Bangladesh Bank Governor Dr. Atiur Rahman said the financial sector in Bangladesh with its limited, regulated external exposure was virtually unaffected by the global crisis; remaining liquid, solvent and free of contagion from toxic assets.

Following the global crisis, regulatory oversight on risk management has been strengthened, compulsory stress testing routines have been introduced to bring out vulnerabilities. Banks are now under Basel II capital adequacy regime, with the Basel III modifications to be phased in duly.

The Governor said this while presiding over a session of the 2nd CUTS-CIRC International Conference on Reviewing the Global Experience on Economic Regulation- A Forward Looking Perspective held in New Delhi on Tuesday, according to a message received here yesterday.

But for the recent global financial crisis that markets and institutions in mature advanced economies are still to recover fully from, the title chosen for this session would probably have been disputed hotly; many would have complained about feeling of suffocation from over-regulation, he said.

Wide ranging as the post-crisis global financial sector regulatory reforms may seem, the actual changes are really incremental and marginal rather than very extensive or radical; some of the changes (like those in capital requirements) will be introduced gradually over a number of years.

Little has been done so far on important overarching issues like preventing buildup of global imbalances from persistent unbalanced domestic policies in major economies; and in reforming the global monetary order with a mechanism tethering global liquidity expansion to growth in real global output of goods and services, so as not to permit the financial sector run amok with speculative excesses.

While some regulatory deficit did exist in the run up to the global crisis, having a more complete regulatory toolkit with the deficits plugged in will not by itself make the financial sector more immune from future recurrence of crisis situation, said Atiur adding: “The main factor setting the global financial system on slippery path to crisis was not a deficit in regulation but gross neglect and lapse in compliance with regulations that existed, particularly in areas of risk appraisal and containment.”

“The problem is rooted deep in human nature. In good times we tend to disregard and cut corners around regulatory disciplines, to ignore looming buildup of risks until a crisis befalls, and sit down to rewrite cautious regulations afterwards,” he said adding: “The mood of caution does not last long after the crisis is over; when good times roll in things revert back to the old cycle of compliance lapse- risk buildup and crisis- regulatory revisions. We need to bear this reality in mind while attempting to chart safe and stable progress path for the financial sector.”

The main thrusts of post crisis regulatory reforms focusing on vulnerabilities of financial institutions and markets are broadly appropriate; but some promising approaches for better stability remain under-explored, said Atiur. “One of these is a drastic diminution of the heavy dependence of banks and financial institutions on deposits and debts repayable with interest at agreed rates, regardless of whether they sink or swim. In severe downturns and crisis situations this becomes a recipe for market collapse with chains of default,” he continued.

News: Daily Sun/ Bangladesh/ 21-Apr-2011