Term Paper on Stress Testing of Shahjalal Islami Bank Limited

It is very important for us to fully capture the knowledge of how a bank works and its limitations on credit lending and borrowing. It is of vital importance to understand and appreciate the risks the banking industry is exposed to so that soundness and sustainability of the industry can be ensured. Earlier, Bangladesh Bank has issued core risk management guidelines so that banks can develop a sound risk management practice while carrying out their day‐to‐day activities.

In the regulatory and supervisory sphere, the Central Bank's activities in banking supervision have often been determined by exogenous elements deriving mainly from the changes in the structure and scope; activities and risks that the financial sector is facing and the changes in regulatory standards occurring internationally. The recent financial turmoil in the US financial system has augmented the importance of establishing more developed risk management regime in the financial industry. Present risk management culture based on normal business conditions and historical trends is not enough to cope with the disorders that have happened in the financial systems globally. This required an appropriate response in the regulatory and supervisory activities of the Central Bank.

The reports and financial statements  to be more rigorous and robust, financial institutions around the world are increasingly employing stress testing to determine the impact on the financial institution under a set of exceptional, but plausible assumptions through a series of battery of tests. Bangladesh Bank has designed a stress testing framework for banks and FIs to proactively manage risks in line with international best practices. Keeping in view with the divergence of skill levels and available resources among banks and FIs, a modest beginning focused with simple sensitivity and scenario analysis considering only credit risk and market risk is suggested in the Stress Testing Guideline, eventually to develop into a more comprehensive approach.

Under such premise, all banks and FIs are expected to carry out stress testing on half‐yearly basis i.e. on June 30 December 31 each year with their first stress testing exercise to be based on 30‐06‐2010. A training program will be initiated shortly for the relevant staff to ensure smooth implementation of the guidelines.