabilities portfolio of the institution. For instance, a portfolio stress test makes a rough estimate of the value of portfolio using a set of exceptional but plausible events in abnormal markets. However, one of the limitations of this technique is that stress tests do not account for the probability of occurrence of these exceptional events. For this purpose, other techniques, for example VAR (value at risks) models etc, are used to supplement the stress tests. These tests help in managing risk within a financial institution to ensure optimum allocation of capital across its risk profile. At the system level, stress tests are primarily designed to quantify the impact of possible changes in economic environment on the financial system. The system level stress tests also complement the institutional level stress testing by providing information about the sensitivity of the overall financial system to a number of risk factors. These tests help the regulators to identify structural vulnerabilities and the overall risk exposure that could cause disruption of financial markets. Its prominence is on potential externalities and market failures.

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1.1 Techniques for Stress Testing:

a) Simple Sensitivity Analysis (single factor tests): It measures the change in the value of portfolio for shocks of various degrees to different independent risk factors while the underlying relationships among the risk factors are not considered. For example, the shock might be the adverse movement of interest rate by 100 basis points and 200 basis points. Its impact will be measured only on the dependent variable i.e. capital in this case, while the impact of this change in interest rate on NPLs or exchange rate or any other risk factor is not considered. b) Scenario Analysis: It encompasses the situation where a change in one risk factor affects a number of other risk factors or there is a simultaneous move in a group of risk factors. Scenarios can be designed to encompass both movements in a group of risk factors and the changes in the underlying relationships between these variables (for example correlations and volatilities). Stress testing can be based on the historical scenarios, a backward looking approach, or the hypothetical scenario, a forwardlooking approach. c) Extreme Value/ Maximum Shock Scenario: It measures the change in the risk factor in the worstcase scenario, i.e. the level of shock which entirely wipes out the capital.

1.2 Framework for Regular Stress Testing:

The stresstesting framework involves the scope of the risks covered and the process/procedure to carry out the stress test. This framework should be flexible enough to adopt advanced models for stress testing. It involves: A well constituted organizational structure defining clearly the roles and responsibilities of the persons involved in the exercise. Preferably, it should be the part of the risk management functions of the bank/FI. The persons involved should be independent from those who are actually involved in the risk taking and should directly report the results to the senior management. Defining the coverage and identifying the data required and available. Identifying, analyzing and proper recording of the assumptions used for stress testing Calibrating the scenarios or shocks applied to the data and interpreting the results.
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An effective management information system that ensures flow of information to the senior management to take proper measures to avoid certain extreme conditions. Setting the specific trigger points to meet the benchmarks/standards set by Bangladesh Bank Ensuring a mechanism for an ongoing review of the results of the stress test exercise and reflecting in the policies and limits set by management and board of directors. Taking this stress test as a starting point and developing inhouse stress test model to assess the bank/FIs specific risks

1.3 Scope of Stress Test:

As a starting point the scope of the stress test is limited to simple sensitivity analysis. Five different risk factors namely; interest rate, forced sale value of collateral, nonperforming loans (NPLs), stock prices and foreign exchange rate have been identified and used for the stress testing. Moreover, the liquidity position of the institutions has also been stressed separately. Though the decision of creating different scenarios for stress testing is a difficult one, however, to start with, certain levels of shocks to the individual risk components have been specified considering the historical as well as hypothetical movement in the risk factors. Stress test shall be carried out assuming three different hypothetical scenarios: Minor Level Shocks: These represent small shocks to the risk factors. The level for different risk factors can, however, vary. Moderate Level Shocks: It envisages medium level of shocks and the level is defined in each risk factor separately. Major Level Shocks: It involves big shocks to all the risk factors and is also defined separately for each risk factor. Assumptions behind each Scenario: The stress test at this stage is only a single factor sensitivity analysis. Each of the five risk factors has been given shocks of three different levels. The magnitude of shock has been defined separately for each risk factor for all the three levels of shocks

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2.0 LankaBangla Finance Limited (LBFL)

