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Risk Management in Financial Institutions with special reference to Bangladesh

Prepared for:|

Professor Dr. Shah Md. Ahsan Habib
Financial Market and Institution
East West University

Prepared By:|

Tamanna Mucsid
2010-2-90-007
East West University

Executive Summary

Increase of global markets, technological advancements, innovative new financial products and changing regulatory environments has made risk management a critical task for financial institutions today as they simultaneously mitigate and create risks. It has, therefore, become increasingly important to identify measure, monitor and manage a financial institutions’ exposure to product-market and capital-market risks. In capital-market a firm transacts with owners and lenders and is exposed to interest rate, liquidity, currency, settlement and basis risks. In the product market it transacts with clients and suppliers. This may result in credit, strategic, regulatory, operating, commodity, human resources, and legal and product risks. Essentially, risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance. Inadequate risk management can result in severe consequences for companies as well as individuals. In the past two decades, the banking industry has evolved from a financial intermediation between depositors and borrowers, to a “one-stop” centre for a range of financial services like insurance, investments and mutual funds. The advancement of information and communicative technology (ICT) is given credit for the evolution of banking services, in particular, online banking. The development in ICT has not only provided vast banking opportunities previously beyond reach, but also heightens the competition and risks faced by banks in the financial system. Risk is the deviation of the expected outcome. In one way, risk can be classified as business risk and financial risk. Business risk arises from the nature of a firm’s business which relates to factors affecting the product market. Financial risk arises from possible losses in financial markets due to movements in financial variables. It is usually associated with leverage with the risk that obligations and liabilities cannot be met with current assets. .

Content| Page No.|
Introduction| 1|
Theoretical aspects of risk management of financial institutions| 2| Risk involved in financial institutions of Bangladesh| 4| Impacts of Risk Management Implementation in Bangladesh| 9| Conclusion| 10|

References |

Introduction
To cope with the international best practices and to make the bank’s capital more risk sensitive as well as more shock resilient, ‘Guidelines on Risk Based Capital Adequacy (RBCA) for Banks’ (Revised regulatory capital framework in line with Basel II) have been introduced from January 01, 2009 parallel to existing BRPD Circular No. 10, dated November 25, 2002. At the end of parallel run period, Basel II regime has been started and the guidelines on RBCA has come fully into force from January 01, 2010 with its subsequent supplements/revisions. Instructions regarding Minimum Capital Requirement (MCR), Adequate Capital, and Disclosure requirement as stated in these guidelines have to be followed by all scheduled banks for the purpose of statutory compliance. With a view to ensuring transition to Basel II in a non-disruptive manner, Bangladesh Bank (BB) adopted a consultative approach. In this process, a high-level National Steering Committee (NSC) headed by a Deputy Governor of BB was formed comprising central bank and commercial banks’ officials for...
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