Credit Risk
Credit risk is the risk of financial
loss to the Group if a customer or counterparty to a financial instrument fails
to meet its contractual obligations. Credit risk is monitored and managed
regularly. Bangladesh Bank's maximum exposure to credit risk in relation to
each class of recognized financial assets, is the carrying amount of those
assets as indicated in the statement of financial position. Bangladesh Bank's
exposure is to highly rated counterparties and its credit risk is very low,
with mitigates to credit risk including both the Bank's rigorous monitoring
activities and, in many cases, guarantees from the government.
Market risk is the probability of
experiencing losses due to changes in market prices – such as foreign exchange
rates, interest rates and equity prices – which will affect the Group’s income
or the value of its holdings of financial instruments. The objective of market
risk management is to manage and control market risk exposures within
acceptable parameters, while optimizing the return.
a)
Currency risk
The risk that the fair value or future
cash flows of a financial instrument will fluctuate because of changes in
foreign exchange rates. In Bangladesh Bank, foreign exchange reserve management
and investment functions are guided by an Investment Committee. Decision of the
Investment Committee and dealing practices approved by the Investment Committee
serve as operational guidelines for Bangladesh Bank's reserve management and
investments. The guidelines are directed towards managing different types of
risks, while earning a reasonable return. There is an approved benchmark for
investment in terms of currency composition, portfolio duration and proportion
of different assets within a band. Dealers/portfolio managers afford best to
comply with this benchmark and continually rebalance the investment portfolio
to follow the benchmark on daily/weekly basis as approved by the Investment
Committee. Foreign currency monetary assets and liabilities In thousand Tk.
Interest rate risk is the risk of loss
arising from changes in interest rates. The Group is exposed to interest rate
risk as a result of mismatches of interest rate re-pricing of assets and
liabilities. Since the primary objective of the Bank is to achieve and maintain
price stability, it determines at its own discretion the monetary policy that
it will implement and the monetary policy instruments that is going to use in
order to achieve and maintain price stability. Bank's interest sensitivity
position based on contractual re-pricing arrangements as on 30 June 2020 is
presented below. It includes the Bank's financial assets and liabilities at
carrying amounts, categorized by the earlier of contractual re-pricing of
maturity dates. The table below summaries all financial instruments in their
re-pricing period, which is equivalent to the remaining term of maturity:
Operational risk’ is the risk of direct
or indirect loss arising from a wide variety of causes associated with the
Group’s processes, personnel, technology and infrastructure, and from external
factors other than credit, market and liquidity risks, such as those arising
from human error, failure of internal processes and systems, legal and
regulatory requirements and generally accepted standards of corporate behavior.
Operational risks arise from all of the Group’s operations. Managing
operational risk is seen as an integral part of the day to day operations and
management which includes explicit consideration of both the opportunities and
the risks of all business activities. Operational risk management includes
Bank-wide corporate policies that describe the standard required for staff and
specific internal control systems designed for the various activities of the
Group. Compliance with corporate policies and departmental internal control
systems are managed by the management of the department and an active internal
audit function.