Introduction to Risk-Based Supervision
The Governor of the Bangladesh Bank, Dr. Ahsan H. Mansur, announced that the official implementation of the risk-based supervision (RBS) system in the country’s banking sector will start in January 2026. This move aims to bring about qualitative changes in how banks are monitored and regulated. The RBS system, which is already practiced in many economies, including neighboring India, will replace the traditional compliance-or directive-based model.
What is Risk-Based Supervision?
Risk-based supervision is forward-looking and anticipatory, rather than reactive. This approach will enable the central bank to identify potential risks and take proactive measures to mitigate them. The central bank has been working on RBS implementation for the past two years and has already carried out a pilot project involving 20 commercial banks. The remaining 41 banks will be brought under the RBS system by December 31, 2025.
Implementation and Expectactions
The Governor expressed his expectation that the RBS system will be fully implemented by January 1, 2026, which will ensure a qualitative transformation in the banking industry. To oversee and coordinate the implementation, 12 dedicated working groups have been formed, comprising officials of different strata at the central bank. A standard response format is being developed and will be shared with all banks, and responses submitted by banks will be handled through an automated system.
International Financial Reporting Standard 9
The Bangladesh Bank plans to adopt International Financial Reporting Standard 9 (IFRS-9) across the banking sector by January 2028, replacing the older IFRS-39. However, the Governor acknowledged that the 2028 time frame is ambitious, noting that many countries have taken four years or more to fully implement IFRS-9 due to its complexity and scope.
Addressing Political Interference and Irregularities
The Governor emphasized the need for a mindset shift at the political level to address the root causes of banking irregularities. He stressed the importance of enhanced autonomy for the Bangladesh Bank, saying that the central bank will approach the government to strengthen its independence and shield it from political pressures. The Governor also revealed that the central bank favors a model where more than 50 per cent of bank directors are independent, and a pool of qualified independent directors will be created for banks to choose from.
Asset Quality Review and Foreign Currency Reserve
The Governor expressed disappointment over the findings of the asset quality review of six struggling banks, stating that their current assets are very weak. He noted that the central bank is planning to diversify its foreign currency reserve investments from a heavy reliance on US dollar-based assets to minimize potential risks. This move is aimed at protecting the reserves from currency shocks, and the central bank will discuss it with international parties.
Conclusion
In conclusion, the implementation of the risk-based supervision system in the Bangladesh banking sector is a significant step towards ensuring the stability and soundness of the financial system. The move to adopt IFRS-9 and diversify foreign currency reserve investments will also contribute to the overall health of the banking sector. By addressing political interference and irregularities, the central bank can create a more conducive environment for the banking sector to thrive. The Governor’s announcements and plans are expected to bring about positive changes in the banking industry, and it will be interesting to see how these developments unfold in the coming years.
