Bangladesh Bank instructs BSEC to calculate bank exposure limit on a cost basis

The decision will take effect immediately, Bangladesh Bank says

The Bangladesh Bank, the country's financial market regulator, has decided to calculate the capital market exposure limit on a cost basis instead of the market price.

The national bank issued a circular directing the change on Thursday after the Ministry of Finance had recommended it two days ago.

The change will take effect immediately, according to the circular.

The Bangladesh Securities and Exchange Commission or BSEC has called for the change for a long time. But many analysts and experts do not agree with considering the cost to calculate the banks’ exposure limit.

The decision comes within a month after Abdur Rouf Talukder took over as the Bangladesh Bank governor.

The regulator reintroduced floor price a week ago to stop a downward spiral of stock prices.

The Bangladesh Bank circular said a bank’s purchase price has to be “considered as the market value” to determine the exposure limit for the bank’s shares.

Many shareholders believe calculating the exposure limit on a cost basis will allow banks and other financial institutions to invest more in the capital market.

The issue with considering the market value is that if the stock market index or the share price goes up, the exposure limit of the bank is exceeded, and thus, banks are forced to sell shares to stay within the threshold limit. As a result, the index falls due to selling pressure in the stock market.

The central bank said “individual or consolidated banks mentioned in the circular” have to follow the directive to calculate the market value of “shares, corporate bonds, debentures, mutual funds and other capital market instruments”.

While asking for the change, the BSEC had argued that calculating exposure limit on a cost basis would facilitate raising the banks’ investment limit and they would not need to sell off any securities.

However, some bankers and economists think the change in rules will allow more opportunities for fraudulent activities while it will be riskier for banks to invest long-term.