Managing Country Risk: Guidelines for Banks in Bangladesh

Introduction

In line with the directives of the central bank (Bangladesh Bank), this framework outlines key principles and practices for managing country risk by banks operating in Bangladesh.

Classification of Country Risk

Banks are required to categorize countries into five risk categories based on their sovereign ratings or internal assessments:

• Insignificant: Countries with a low risk profile.
• Low: Countries with a moderate risk profile.
• Marginal: Countries with a higher risk profile.
• Moderate: Countries with a significant risk profile.
• High: Countries with a very high risk profile.

Provisioning/ Capital Requirement

Banks must make general provisions on net funded country exposures, with provisioning requirements ranging from 0.25% to 20% depending on the risk category:

• Insignificant: 0.25%
• Low: 1%
• Marginal: 5%
• Moderate: 10%
• High: 20%

Stress Testing

Banks should periodically stress-test their foreign exposures and report the results to the board of directors and senior management.

Disclosures, Reporting, and Monitoring

Banks are required to disclose country exposures and provisions held against them in their annual reports and submit assessments under ICAAP reporting.

Factors Affecting Country Risk

The framework considers both macroeconomic factors (such as the size and structure of external debt, current account conditions, international reserves, import coverage, and foreign sources of capital) and social, political, and legal factors (including government willingness to address economic problems, political stability, and the reliability of the legal system).

Conclusion

The guidelines aim to ensure that banks in Bangladesh manage country risk effectively by following a structured approach. By adhering to these principles, banks can mitigate potential risks associated with international transactions and contribute to the overall stability of the financial system.