<abstract xmlns="http://www.w3.org/1999/xhtml"><p>International concern on bank capital and minimum capital adequacy was first raised in 1980, in the G-10 countries governors meeting at the Bank for International Settlements (BIS) to respond to a series of bank failures and financial instability observed in Western developed economies. Later, the Basel Committee on Banking Supervision (BCBS) of the BIS proposed the Basel accord I, II and III in 1988, 2004 and 2010, respectively. Bangladesh Bank (BB) has introduced the ‘capital to risk weighted assets’-based approach for assessing the capital adequacy of banks in 1996 and later formally introduced the Basel framework in the early 2000s for its regulated banks. However, during Basel accord II and III implementation period (2009-2018), the banking industry accumulated huge non-performing loans which eroded its profitability. This creates a skepticism regarding any loopholes within the institutions. This paper argues that the naïve and excess reliance on External Credit Assessment Institutions (ECAIs’) credit rating in the process of adopting the Basel-type capital adequacy amounted to a risky strategy for the Bangladeshi banking industry in a sense that ECAIs allocate less efforts on accumulation of credit risk screening skills. We also document that the huge transaction cost and high coupon rate embedded within the debt instrument like the subordinated debt (sub-debt) issued by the regulated banks as Tier 2 capital might shrink the bank’s profitability and its contribution to the national exchequer. Little in the existing literature has been addressed to investigate the adoption of Basel regulations in Bangladesh from the institutional lens. This paper critically reviewed the Bangladeshi ECAIs regulations and sub-debt regulations to fill this research gap.</p></abstract>

International concern on bank capital and minimum capital adequacy was first raised in 1980, in the G-10 countries governors meeting at the Bank for International Settlements (BIS) to respond to a series of bank failures and financial instability observed in Western developed economies. Later, the Basel Committee on Banking Supervision (BCBS) of the BIS proposed the Basel accord I, II and III in 1988, 2004 and 2010, respectively. Bangladesh Bank (BB) has introduced the ‘capital to risk weighted assets’-based approach for assessing the capital adequacy of banks in 1996 and later formally introduced the Basel framework in the early 2000s for its regulated banks. However, during Basel accord II and III implementation period (2009-2018), the banking industry accumulated huge non-performing loans which eroded its profitability. This creates a skepticism regarding any loopholes within the institutions. This paper argues that the naïve and excess reliance on External Credit Assessment Institutions (ECAIs’) credit rating in the process of adopting the Basel-type capital adequacy amounted to a risky strategy for the Bangladeshi banking industry in a sense that ECAIs allocate less efforts on accumulation of credit risk screening skills. We also document that the huge transaction cost and high coupon rate embedded within the debt instrument like the subordinated debt (sub-debt) issued by the regulated banks as Tier 2 capital might shrink the bank’s profitability and its contribution to the national exchequer. Little in the existing literature has been addressed to investigate the adoption of Basel regulations in Bangladesh from the institutional lens. This paper critically reviewed the Bangladeshi ECAIs regulations and sub-debt regulations to fill this research gap.

A Critique of Bangladeshi Adoption of Basel Type Capital Regulation: An Institutional View

Financial Internet Quarterly

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

International concern on bank capital and minimum capital adequacy was first raised in 1980, in the G-10 countries governors meeting at the Bank for...

A Critique of Bangladeshi Adoption of Basel Type Capital Regulation: An Institutional View

Published Online: Jun 30, 2020

Page range: 49 - 65

Received: Apr 20, 2020

Accepted: Jun 03, 2020

DOI: https://doi.org/10.2478/fiqf-2020-0012

Keywords
BCBS, Basel accord, ECAIs regulation, Sub-debt regulation

© 2020 A K M Kamrul Hasan et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

A Critique of Bangladeshi Adoption of Basel Type Capital Regulation: An Institutional View

Published Online: Jun 30, 2020

Page range: 49 - 65

Received: Apr 20, 2020

Accepted: Jun 03, 2020

DOI: https://doi.org/10.2478/fiqf-2020-0012

KeywordsBCBS, Basel accord, ECAIs regulation, Sub-debt regulation

© 2020 A K M Kamrul Hasan et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Keywords
BCBS, Basel accord, ECAIs regulation, Sub-debt regulation