LankaBangla Finance Limited, a joint-venture listed financial institution established with multinational collaboration, started its journey in 1997. The institutional shareholding structure and corporate culture have enabled LankaBangla to be one of the most diversified financial service providing institutions of the country. Under the right direction of an enlightened board of directors, and the policy executed by the resourceful management, the company has emerged as one of the leading financial institutions in the country. Having strong presence and recognition in almost all financial product and service lines in the industry, LankaBangla is the lone financial institution which operates masterCard & VISA card and provides third party card processing services to different banks. The companys one of the subsidiaries, LankaBangla Securities Limited, is involved in dealing with securities as broker in capital market at both DSE & CSE and secured the position as business leader in this arena. The other subsidiary, LankaBangla Investments Limited is a well staffed merchant bank with a promising future. The company practices participatory management and adheres to industry best practices in all endeavors. Increasing stakeholders value is a natural driving force for the people at LankaBangla; nevertheless maintaining quality of service is at the core of business which earned its unparallel customer loyalty. Everything is done in compliance of all norms and regulatory requirements.

2.1 Core Values

Integrity: We are committed to conduct that reflects the highest standard of integrity in everything we do. Teamwork: It is the essence of our ability to succeed as a trusted and preferred provider of financial solutions to our clients. Our overriding loyalty is to the good of the whole organization. We learn from each other and share our skills and resources across organizational boundaries for our stakeholders benefit and our own. Respect: We respect every individual. We draw strength from equal opportunity at the same time supporting personal growth and development. We value and we all benefit from the entrepreneurial spirit of each individual. Professionalism: We are committed to the highest standards of professionalism, we pursue innovation, we continually quest for quality at each level, we are open to new ideas and we act decisively and consistently. We are determined to deliver outstanding quality so that our relationships with our clients will be long-lasting.

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Value creation: We offer what creates and maximizes value to the stakeholders, the society and the environment together.

2.2 Vision
To be the nations most sought after facilitator in creating, nurturing and maximizing value to the stakeholders, the society, and the environment, thereby, GROWING TOGETHER

2.3 Mission
To lead by example through a committed team of nurtured resources fostering ownership that motivates thriving towards excellence in knowledge, systems, structures, processes and procedures, thereby empowering the organization at every level to deliver the highest quality of product, customer care, and stakeholder value keeping environmental safety a priority.

2.4 Goals
To be the most preferred financial services provider To maximize the value of being our customer, shareholder or employee To build and retain a team of highly skilled human resources through talent hunting, nurturing, training, developing and motivating through rewarding to deliver the highest level of customer service To build state-of-the-art technological framework for ensuring faster, accurate, timely and risk calculated operations capable of coping with ever increasing financial and operational complexities To standardize policies, rules, regulations and operational procedures guiding seamless and efficient delivery of service at every level To develop and maintain an organizational culture committed towards ownership thriving for continuous innovation and improvement in our way of doing business to meet and exceed stakeholders ever growing expectations To establish strong regional presence through expanding our product and service delivery networks covering wider clienteles
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2.5 Products & Services:

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2.6 Milestones of LankaBangla:

Incorporation of the Company 5th November, 1996 Registration of First Subsidiary (LankaBangla Securities Limited) 3rd July, 1997 Licensed as Financial Institution by Bangladesh Bank 30th October, 1997 Issuance of First Credit Card 16th August, 1998 Listing on Dhaka Stock Exchange 17th October, 2006 Trading of share in Stock Exchanges 1st November, 2006 Registration of Second Subsidiary (Lanka Bangla Asset Management Company Limited) 16th July, 2007 First disbursement of Mortgage Loan 18th February, 2008 Licensed as Primary Dealer 23rd November, 2009 Participation in the 1st Auction of Govt. Securities as Primary Dealer 1st December, 2009 Approval of Right Issue by SEC 31st January, 2012 Signing of First Lease Agreement 30th March, 1998 Launching of MasterCard 5th September, 2005 Listing on Chittagong Stock Exchange 31st October, 2006 Commercial Launching of Chittagong Branch 19th February, 2007 First disbursement of Domestic Factoring 11th December, 2007

Commencement of Operation of Sylhet Branch 27th April, 2009 Issuance of First VISA card 24th November, 2009 Registration of Third Subsidiary (LankaBangla Investments Limited) 29th March, 2010 Signing of Agreement with Leads Corporation for Bank Ultimus (CBS) 10th January, 2012

Commercial Launching of Khatungonj Branch, Chittagong 8th March, 2012

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3.0 Methodology and Calibration of Shocks :

