Money Laundering.

BACH, Step in Money Laundering, Core Capital/Tier 1 capital, Bond, Call option, A financial intermediary, Investment companies, Stress testing, Risk-weighted asset, Risk Premium, National Payment Switch Bangladesh (NPSB), Core Risk, Why Prevention of Money Laundering is necessary, Portfolio management, Loan classification, Loan provision, Bank Rate, Repo, Reverse Repo, CAMELS, Type of Loan

Bangladesh Automated Clearing House: Bangladesh Automated Clearing House (BACH): BACH, the first ever electronic clearing house of Bangladesh, has two components - the Automated Cheque Processing System (ACPS) and the Electronic Funds Transfer (EFT). Both the systems operate in batch processing mode- transactions received from the banks during the day are processed at a pre-fixed time and settled through a single multilateral netting figure on each individual bank's respective books maintained with the Bangladesh Bank. A state-of-the-art Data Center (DC) and a Disaster Recovery Site (DRS) have been established comprising of most modern software and hardware for dealing with the operations of BACH. A Virtual Private Network (VPN) has been created between the participating commercial banks and Data Center (DC) & Disaster Recovery Site (DRS) for communicating necessary information related to BACH. Digital Certificate has been formulated for the first time in Bangladesh for secured data communication.

Step in Money Laundering: Placement (money laundering, currency exchange, Securities brokerage, fund mixture, land purchage), Layering and Integration (property dealing, fake import or export).

Core Capital/Tier 1 capital: Core capital is the minimum amount of capital. 

Core Capital (Tier 1 Capital):

01) Paid up capital / capital deposited with BB

02) Share premium,03) Statutory reserve

04) General reserve,05) Retained earning

06) Minority Interest in subsidiaries

07) Non-Cumulative irredeemable preference shares

08) Dividend equalization account.

Call option: 

A call option is an agreement that gives an investor the right, but not the obligation, to buy a stock, bond, commodity  or other instrument at a specified price within a specific time period.

Bond: 

A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer.

Characteristics of Bonds

• Most bonds share some common basic characteristics including:

• Face value is the money amount the bond will be worth at its maturity, and is also the reference amount the bond issuer uses when calculating interest payments.

• Coupon rate is the rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage.

• Coupon dates are the dates on which the bond issuer will make interest payments. Typical intervals are annual or semi-annual coupon paymets.

• Maturity date is the date on which the bond will mature and the bond issuer will pay the bond holder the face value of the bond.

Issue price is the price at which the bond issuer originally sells the bonds.

A financial intermediary is an entity that acts as the middleman between two parties in a financial transaction, such as a commercial bank, investment banks, mutual funds and pension funds. Financial intermediaries offer a number of benefits to the average consumer, including safety, liquidity, and economies of scale involved in commercial banking, investment banking and asset management. Although in certain areas, such as investing, advances in technology threaten to eliminate the financial intermediary, disintermediation is much less of a threat in other areas of finance, including banking and insurance.

Investment companies are business entities, both privately and publicly owned, that manage, sell, and market funds to the public. They typically offer investors a variety of funds and investment services, which include portfolio management, recordkeeping, custodial, legal, accounting and tax management services.

Core Risk:

01) Credit Risk

02) Foreign Exchange Risk

03) Asset – Liability management risk

04) Money laundering prevention risk

05) Internal control and compliance risk

06) Information and Communication Technology risk.

Stress Testing: 

A bank stress test is an analysis conducted under unfavorable economic scenarios designed to determine whether a bank has enough capital to withstand the impact of adverse developments. Banks with $50 billion in assets are required to do internal stress tests by their own risk management team and also stress tests from the Federal Reserve.Stress tests focus on a few key risks, such as credit risk, market risk and liquidity risk, to banks' financial health in crisis situations. Hypothetical crises are determined using various factors from the Federal Reserve and International Monetary Fund (IMF). Bank stress tests were put in place and became more widespread after the 2007-2009 global financial crisis, the worst since the Great Depression. This crisis left many banks and financial institutions severely undercapitalized, which the stress tests aim to prevent.

Risk-weighted asset Risk-weighted assets are used to determine the minimum amount of capital that must be held by banks and other institutions to reduce the risk of insolvency. The capital requirement is based on a risk assessment for each type of bank asset. For example, a loan that is secured by a letter of credit is considered to be riskier and requires more capital than a mortgage loan that is secured with collateral.

