The central bank has ordered all banks and other financial institutions to undergo stress tests to check whether they are strong enough to hold up in the face of more difficulties and risks.
A Bangladesh Bank (BB) circular issued yesterday has asked the banks to send their respective stress test reports twice a year. The BB must get the reports within 45 days after June 30 and December 31.
Earlier, the BB used to carry out the stress tests and has shifted the responsibility to the banks. It is the central bank's new measure for risk analysis of the banks, which was introduced last year.
The central bank has also sent a guideline to the banks in this regard.
The BB has taken the initiative as many countries adopted it in the wake of the recession that rattled the global economy, particularly the financial sector.
The idea behind a bank's stress test is to check out its financial strength and see how or whether it will stay afloat in difficult times. Stress test is to measure what will happen with a bank if the economy worsens and bank difficulties increase.
According to the guidelines, the BB puts stress on simple sensitivity and scenario analysis, which provides ways to assess risks in credit, interest rate, exchange rate, share market and liquidity.
The circular said: "You are aware that measuring, monitoring and controlling various types of risk is vital for ensuring the health of the financial institutions as well as of the whole financial system.”
Financial institutions across the world are increasingly employing sophisticated techniques for managing risks, said the circular.
“Stress testing is one of the such techniques that have been used to determine the reaction of different financial institutions as a set of exceptional but plausible assumption through a series of tests."
The circular said stress-test technique, at institutional level, provides a way to qualify the impact of changes in a number of risk factor on the asset and liabilities portfolio of the institution.
A high official of the central bank said the banks are making huge investment in the capital market. If the banks undergo stress tests properly, they can measure their ability to bear the risks that may stem from a disaster in the market.