3.1 Interest Rate Risk:
Interest rate risk is the potential that the value of the onbalance sheet and the off-balance sheet positions of the bank/DFI would be negatively affected with the change in the interest rates. The vulnerability of an institution towards the adverse movements of the interest rate can be gauged by using duration GAP analysis. Following steps were used in carrying out the interest rate stress tests: First I have estimated the market value of all onbalance sheet rate sensitive assets and liabilities of the Lanka Bangla Finance Limited (LBFL) to arrive at market value of equity Then I have calculated the durations of each class of asset and the liability of the onbalance sheet portfolio Arrive at the aggregate weighted average duration of assets and liabilities Then I have calculated the duration GAP by subtracting aggregate duration of liabilities from that of assets. Then the changes in the economic value of equity due to change in interest rates on onbalance sheet positions along the three interest rate changes has been estimated. Surplus/(deficit) on offbalance sheet items under the assumption of three different interest rate changes i.e. 1%, 2%, and 3% is calculated. Then the impact of the net change in the market value of equity on the capital adequacy ratio (CAR) has been estimated. Interest Rate Shock
Magnitude of Shock Change in MVE(onbalance sheet) Net Change in MVE(onbalance sheet & offbalance sheet) Tax Rate Tax adjusted loss Total Regulatory capital Revised Capital Risk weighted assets Revised risk weighted assets CAR Revised CAR 0.01 -243254846.1 -243254846.1 0.425 -139871536.5 1918100000 1778228463 18593300000 18453428463 10.32% 9.64% 0.02 -486509692.2 -486509692.2 0.425 -279743073 1918100000 1638356927 18593300000 18313556927 10.32% 8.95% 0.03 -729764538.4 -729764538.4 0.425 -419614609.6 1918100000 1498485390 18593300000 18173685390 10.32% 8.25%

Change in CAR (% age points)

-0.68%

-1.37%

-2.07%

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Market value of the asset or liability has been assessed by calculating its present value discounted at the prevailing interest rate. The outstanding balances of the assets and Liabilities have been taken along with their remaining maturity period. Because in the mismatch in duration of asset and liability changes in interest rate adversely affect the market value of equity as well as capital adequacy. The CAR of Lanka Bangla Finance Limited (LBFL) has also declined because of interest rate shock.

3.2 Credit Risk:

The bank is exposed to credit risk in its lending operation. Credit risk is the risk of loss that may occur from the failure of any counterparty to make required payments in accordance with agreed terms and conditions. Management of credit risk in the bank is governed by a Credit Policy Manual which contains the principles for identifying, measuring, approving and managing credit risk. These policies are established by the Board of Directors and are designed to meet the organizational requirements that exist today, and to provide flexibility for future. These policies represent the minimum standards for credit extension and are not a substitute for experience and good management. The bank has adopted a framework for credit risk management, setting up of an independent Credit Risk Management Team to establish better control and check, to reduce conflict of interest in the business units. The stress test for credit risk assesses the impact of increase in the level of nonperforming loans of the bank/FI. This involves six types of shocks: 1. Increase in the NPLs and the respective provisioning: The three scenarios shall explain the impact of 2%, 5% and 10% of the total performing loans directly downgraded to bad/loss category having 100% provisioning requirement. 1. Increase in NPLs:
Magnitude of Shock Total Loan Total Performing Loan Total NPLs NPLs to Loans (%) Increase in NPLs Increase in Provisions Tax Rate Tax adjusted provision 0.02 14217180000 13291570000 925610000 0.065105035 265831400 265831400 0.425 152853055 0.05 14217180000 13291570000 925610000 0.065105035 664578500 664578500 0.425 382132637.5 0.1 14217180000 13291570000 925610000 0.065105035 1329157000 1329157000 0.425 764265275

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Total eligible capital Revised Capital Risk weighted assets Revised risk weighted assets CAR Revised CAR change in CAR (% age points) Revised NPLs Revised NPLs to Loans (%)

1918100000 1765246945 18593300000 18440446945 10.32% 9.57% -0.74% 1191441400 8.38%

1918100000 1535967363 18593300000 18211167363 10.32% 8.43% -1.88% 1590188500 11.18%

