Report On Stress Testing of Uttara Bank limited

Stress testing is a simulation technique, which are used to determine the reactions of different financial institutions under a set of exceptional, but plausible assumptions through a series of battery of tests. At institutional level, stress testing techniques provide a way to quantify the impact of changes in a number of risk factors on the assets and liabilities portfolio of the institution. These tests help the regulators to identify structural vulnerabilities and the overall risk exposure that could cause disruption of financial markets. Its prominence is on potential externalities and market failures. But one of the limitations of this technique is that stress tests do not account for the probability of occurrence of these exceptional events.There are three techniques of stress testing. These are: a) Simple Sensitivity Analysis, b) Scenario Analysis & c) Extreme Value/ Maximum Shock Scenario. Stress test shall be carried out assuming three different hypothetical scenarios. These are major, moderate & minor level of shocks.Uttara Bank is one of the largest and oldest private-sector commercial bank in Bangladesh, with years of experience. Adaptation of modern technology both in terms of equipment and banking practice ensures efficient service to clients. 211 branches at home and 600 affiliates worldwide create efficient networking and reach capability. Uttara is a bank that serves both clients and country.
The bank floated its shares in the year 1984. The bank is listed in the DSE & CSE as a publicly quoted company for trading of its shares. CRAB has rated the Company as AA3 in the long term and ST-2 in the short term based on audited financial statements of the Company up to 31st December 2011.The rise in interest rate would lower the CAR in 2012 because the duration gap of Uttara Bank is positive (0.5886).In 2012, the CAR of UBL was satisfactory and the bank was only in danger in cases of credit risk- increase in NPL, credit risk-increase in NPL under 1 or 2 sectors.Net exposure in foreign currency was always positive for Uttara Bank. It means, the bank was in net long position in 2012. As a result, currency appreciation would harm the bank.UBL equity price risk management was very satisfactory. Uttara Bank Limited was much robust in equity price risk because 10%, 20% and 40% fall in stock prices.In 2012 UBL’s Revised Liquidity Ratio would be 110.31%, 111.59% and 115.46% respectively for 10%, 20% and 40% shock which is not so far from its actual CAR 109.28%.

To understand and appreciate the risks the banking industry is exposed to so that soundness and sustainability of the industry can be ensured is much important. 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. 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. All banks and FIs are expected to carry out stress testing on half‐yearly basis i.e. on June 30 and December 31 each year with their first stress testing exercise to be based on 30‐06‐ 2012.