The following is the speech that Bangladesh Bank Governor Dr. Atiur Rahman delivered at “Redefining Central Banking: Financial Stability, Early Intervention and Crisis Preparedness” in Ontario, Canada on June 27:

Financial sector supervision for upholding financial stability has been a longstanding traditional central banking responsibility, although in the later decades of twentieth century this got shifted to separate authorities in some countries.

The global financial crisis of 2008 brought back into focus the interrelated nature of monetary and financial stability and the need for closely coordinated supervision of both.

Wherever this separation took place, the central banks have got themselves reengaged in financial stability issues after the global crisis. I see this more as a return back to, rather than as redefinition of traditional central banking.

Bangladesh did not go for separation of monetary and financial sector supervision authority, both rests with Bangladesh Bank (BB), the country’s central bank. Our financial sector with its limited, regulated external exposure was virtually unaffected by the global financial crisis, remaining solvent, liquid, and free of contagion from toxic assets.

Safeguarding of financial stability remains nevertheless at forefront of BB’s priorities.

Alongside supporting ongoing market development, we are continually upgrading our financial sector regulatory and supervisory structure, practices and capacities in line with evolving local context and international best practices.

Basel II capital regime implementation has strengthened risk focus in financial sector management and supervision; work towards phasing in of the Basel III modifications is in progress. Basel III liquidity coverage requirements are soon to be introduced, following completion of preparatory exercises.

Stress testing routines have been introduced as mandatory practice in banks, to identify and address vulnerabilities.

BB’s prudential regulations and onsite examination/offsite supervision procedures and practices are also now risk focused, in line with international best practices recommended by Basel Committee (BCBS).

Supervisory CAMELS rating exercises and Early warning systems at BB maintain vigilance on risk management, corporate governance and internal control processes and practices in the financial sector.

A problem bank unit at BB’s Offsite Supervision Department oversees restoration of weak banks to health. BB’s supervisory departments are increasingly focusing on consolidated supervision of banks/financial institutions and their subsidiaries, as also on closer contact and information exchange between host country and home country supervisors for effective supervision of banks with branches/subsidiaries across borders.

A new Financial Stability Department has been created in BB for focused oversight of systemic stability related issues, taking over from the offsite supervision department tasks like conducting of stress tests and forward looking assessments of banks.

Creation of contingency planning and crisis management structures are also underway. Efficacy of BB’s financial sector supervision is evidenced by relative rarity of bank/finance company failure episodes, four in as many decades since independence.

In all these cases BB restructured the failing institutions into viable ones without involving any fund of its own and without causing loss for depositors and other creditors. Nonetheless, BB is not complacent and is fully aware of gaps and weaknesses in capacity of coping with existing and upcoming challenges, including impacts of fiscal and other macroeconomic imbalances of domestic and external origin.

The Daily Sun/Bangladesh/ 2nd July 2012