1918100000 1153834725 18593300000 17829034725 10.32% 6.47% -3.84% 2254767000 15.86%

The effect of increase in NPL in 2009, 2010 & 2011 by 2%, 5%, and 10% results in increase in the provision by the same amount and reduced the capital base and risk weighted asset and thus the CAR. 2. Negative shift in the NPLs categories and hence the increase in respective provisioning: The three scenarios shall explain the impact of 5%, 10% and 15% downward shift in the NPLs categories.
2. Shift in NPLs categories: Magnitude of Shock Provision Requirement Revised Provision Requirement Increase in Provisions Tax Rate Tax adjusted provision Total eligible capital Revised Capital Risk weighted assets Revised risk weighted assets CAR Revised CAR Change in CAR (% age points) 5% 536575175.9 541364447 4789271 0 541364447.3 1918100000 1376735553 18593300000 18051935553 10.32% 7.63% -2.69% 10% 536575175.9 546153719 9578543 0 546153718.8 1918100000 1371946281 18593300000 18047146281 10.32% 7.60% -2.71% 15% 536575175.9 541364447 550942990 0 541364447.3 1918100000 1376735553 18593300000 18051935553 10.32% 7.63% -2.69%

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Here, for the first level of shock 5%, of the SMA shall be categorized under substandard, 50% of the substandard shall be categorized under doubtful and 50% of the doubtful shall be added to the bad/loss category. Then the provision has been calculated. The capital base and RWA has been then reduced by the amount of increase in provision which lowers its CAR, but the reduction is negligible. CARs in major shock were higher than the required CAR level.

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Lets see what happens when there is a shift of 5%, 10% and 15% in the NPLs categories: Original Composition Loan Portfolio
amount rate of provision Provision Required 9,326,386,911 1% 93263869.11 556,109,831 5% 27805491.55 57,643,951 20% 11528790.2 25,997,318 50% 12998659 390,978,366 100% 390978366 536575175.9

Loans & leases (Excluding SMA) Special mention account (SMA) Sub-standard Doubtful Bad / Loss total Provision Requirement

Composition Loan Portfolio (5% Shift)

amount rate of provision Provision Required 8,860,067,565 1% 88600675.65 994,623,685 5% 49731184.25 82,567,245 20% 16513449 27,579,650 50% 13789824.83 372,729,314 100% 372729313.6 541364447.3

Loans & leases (Excluding SMA) Special meni on account (SMA) Sub-standard Doubtful Bad / Loss total Provision Requirement

Composition Loan Portfolio (10% Shift)

amount rate of provision Provision Required 8,393,748,220 1% 83937482.2 1,433,137,539 5% 71656876.95 107,490,539 20% 21498107.8 29,161,981 50% 14580990.65 354,480,261 100% 354480261.2 546153718.8

Loans & leases (Excluding SMA) Special meni on account (SMA) Sub-standard Doubtful Bad / Loss total Provision Requirement

Composition Loan Portfolio (15% Shift)

Loans & leases (Excluding SMA) Special meni on account (SMA) Sub-standard Doubtful Bad / Loss total Provision Requirement amount rate of provision Provision Required 7,927,428,874 1% 79274288.74 1,871,651,393 5% 93582569.65 132,413,833 20% 26482766.6

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11

30,744,313 336,231,209

50% 100%

15372156.48 336231208.8 550942990.3

3. Increase of the NPLs in particular 1 or 2 sector and the respective provisioning: The three scenarios shall explain the impact of 5%, 10% and 15% performing loans of particular 1 or 2 sectors directly downgraded to bad/loss category having 100% provisioning requirement.
3. Increase of NPLs in particular 1 or 2 sectors:
Magnitude of Shock Total Loan in Garments & Textile Sectors Increase in NPLS under B/L category Increase in Provisions Total eligible capital Revised Capital Risk weighted assets Revised risk weighted assets CAR Revised CAR Change in CAR (% age points) 5% 722,770,000 36,138,500 36,138,500 10.0% 722,770,000 72,277,000 72,277,000 1,918,100,000 1,845,823,000 15% 722,770,000 108,415,500 108,415,500 1,918,100,000 1,809,684,500

1918100000
1,881,961,500

18593300000
18,557,161,500 10.32% 10.14% -0.17%

18593300000
18,521,023,000 10.32% 9.97% -0.35%

18593300000
18,484,884,500 10.32% 9.79% -0.53%

Lanka Bangla Finance Limited has given 17.35% of its loan to large and medium scale industry. Increase in NPLs has increased the provision by the same amount and thus decrease the Capital base and RWA. 4. Extreme Events: In which due to increase in the certain percentage of NPLs, the whole capital position of a bank will be wiped out to offset the increased amount of provision due to cover respective loan losses.

