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1.0 Stress Testing

Extreme market movements or crises in the past reveal the inadequacy of managing risks

based only on normal business conditions and historical trends. In particular, crises in the

1990s (e.g. Asian Crisis) and current financial turmoil have augmented the importance of

better understanding of potential vulnerabilities in the financial system and the measures

to assess these vulnerabilities for both the regulators and the bankers. The regulators and

managers of the financial system around the globe have developed a number of

quantitative techniques to assess the potential risks to the individual institutions as well as

financial system. A range of quantitative techniques that could serve the purpose is widely

known as stress testing. IMF and Basel Committee on banking supervision have also

suggested for conducting stress tests on the financial sector.

Stress testing is a simulation technique, which are used to determine the reactions ofdifferent financial institutions under a set of exceptional, but plausible assumptions

through a series of battery of tests. At institutional level, stress testing techniques provide a

way to quantify the impact of changes in a number of risk factors on the assets and

liabilities portfolio of the institution. For instance, a portfolio stress test makes a rough

estimate of the value of portfolio using a set of exceptional but plausible events in abnormal

markets.

However, one of the limitations of this technique is that stress tests do not account for the

probability of occurrence of these exceptional events. For this purpose, other techniques,

for example VAR (value at risks) models etc, are used to supplement the stress tests. Thesetests help in managing risk within a financial institution to ensure optimum allocation of

capital across its risk profile.

At the system level, stress tests are primarily designed to quantify the impact of possible

changes in economic environment on the financial system. The system level stress tests

also complement the institutional level stress testing by providing information about the

sensitivity of the overall financial system to a number of risk factors. These tests help the

regulators to identify structural vulnerabilities and the overall risk exposure that could

cause disruption of financial markets. Its prominence is on potential externalities and

market failures.

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1.1 Techniques for Stress Testing:

a) Simple Sensitivity Analysis (single factor tests): It measures the change in

the value of portfolio for shocks of various degrees to different independent risk

factors while the underlying relationships among the risk factors are not

considered. For example, the shock might be the adverse movement of interest rate

by 100 basis points and 200 basis points. Its impact will be measured only on the

dependent variable i.e. capital in this case, while the impact of this change in interest

rate on NPLs or exchange rate or any other risk factor is not considered.

b) Scenario Analysis:It encompasses the situation where a change in one risk factor

affects a number of other risk factors or there is a simultaneous move in a group of

risk factors. Scenarios can be designed to encompass both movements in a group of

risk factors and the changes in the underlying relationships between these variables

(for example correlations and volatilities). Stress testing can be based on thehistorical scenarios, a backward looking approach, or the hypothetical scenario, a

forwardlooking approach.

c) Extreme Value/ Maximum Shock Scenario:It measures the change in the risk

factor in the worstcase scenario, i.e. the level of shock which entirely wipes out the

capital.

1.2 Framework for Regular Stress Testing:

The stresstesting framework involves the scope of the risks covered and the

process/procedure to carry out the stress test. This framework should be flexible enough

to adopt advanced models for stress testing. It involves:

A well constituted organizational structure defining clearly the roles and

responsibilities of the persons involved in the exercise. Preferably, it should be

the part of the risk management functions of the bank/FI. The persons involved

should be independent from those who are actually involved in the risk taking

and should directly report the results to the senior management.

Defining the coverage and identifying the data required and available.Identifying, analyzing and proper recording of the assumptions used for stress

testing

Calibrating the scenarios or shocks applied to the data and interpreting the

results.

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An effective management information system that ensures flow of information to

the senior management to take proper measures to avoid certain extreme

conditions.

Setting the specific trigger points to meet the benchmarks/standards set by

Bangladesh Bank

Ensuring a mechanism for an ongoing review of the results of the stress test

exercise and reflecting in the policies and limits set by management and board of

directors.

Taking this stress test as a starting point and developing inhouse stress test

model to assess the bank/FIs specific risks

1.3 Scope of Stress Test:

As a starting point the scope of the stress test is limited to simple sensitivity analysis. Five

different risk factors namely; interest rate, forced sale value of collateral, nonperforming

loans (NPLs), stock prices and foreign exchange rate have been identified and used for the

stress testing. Moreover, the liquidity position of the institutions has also been stressed

separately. Though the decision of creating different scenarios for stress testing is a

difficult one, however, to start with, certain levels of shocks to the individual risk

components have been specified considering the historical as well as hypothetical

movement in the risk factors.

Stress test shall be carried out assuming three different hypothetical scenarios:

Minor Level Shocks:These represent small shocks to the risk factors. The level fordifferent risk factors can, however, vary.

Moderate Level Shocks:It envisages medium level of shocks and the level is defined

in each risk factor separately.

Major Level Shocks: It involves big shocks to all the risk factors and is also defined

separately for each risk factor.

