This document discusses stress testing conducted on Prime Bank Limited (PBL) in Bangladesh from 2009-2011. It analyzes various risks, including interest rate risk, exchange rate risk, equity price risk, liquidity risk, and credit risk. Credit risk, specifically the risk of a fall in the forced sale value of mortgaged collateral, posed the highest risk to PBL's capital adequacy ratio during this period. The stress testing assessed the potential impact of shocks to different risk factors and determined that PBL had sufficient capital to absorb minor and moderate shocks, but may have required additional capital to withstand cumulative shocks across multiple risk areas.

2. (Year 2009-2011)

3. Professor Dr. Mahmood Osman Imam
Course
Instructor
(F-503)
Department
of Finance
University of
Dhaka

4. Banking Sector of Bangladesh
Banks are allowed to lend up to
82% against deposits. But many
private banks lent up to 85% and
some lent more than 100%.
The banking industry in
Bangladesh has flourished over the
years and making double-digit
profit percentages.
Total size of the sector at
26.54% of GDP dominates the
financial system with its sustaining
growth and attractive returns to
shareholders.
Banks are allowed to invest up
to 10% of their total liabilities in
the capital market. But, in late
2010, the banks made most of its
investments in the capital market.

5. Banking Sector of Bangladesh
It has set a mandatory
timeframe for the banks to
maintain their capital against
9% of risk weighted assets by
June 2011.
It has designed a stress
testing framework for banks
and FIs to proactively manage
risks in line with Basel-II
framework
Bangladesh Bank is the
Central Bank of Bangladesh
and the Chief Regulatory
Authority in the sector.

6. Stress Testing
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.
It provides an indication how much Capital Adequacy Ratio
(CAR) might be needed to absorb losses if any large shocks occur.
It is mandatory for all banks and FIs to carry out stress testing on
half-yearly basis i.e. on June 30 and December 31 each year and
reporting the results to Bangladesh Bank.

7. Prime Bank Limited
CAR required 9%
and
maintained 12.49%
CAR increased from
previous year

8. Capital Details in PBL

9. Stress Testing in PBL
Risk Management Unit (RMU) of PBL has already prepared a stress testing
model in line with the Bangladesh Bank’s guideline which initially focused on
“Simple Sensitivity and Scenario Analysis” on the following five risk factors:
 Interest rate;
 Forced sale value of collateral;
 Non-performing loans (NPLs);
 Share prices; and
 Foreign exchange rate.
The 1st phase of stress testing was based on the financial performance of the
bank as of June 30, 2010.
The 2nd phase of stress testing was based on the financial performance as on
December 31, 2010 .
PBL claims that it has adequate capital to absorb minor, moderate and major
level of shocks. In case of cumulative shocks, some additional capital may be
required.
I have done stress testing on PBL based on year-end data of 2009, 2010
&2011. I have also used some assumptions in case of unavailable data.

10. Interest Rate Risk Calculation

11. Interest Rate Risk Calculation
Current market rate PV (rate, nper, pmt, [fv] )
DURATION (settlement, maturity, coupon,
yield, frequency)
Settlement date = Present date
Maturity date = Settlement Date + Repricing Period
Assumption
Excel File

12. Interest Rate Risk Calculation
Given in Annual Report
Market Value weighted YTM and Duration

13. Interest Rate Risk Calculation
Revised Regulatory Capital = Regulatory
Capital – Tax adjusted loss
Revised RWA = RWA – Tax adjusted loss
Revised CAR (%) = (RRC/RRWA)

14. Interest Rate Risk Calculation

15. Exchange Rate Risk Calculation

16. Exchange Rate Risk Calculation

17. Equity Price Risk Calculation

18. Equity Price Risk Calculation

19. Liquidity Risk Calculation
Total Liabilities – Borrowings of more than one year
All the deposits including the term deposits are
assumed to be liquid

20. Credit Risk Calculation 1 : Increase in NPLs
Total NPLs * % increase in NPLs

21. Credit Risk Calculation 2 : Shift in NPLs Category
Multiply
(SMA*%Shift*Provision Substandard + Substandard * (1-
%Shift)*Provision Substandard) + (Substandard * %Shift*
Provision doubtful + Doubtful * (1- %Shift)*Provision doubtful)
+ Doubtful *% Shift*Provision Loss + Loss * Provision Loss

22. Credit Risk Calculation 2: Shift in NPLs Category

23. Credit Risk Calculation 3 : Fall in FSV of
Mortgaged Collateral
Multiply

24. Credit Risk Calculation 4 : Increase in
NPL in Particular 1 or 2 sectors

25. Credit Risk Calculation 5 : Increase in NPL
for default of top 10 large borrowers

26. Credit Risk Calculation 6 : Increase in NPL up to that
position in which whole capital will be wiped out

27. Cumulative Credit Risk Calculation

28. Calculation of All Risk Cumulative

29. Comparison among Individual Risks
Reason for the highest
risk Each Year

30. Findings
And The highest risk is caused by Fall
in FSV of Mortgaged Collateral