4. Fall in the value of eligible securities

Magnitude of Shock Weighted Value of Eligible Securities Revised Value of Eligible Securities fall in the value of Eligible Securities Provision Requirement Revised Provision Requirement Increase in Provisions Tax Rate Tax adjusted provision Total eligible capital Revised Capital 10% 3107134913 2796421422 310713491 310713491 0 -310713491.3 0.425 0 1918100000 1918100000 25% 3107134913 2330351185 776783728 776783728 0 -776783728.3 0.425 0 1918100000 1918100000 50% 3107134913 1553567457 1553567457 1553567457 0 0 0.425 0 1918100000 1918100000

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Risk weighted assets Revised risk weighted assets CAR Revised CAR Change in CAR (% age points)

18593300000 18593300000 10.32% 10.32% 0.00%

18593300000 18593300000 10.32% 10.32% 0.00%

1.8593E+10 1.8593E+10 10.32% 10.32% 0.00%

3.3 Equity Price Risk:

The stress test for equity price risk assesses the impact of the fall in the stock market index. Here we have taken the market value of the portfolio of the bank. Appropriate shocks have been absorbed to the respective securities if the current market value of all the on balance sheet and off balance sheet securities listed on the stock exchanges including shares, NIT units, mutual funds etc falls at the rate of 10%, 20% and 50% respectively. The impact of 5resultant loss has been calibrated in the CAR. Equity price of the listed securities is very volatile in our country. The adverse and sudden changes in share price are very much detrimental for financial institutions especially for banking corporations. At the time of calculating the equity price risk, equity price was taken at balance sheet date from cost price or market value which one is lower. The cost price was below the market value. So the cost price was taken to measure the shock. The changes in market price of shares reduce the CAR but the CAR is still in a good position. Eligible Capital
Stock Market Investment Tax rate Adverse Movement Net Exposure Fall in Stock Prices Tax rate Tax adjusted loss Loss as % of capital Revised Capital Risk weighted assets Revised risk weighted assets CAR Revised CAR Change in CAR (% age points)

1,918,100,000.00
593,701,543.00 42.50% 10% 593701543 59370154 42.50% 34137839 1.780% 1883962161 18593300000 18559162161 10.32% 10.15% -0.16% 25% 593701543 148425386 42.50% 85344597 4.449% 1832755403 1.8593E+10 1.8508E+10 10.32% 9.90% -0.41% 50% 593701543 296850772 42.50% 170689194 8.899% 1747410806 1.8593E+10 1.8423E+10 10.32% 9.49% -0.83%

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3.4 Liquidity Risk:

The stress test for liquidity risk evaluates the resilience of the banks towards the fall in liquid liabilities. The ratio liquid assets to liquid liabilities has been calculated before and after the application of shocks by dividing the liquid assets with liquid liabilities. Liquid assets are the assets that are easily turned into cash without the threat of loss. They include cash, balances with Bangladesh Bank and balances with banks, call money lending, lending under repo and investment in government securities. Liquid liabilities include the deposits and the borrowings. Appropriate shocks have been absorbed to the liquid liabilities if the current liquidity position falls at the rate of 5%, 7% and 10% respectively. The ratio of liquid assets to liquid liabilities has been recalculated under each scenario.
Not more than 1 month term 3,797,397,833 105,000 3,797,292,833 -100.00% -3797292833 -1780037916 1-3 months term 3,952,268,974 962,636,179 2,989,632,795 -75.64% -6786925628 -6446925628 3-12 months term 2,943,895,789 3,152,170,360 208,274,571 7.07% -6578651057 -6238651057 1-5 years term 3,515,671,845 1,152,298,197 2,363,373,648 -67.22% -8942024705 above 5-years term 830,565,194 5,738,222,506 4,907,657,312 590.88% -4034367393

