3 pillars of Basel-II

Pillar-I: Minimum Capital Requirements
i) Capital for Credit Risk
 a) Standardized Approach (upto 2012)
 b) Internal Rating Based Approach( from 2013)
2 Rating Agencies are CRISL and CRAB
(BRPD circular-05 29/04/2009)

Tier 3 Capital ( Additional Supplementary Capital)

Tier 3 Capital (Additional Supplementary Capital) consisting of short term subordinated debt maturity less than or equal of five years but greater than or equal to two years is meant solely for purpose of meeting a proportion of the capital requirements for market risk.

Tier 2 capital (Supplementary Capital)

Tier 2 Capital (Supplementary Capital) contribute to the overall strength of a bank

1. General Provision
2. Asset Revaluation Reserve
3. Preference Shares
4. Subordinated Debt
5. Exchange Equalization Account
6. Revaluation Reserves for Securities

Tier 1 Capital (Core Capital)

Tier 1 Capital (Core Capital) comprises of highest quality capital elements:

1. Paid up capital/capital deposited with BB
2. Non-repayable share premium account
3. Statutory Reserve
4. General Reserve
5. Retained Earnings
6. Minority Interest in subsidiaries
7. Non-Cumulative irredeemable Preference Shares
8. Dividend Equalization Account

Use of Fund

Use of Bank Fund:

1. To fulfill the regulatory and business requirement:

i) Cash (For meeting up day to day operational expenses of the business/withdrawl of deposits/payment of borrowings/payment of dividend/payment of salaries, allowances, wages etc.)
ii) Balance with Bangladesh Bank/Sonali Bank(For Liquidity Purpose)
iii) Fixed Assets acquisition ( Land, Building, Machineries, Furnitures, Car, Computer etc.)

2. To deploy in earning Assets:

i) Investment (By purchasing of shares/debentures/bonds/Govt. securities/Treasury bills etc)
ii) Loans and Advances (both short & long term)
iii) Investing in the Money Market( By investing money at call & short notice to other banks/financial institutions)

Banks sources of Fund

1. Paid up capital
2. Share Premium
3. Debenture/Bond issue
4. Reserve Fund
5. Deposit
6. Bills payable/Remittance
7. Borrowings from Money Market
8. Recovery of Advance/Payment of due installment of loans
9. Undistributed profit/Retained earnings
10. Sale of Assets
11. Govt. /Agencies Loan/Aid/Grant
12. Any other funds raised by the owner/Employees/Profit
REPO agreements/arrangements also acts as source of funding

What is Money Laundering?

Money Laundering means:

As per Money Laundering Prevention Act, 2002
Article 2 (Tha)
Au Properties acquired or earned directly or indirectly through illegal means.
Aa Illegal transfer, conversion, concealment of location or assistance in the above act of the
properties acquired or earned directly or indirectly through legal or illegal means.

Process of money laundering:

Placement

Layering

Integration

Predicate offenses:

Corruption and bribery

Currency duplication

Duplication of paper and documents

Compelling to subscribe

Cheating

Counterfeiting

Illegal arms business

Illegal business of drug

Illegal business of theft goods

Abduction

Killing and injury seriously

Slaying of women and child

Black marketing and handover local and foreign currency

Theft and robbery

Human exploitation and illegal immigration

Dowry

Any other offence declared by the Govt. through public gazette.

Liquid Assets

Liquid Assets can be as follows:

i) Reserve Assets
ii) Cash in Tills
iii) Specific Government Securities.
iv) Foreign Currency in open position.
v)  Specific FDRs.

Objectives of Asset Management

The objectives of Asset Management is to maximize returns on loans and securities and minimize risk by acquiring assets that have a low rate of default risk and by diversifying asset holdings.

Medium Term Funding Ratio(MTF)

Banks earn money from mismatches, i.e. by borrowing short term and lending long term. Bank has to find out the right combination for longer term mismatch. MTF ratio is based on the amount of liability with a contractual maturity of more than one year to assets with a contractual maturity of more than one year, that is MTF should be done on the basis of 1 year and above but less than 2 years term deposit. The desirable ratio of MTF should be 15% to 20%.

Maximum Cumulative Outflow (MCO)

Maximum Cumulative Outflow(MCO) guidelines control the net outflow ( Inflow from asset maturity minus outflow from liability maturity) over the following periods:
i) Overnight
ii) One week
iii) One month
MCO up to 1 month bucket should not exceed 10% of balance sheet amount to avoid funding mismatch (it may vary according to the volume of Assets and Liabilities of a Bank.

Wholesale Borrowing Guidelines(WBG)

Wholesale Borrowing Guidelines limit is based on the match funding basis:

i) Current deposit and part of savings deposit is considered as investment to meet legal requirements of CRR & SLR.
ii) One year and above but less than 2 yrs term deposit may be used for midterm investment.
iii) 3 months 6 months but less than 1 year term deposit and part of savings deposit may be used to finance working capital & other demand loan.
iv) Next day, 2 to 7 days, 7 days to  1 month and 1 to 3 months term deposit may be used for demand loan and short term investment ie. Call money, Reverse REPO, 28 days, 91 days, 182 days Govt. Treasury Bills/Bonds and Govt. securities.
v) 2 yrs and above term deposits can be taken up to the amount of long term loan.

Asset Liability Management (ALM)

Asset Liability Management(ALM):
Asset Liability Management (ALM) is an integral part of Bank Management and so, it is essential to have a structured and systematic process for managing the Banance Sheet or the assets and the liabilities of the Bank.