Assumptions behind each Scenario:The stress test at this stage is only a single factor

sensitivity analysis. Each of the five risk factors has been given shocks of three different

levels. The magnitude of shock has been defined separately for each risk factor for all

the three levels of shocks

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2.0 LankaBangla Finance Limited (LBFL)

LankaBangla Finance Limited, a joint-venture listed financial institution established with

multinational collaboration, started its journey in 1997. The institutional shareholding

structure and corporate culture have enabled LankaBangla to be one of the most

diversified financial service providing institutions of the country. Under the right direction

of an enlightened board of directors, and the policy executed by the resourceful

management, the company has emerged as one of the leading financial institutions in the

country. Having strong presence and recognition in almost all financial product and service

lines in the industry, LankaBangla is the lone financial institution which operates

masterCard & VISA card and provides third party card processing services to different

banks. The companys one of the subsidiaries, LankaBangla Securities Limited, is involved

in dealing with securities as broker in capital market at both DSE & CSE and secured the

position as business leader in this arena. The other subsidiary, LankaBangla Investments

Limited is a well staffed merchant bank with a promising future.

The company practices participatory management and adheres to industry best practices

in all endeavors. Increasing stakeholders value is a natural driving force for the people at

LankaBangla; nevertheless maintaining quality of service is at the core of business which

earned its unparallel customer loyalty. Everything is done in compliance of all norms and

regulatory requirements.

2.1 Core Values

Integrity: We are committed to conduct that reflects the highest standard of integrity in

everything we do.

Teamwork: It is the essence of our ability to succeed as a trusted and preferred provider of

financial solutions to our clients. Our overriding loyalty is to the good of the whole

organization. We learn from each other and share our skills and resources across

organizational boundaries for our stakeholders benefit and our own.

Respect: We respect every individual. We draw strength from equal opportunity at the

same time supporting personal growth and development. We value and we all benefit fromthe entrepreneurial spirit of each individual.

Professionalism: We are committed to the highest standards of professionalism, we

pursue innovation, we continually quest for quality at each level, we are open to new ideas

and we act decisively and consistently. We are determined to deliver outstanding quality so

that our relationships with our clients will be long-lasting.

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Value creation: We offer what creates and maximizes value to the stakeholders, the

society and the environment together.

2.2 Vision

To be the nations most sought after facilitator in creating, nurturing and maximizing valueto the stakeholders, the society, and the environment, thereby, GROWING TOGETHER

2.3 Mission

To lead by example through a committed team of nurtured resources fostering ownership

that motivates thriving towards excellence in knowledge, systems, structures, processes

and procedures, thereby empowering the organization at every level to deliver the highest

quality of product, customer care, and stakeholder value keeping environmental safety a

priority.

2.4 Goals

To be the most preferred financial services provider

To maximize the value of being our customer, shareholder or employee

To build and retain a team of highly skilled human resources through talent hunting,

nurturing,

training, developing and motivating through rewarding to deliver the highest level

of customer service

To build state-of-the-art technological framework for ensuring faster, accurate,

timely and riskcalculated operations capable of coping with ever increasing financial and

operational complexities

To standardize policies, rules, regulations and operational procedures guiding

seamless and efficient

delivery of service at every level

To develop and maintain an organizational culture committed towards ownership

thriving for

continuous innovation and improvement in our way of doing business to meet and

exceed stakeholders

ever growing expectations

To establish strong regional presence through expanding our product and service

delivery networks

covering wider clienteles

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2.5 Products & Services:

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2.6 Milestones of LankaBangla:

Incorporation of the Company

5th November, 1996

Registration of First Subsidiary (LankaBangla Securities Limited)

3rd July, 1997

Licensed as Financial Institution by

Bangladesh Bank

30th October, 1997

Signing of First Lease Agreement

30th March, 1998

Issuance of First Credit Card

16th August, 1998

Launching of MasterCard

5th September, 2005

Listing on Dhaka Stock Exchange 17th

October, 2006

Listing on Chittagong Stock Exchange

31st October, 2006

Trading of share in Stock Exchanges 1st

November, 2006

Commercial Launching of Chittagong Branch

19th February, 2007

Registration of Second Subsidiary (Lanka

Bangla Asset Management Company

Limited)

16th July, 2007

First disbursement of Domestic Factoring

11th December, 2007

First disbursement of Mortgage Loan

18th February, 2008

Commencement of Operation of Sylhet

Branch

27th April, 2009

Licensed as Primary Dealer 23rd

November, 2009

Issuance of First VISA card

24th November, 2009

Participation in the 1st Auction of Govt.

Securities as Primary Dealer

1st December, 2009

Registration of Third Subsidiary

(LankaBangla Investments Limited)

29th March, 2010

Approval of Right Issue by SEC

31st January, 2012

Signing of Agreement with Leads

Corporation for Bank Ultimus (CBS)

10th January, 2012

Commercial Launching of Khatungonj Branch, Chittagong8th March, 2012

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3.0 Methodology and Calibration of Shocks :

3.1 Interest Rate Risk:

Interest rate risk is the potential that the value of the onbalance sheet and the off-balance

sheet positions of the bank/DFI would be negatively affected with the change in the

interest rates. The vulnerability of an institution towards the adverse movements of the

interest rate can be gauged by using duration GAP analysis.

