Impact of implementation of basel ii in the commercial banks of Bangladesh

Abstract

Globalization necessitates drastic changes in the banking sector across countries. The regulation of banking in the developing countries has increasingly focused on attaining financial stability. The Basel Committee on Banking Supervision provides a platform for regular cooperation on banking supervisory matters. Basel-I focus more on credit risks, not on operational risks and market risks, by establishing a direct link between capital of a bank and its credit risk. Basel-II addresses the gap by establishing rigorous risk and capital management requirements designed to ensure that a bank maintains capital reserves appropriate to its risk exposures. The Commercial Bank in Bangladesh has performed well in Basel-I implementation. Bangladesh Bank has also implemented the Basel-II to ensure that better risk management is adopted in the nation’s banking system. To analyze impact of implementation of Basel-II in the Commercial banks of Bangladesh and to check out the alignment of the capital standard of Bangladesh Bank is with the Core Principles of Banking Supervision has been main the target of the report, a precise but concise overview has been given to illustrate the evolution of risk based capital standards i.e. Basel-I, II and III over the globe. The result shows that the capital requirement to comply with Basel-II has been increased as compared to Basel-I capital requirements. The capital requirement under Basel-II regime increased due to additional burden of capital from Market Risk and Operational Risk. Though capital requirement has been increased due to implementation of Basel-II, Commercial Banks of Bangladesh follow Bangladesh Bank direction prudentially. Another purpose of this study is to investigate the determinants of Bangladeshi Banks capital adequacy ratio and its effects on financial positions of banks covered by the study. Data are obtained from banks' annual reports for the period 2004 - 2013. Panel data methodology is used in this study and analyzes relationships between independent variables; bank size (SIZE), deposits (DEP), loans (LOA), loan loss reserve (LLR), liquidity (LIQ), profitability (ROA and ROE), net interest margin (NIM) and leverage (LEV) and a dependent variable which is capital adequacy ratio (CAR). The results of the paper indicate that LOA and SIZE have a negative effect on CAR, while ROE and LEV positively influence CAR. On the other hand DEP, LIQ, LLR, ROA and NIM do not appear to have any significant effect on CAR.