4.

1 Introduction In 1988, the "Basel Committee on Banking Regulations and Supervisory Practices' first released a capital adequacy framework, now known as Basel I. This initiative set out the internationally accepted framework for measuring capital adequacy and a minimum ratio to be achieved by the banks. This norm was widely adopted in over 100 countries, and in Bangladesh, it was implemented in 1990s. Over the years the Basel I framework was found to have several limitations such as its simplified approach to credit risk, its narrow coverage confined to only credit and market risks, and non-recognition of credit risk mitigants. Moreover, the rapid advances in risk management, information technology, banking markets and products, and banks' internal processes, during the last decade, had far outpaced the simple approach of Basel I. Therefore, a need was felt to replace this Accord with a more risk-sensitive framework, which would address these shortcomings.

4.1.1: Experience of Bangladesh Bank in Basel Implementation: As the central bank, Bangladesh Bank possesses the authority to implement Basel Accords in Bangladesh. Its Banking Regulations and Policy Department (BRPD) is in charge of handling such issues. BRPD specifically holds responsibilities for issuance of prudential guidelines to ensure a sound and stable banking system.

4.1.2: Steps taken by BRPD in Implementing Basel: The Banking Regulations and Policy Department has taken its initiatives to implement appropriate format for banks to maintain regulatory capital for risk management. Some of the important steps are given below:

4.1.2.1: BRPD Circular No. 1 (08-01-1996): Introducing Basel I in Bangladesh: This circular introduced new arrangements for assessing the capital adequacy of banks replacing the capital-to-liabilities approach for assessing capital positions of banks. The revised policy on capital adequacy takes account of different degrees of credit risk and covers both on- balance sheet and off-balance sheet transactions. The following broad outlines are issued for compliance of banks: Definition of capital Capital, for supervisory purposes will be considered in two tiers. Tier 1 or Core capital: comprises the highest quality capital elements, Tier 2 or supplementary capital: represents other elements which fall short of some of the characteristics of core capital but which contribute to overall strength of a bank.

Minimum Capital Standards Each bank will maintain a ratio of capital to risk weighted assets of not less than 8 percent with at least 4 percent in core capital. The minimum capital requirements of Tk. 20 crore for locally incorporated banks and Tk. 10 crore for banks incorporated outside Bangladesh will remain unchanged. Risk-weighted Assets Balance sheet assets and off-balance sheet exposures are to be weighted according to broad categories of relative risk. There are five categories of risk weight- O, 10, 20, 50 and 100 percent. Off-balance sheet transactions are to be converted to balance sheet equivalents before being allocated a risk weight. Four categories of credit equivalents-100, 50, 20 and 0 percent will apply.

4.1.2.2: BRPD Circular No. 10 (24-11-2002): Change in Minimum Capital Standards: This is one of the master circulars which introduced new arrangements for assessing the capital adequacy of banks on the basis of Risk-weighted Assets replacing Capital-toLiabilities approach for assessing capital adequacy. In order to enable the banks to have all existing instructions on the subject at one place this Master Circular has been prepared by incorporating all instructions issued from time to time. Minimum Capital Standards Each bank will maintain a ratio of capital to risk weighted assets of not less than 9% with at least 4.5% in core capital and this requirement will have to be achieved by 30 June 2003. However, the minimum capital requirements of Tk. 40 crore for locally incorporated banks and an amount equivalent to USD 10 million for banks incorporated outside Bangladesh will remain unchanged until further instructions. Risk-weighted Assets Both balance sheet assets and off-balance sheet exposures are to be weighted according to their relative risk. Presently, there are 4(four) categories of risk weights - 0, 20, 50 and 100 percent.

4.1.2.3: BRPD Circular No. 17 (07-10-2003) Managing Core Risks in Banking: In this circular, Bangladesh Bank specified the core areas of risk that all banks need to address. These core risks are as follows: Credit Risks; Asset and Liability/Balance Sheet Risks; Foreign Exchange Risks; Internal Control and Compliance Risks; and

Money Laundering Risks.

Banks were advised to put in place an effective risk management system by December, 2003 based on the guidelines sent to them. These guidelines were flexible in the sense that banks can adopt and adapt them in line with the size and complexity of their business. 4.1.2.4: BRPD Circular No. 7 (14-05-2007) Change in Minimum Capital Standards: With a view to strengthening the capital base of banks and make them prepare for the implementation of Basel II Accord, Bangladesh Bank decided that henceforth banks will be required to maintain Capital to Risk-Weighted Assets Ratio 10% at the minimum with core capital not less than 5%. This requirement were requires to be achieved by December 31, 2007.

4.1.2.5: BRPD Circular No. 14 (30-12-2007) Implementation of New Capital Accord (Basel II) In this circular, BRPD Department provided an action plan that showed how Basel II would be implemented in Bangladesh.