Particulars
TOTAL OUTFLOWS (A) TOTAL INFLOWS (B) MISMATCH MISMATCH (%) cumulative mismatch F. CUMULATIVE COUNTER BALANCING CAPACITY (AFTER MISMATCH)

minor 5% gap during 1-90 day time bucket cumulative gap upto 1 year 1st line of defence 2nd line of defence

moderate major 7% 10% -88.42% -88.75% -89.23% -63.59% -64.40% -65.60%

680,000,000 8,386,274,584

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shock of 5% TOTAL OUTFLOWS (A) TOTAL INFLOWS (B) MISMATCH MISMATCH (%) cumulative mismatch

cumulative counter balancing ability

shock of 7% TOTAL OUTFLOWS (A) TOTAL INFLOWS (B) MISMATCH MISMATCH (%) cumulative mismatch

3995011282 99750 -3994911532 -100.00% -3994911532 -3654911532

3901850315 914509620.1 -2987340695 -76.56% -6982252226 -6642252226

2972484592 3042693651 70209059.15 2.36% -6912043167 -6572043167

3381416512 1252291805 -2129124707 -62.97% -9041167875

789036934.3 5508926291 4719889356 598.18% -4321278518

cumulative counter balancing ability

4074056661 97650 -4073959011 -100.00% -4073959011 -3733959011

3881682851 895258996.5 -2986423855 -76.94% -7060382866 -6720382866

2983920113 2998902967 14982854.41 0.50% -7045400011 -6705400011

3327714379 1292289248 -2035425131 -61.17% -9080825142

772425630.4 5417207804 4644782174 601.32% -4436042968

shock of 10% TOTAL OUTFLOWS (A) TOTAL INFLOWS (B) MISMATCH MISMATCH (%) cumulative mismatch

cumulative counter balancing ability

4192624730 94500 -4192530230 -100.00% -4192530230 -3852530230

3851431656 866383061.1 -2985048594 -77.50% -7177578825 -6837578825

3001073395 2933216942 -67856452.7 -2.26% -7245435278 -6905435278

3247161180 1352285413 -1894875767 -58.35% -9140311044

747508674.6 5279630075 4532121401 606.30% -4608189644

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3.5 Insolvency Ratio :

Insolvency Ratio depicts the situation or scenario where there is a risk for the firm to be wiped out by its capital. Under this ratio I have tried to show what would be the situation in the capital being wiped out by change in NPL. Later I have shown the impact over the regulatory capital when the NPL fluctuates.
Infection Ratio Total NPLs Total Loan Total eligible capital Infection Ratio Critical Infection Ratio Insolvency Ratio 925610000 14217180000 1918100000 6.51% 20.00% 32.55%

Combined Shocks
Magnitude of Shock Increase of NPL after CR-1 Increase of NPL after CR-2 Increase of NPL after CR-4 Revised Regulatory Capital after CR-1 Revised Regulatory Capital after CR-2 Revised Regulatory Capital after CR-4 Increase of NPL Revised NPL Revised Regulatory Capital Total of NPL & Regulatory Capital Revised Infection Ratio (Revised NPL to Loans) Revised Critical Infection Ratio Revised Insolvency Ratio Minor Moderate Major

265831400 27805492
36138500 1765246945 1376735553 1881961500 109925131 1035535131 1674647999 2710183130 7.28% 19.06% 38.21%

664578500 55610983
72277000 1535967363 1371946281 1845823000 264155494 1189765494 1584578881 2774344376 8.37% 19.51% 42.88%

1329157000 83416475
108415500 1153834725 1376735553 1809684500 506996325 1432606325 1446751593 2879357917 10.08% 20.25% 49.75%

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3.6 WAR & WIR Matrix

The following tables describe the WAR & WIR matrix showing the risk shocks under different types of risky factors like interest rate shocks, credit risk shocks, equity risk shocks etc.
Test-I : WAR MATRIX Risk Shocks in Stress Testing Risk Factors Weight 1. Interest Risk Increase in Interest Rate 2. Credit Risk increase in NPLs Downward shift in all Categories Fall in the VES Increase in NPLs under B/L category in 2 sectors 3. Equity price Risk Fall in Stock Prices 4. Liquidity Shock VWAR 10% Minor Zone 50% 9.64% 0 8.95% Score Moderate Zone 30% 0 Score Major Zone 20% 8.25% 0 Score 100% 0 HWAR