A risk premium is the return in excess of the risk-free rate of return an investment is expected to yield; an asset's risk premium is a form of compensation for investors who tolerate the extra risk, compared to that of a risk-free asset, in a given investment. For example, high-quality corporate bonds issued by established corporations earning large profits have very little risk of default. Therefore, such bonds pay a lower interest rate, or yield, than bonds issued by less-established companies with uncertain profitability and relatively higher default risk.

National Payment Switch Bangladesh (NPSB) is an electronic platform, started its operation on 27 December 2012. The core objective behind implementation of NPSB is to attain interoperability in retail banking transactions originating from different electronic delivery channels e.g. Automated Teller Machines (ATM), Point of Sales (POS), internet, mobile applications etc. Moreover, the switch is also a stimulus to boost up cashless and electronic payments all over the country.At present, 51 banks are in operation for interbank ATM transactions among which 46 banks are also in operation for interbank POS transactions through NPSB. The following types of ATM and POS transactions are presently live through NPSB:

• ATM channel is accommodating Balance Inquiry, Mini Statement, Cash Withdrawal transactions.

• POS is accommodating Retail Purchase transaction.

Bangladesh Bank is also looking forward to gradually accommodating the transaction scopes mentioned below under NPSB that depends on the readiness of commercial banks:

• Over the counter (OTC through POS) Standing Order 

• ATM: Interbank Fund Transfer, Bill Payment, Interbank Cash Deposit 

• POS: Interbank Cash Withdrawal, Bill Payment 

• Kiosk: Interbank Fund Transfer, Mini Statement, Balance Enquiry, Bill Payment 

• m-Commerce (App based Mobile Banking) : Interbank Fund Transfer, Bill Payment, Retail Purchase 

• e-Commerce: Bill Payment, Retail Purchase.

Why Prevention of Money Laundering is necessary?

Money laundering allows terrorists and criminals to undertake various activities like:

1. Drug trafficking

2. Financing terrorist activities

3. Evasion of exchange regulations

4. Evasion of taxation rules

5. Making blackmail payments

6. Paying ransom for kidnapping.

7. Dealing of arms and ammunitions

Portfolio management is the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. Portfolio management is all about determining strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other trade-offs encountered in the attempt to maximize return at a given appetite for risk.

Loan Classification:

5 categories

1. standard – due for less than 2 months

2. SMA: Above 2 month

3. Substandard – due for 3 months or more but less than 6 month

4. Doubtful – due for 6 months or more but less than 9 month

5. Bad and Loss – due for more than 9 month

Loan Provision: It is of two types General & Specific. Now general provision is 1% (with some variation like for SME 0.25&) and Specific provision is now as follows:

For Sub Standard = 20%

For Doubtful       = 50% & 

For Bad/Loss      = 100%

Repo (Repurchase) rate is the rate at which the central bank lends shot-term money to the banks against securities. When the repo rate increases borrowing from Central Bank becomes more expensive.  Therefore, we can say that in case, BB wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the BB.  The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns. An increase in the reverse repo rate means that the BB is ready to borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep more and more surplus funds with RBI.

Repo vs Reverse Repo: 

we can conclude that Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI, whereas Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks

Loan generally of 4 types

1. Continuous Loan like Cash credit, overdraft

2. Demand Loan

3. Fixed Term Loan

Short term Agriculture & Micro Credit.

Bank Rate: 

This is the rate at which central bank lends money to other banks or financial institutions.  If the bank rate goes up, long-term interest rates also tend to move up, and vice-versa. Thus, it can said that in case bank rate  is hiked, in all likelihood banks will hikes their own lending rates to ensure that they continue to make profit

CAMELS Rating: Bangladesh Bank analyses Capital, Asset, Management, Earning, Liquidity and Sensitivity to Market Risk and does CAMELS rating and accordingly rank the Bank under 

1) Strong 

2) Satisfactory

3) Fair

4) Marginal & 

5) Unsatisfactory. 

BB sends this report to respective Bank and the Bank will present it in the Board Meeting and the Board will provide the guideline based on this report. If there is bad position in any single indicator or point is below 3 in total rating then BB will give EWS (Early Warning System) and try to develop the condition. If the rating is Marginal or Unsatisfactory or there is no development in EWS then BB declares the Bank a Problem Bank. If the Bank is a Problem Bank then BB imposes some injection with dense supervision. Now BB does it twice in a year.