60% 10% 10% 9.57% 7.63%

12 0 0 8.43% 7.60%

0 0 0 6.47% 7.63%

0 0 0

6 0 0

5% 15%

0.00% 10.14%

0 12

0.00% 9.97%

0 0

0.00% 9.79%

0 0

0 6

10%

10.15%

9.90%

9.49%

20% 40%

1-0-0 28

20

1-0-0 0

1-0-0 0

20 0

Test-II : WIR MATRIX Risk Shocks in Stress Testing Risk Factors Weight 1. Credit Risk shocks Increase in NPL Minor Zone 50% 38.21% Moderate Zone 30% 42.88% Major Zone 20% 49.75% 0.00% WIR

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Here is the summary of the risks providing under three situation: minor, moderate and major -

DIFFERENT RISK (at a glance)

Risk Factors Interest risk Credit risk Increase in NPLs Downward shift in all categories Increase in NPLs under B/L category in 2 sectors Equity Price Risk Liquidity risk 9.57% 7.63% 10.14% 8.43% 7.60% 9.97% 6.47% 7.63% 9.79% Minor 9.64% Moderate 8.95% Major 8.25%

10.15% 1-0-1 1-0-1

9.90%

9.49% 1-0-1

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WAR MATRIX: Interest risk Credit risk Increase in NPLs Downward shift in all categories Increase in NPLs under B/L category in 2 sectors Equity Price Risk Liquidity risk

MINOR MODERATE MAJOR CAR SCORE CAR SCORE CAR SCORE 9.64% 0 8.95% 0 8.25% 0 9.57% 7.63% 10.14% 10.15% 1-0-1 0 0 80 80 8.43% 7.60% 9.97% 9.90% 0 0 0 0 6.47% 7.63% 9.79% 9.49% 0 0 0 0 80

80 1-0-1

80 1-0-1

WEIGHTED AVERAGE RESILIENCE Interest risk Credit risk Increase in NPLs Downward shift in all categories Increase in NPLs under B/L category in 2 sectors Equity Price Risk Liquidity risk TOTAL

SCORE WEIGHTED SCORE WEIGHTS MINOR MODERATE MAJOR MINOR MODERATE MAJOR 0.1 0 0 0 0 0 0 0.171429 0.171429 0.257143 0.1 0.2 0 0 80 80 80 0 0 0 0 80 0 0 0 0 80 0 0 20.57143 8 16 36.57143 0 0 0 0 16 16 0 0 0 0 16 16

WEIGHTED AVERAGE RESILIENCE

26.28571

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In the above mentioned tables I have shown the Resilience of the Lanka Bangla Finance Limited (LBFL). This is calculated by multiplying the scores with the weights of that particular risk class. The weighted average resilience here is 26.28571.

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4.0 Findings & Conclusion

It is of vital importance to understand and appreciate the risks the NBFI industry is exposed to so that soundness and sustainability of the industry can be ensured. Earlier, Bangladesh Bank has issued core risk management guidelines so that NBFIs can develop a sound risk management practice while carrying out their daytoday activities. Simple stress testing results of Lanka Bangla Finance Ltd. reveals that the its overall CAR would stay above the required level in most of shocks. In some case the NBFI can maintain the capital adequacy in minor and moderate shocks, but in major shocks the firm is exposed to risk to losing capital adequacy according to the required CAR. In testing cumulative shocks the firm only has the capacity to absorb minor shocks, the CAR would fall below required level if moderate and major shock takes place. Stress tests cover a range of methodologies. Complexity can vary, ranging from simple sensitivity tests to complex stress tests, which aim to assess the impact of a severe macroeconomic stress event on measures like earnings and economic capital. Most risk management models, including stress tests, use historical statistical relationships to assess risk. They assume that risk is driven by a known and constant statistical process and historical relationships constitute a good basis for forecasting the development of future risks. The recent financial turmoil has revealed serious flaws with relying solely on such an approach.

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Bibliography
Bangladesh Bank, Guidelines on Stress Testing, Department of Offsite Supervision Annual Report (2009, 2010, 2011), LankaBangla Finance Limited Official website of LankaBangla Finance Limited Website of Bangladesh Bank

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