Following steps were used in carrying out the interest rate stress tests:

First I have estimated the market value of all onbalance sheet rate sensitive assetsand liabilities of the Lanka Bangla Finance Limited (LBFL) to arrive at market value

of equity

Then I have calculated the durations of each class of asset and the liability of the

onbalance sheet portfolio Arrive at the aggregate weighted average duration of

assets and liabilities

Then I have calculated the duration GAP by subtracting aggregate duration of

liabilities from that of assets.

Then the changes in the economic value of equity due to change in interest rates on

onbalance sheet positions along the three interest rate changes has been estimated.

Surplus/(deficit) on offbalance sheet items under the assumption of three different

interest rate changes i.e. 1%, 2%, and 3% is calculated.

Then the impact of the net change in the market value of equity on the capital

adequacy ratio (CAR) has been estimated.

Interest Rate Shock

Magnitude of Shock 0.01 0.02 0.03

Change in MVE(onbalance sheet) -243254846.1 -486509692.2 -729764538.4

Net Change in MVE(onbalance sheet &

offbalance sheet)

-243254846.1 -486509692.2 -729764538.4

Tax Rate 0.425 0.425 0.425

Tax adjusted loss -139871536.5 -279743073 -419614609.6

Total Regulatory capital 1918100000 1918100000 1918100000

Revised Capital 1778228463 1638356927 1498485390

Risk weighted assets 18593300000 18593300000 18593300000

Revised risk weighted assets 18453428463 18313556927 18173685390

CAR 10.32% 10.32% 10.32%

Revised CAR 9.64% 8.95% 8.25%

Change in CAR (% age points) -0.68% -1.37% -2.07%

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Market value of the asset or liability has been assessed by calculating its present value

discounted at the prevailing interest rate. The outstanding balances of the assets and

Liabilities have been taken along with their remaining maturity period.

Because in the mismatch in duration of asset and liability changes in interest rate adversely

affect the market value of equity as well as capital adequacy. The CAR of Lanka BanglaFinance Limited (LBFL) has also declined because of interest rate shock.

3.2 Credit Risk:

The bank is exposed to credit risk in its lending operation. Credit risk is the risk of loss that

may occur from the failure of any counterparty to make required payments in accordance

with agreed terms and conditions. Management of credit risk in the bank is governed by a

Credit Policy Manual which contains the principles for identifying, measuring, approving

and managing credit risk. These policies are established by the Board of Directors and aredesigned to meet the organizational requirements that exist today, and to provide

flexibility for future. These policies represent the minimum standards for credit extension

and are not a substitute for experience and good management.

The bank has adopted a framework for credit risk management, setting up of an

independent Credit Risk Management Team to establish better control and check, to reduce

conflict of interest in the business units.

The stress test for credit risk assesses the impact of increase in the level of nonperforming

loans of the bank/FI. This involves six types of shocks:

1. Increase in the NPLs and the respective provisioning:The three scenarios shallexplain the impact of 2%, 5% and 10% of the total performing loans directly

downgraded to bad/loss category having 100% provisioning requirement.

1. Increase in NPLs:

Magnitude of Shock 0.02 0.05 0.1

Total Loan 14217180000 14217180000 14217180000

Total Performing Loan 13291570000 13291570000 13291570000

Total NPLs 925610000 925610000 925610000

NPLs to Loans (%) 0.065105035 0.065105035 0.065105035

Increase in NPLs 265831400 664578500 1329157000

Increase in Provisions 265831400 664578500 1329157000

Tax Rate 0.425 0.425 0.425

Tax adjusted provision 152853055 382132637.5 764265275

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Total eligible capital 1918100000 1918100000 1918100000

Revised Capital 1765246945 1535967363 1153834725



CAR 10.32% 10.32% 10.32%

Revised CAR 9.57% 8.43% 6.47%

change in CAR (% age points) -0.74% -1.88% -3.84%

Revised NPLs 1191441400 1590188500 2254767000

Revised NPLs to Loans (%) 8.38% 11.18% 15.86%

The effect of increase in NPL in 2009, 2010 & 2011 by 2%, 5%, and 10% results in increase

in the provision by the same amount and reduced the capital base and risk weighted asset

and thus the CAR.

2. Negative shift in the NPLs categories and hence the increase in respectiveprovisioning:The three scenarios shall explain the impact of 5%, 10% and 15%

downward shift in the NPLs categories.

2. Shift in NPLs categories:

Magnitude of Shock 5% 10% 15%

Provision Requirement 536575175.9 536575175.9 536575175.9

Revised Provision Requirement 541364447 546153719 541364447

Increase in Provisions 4789271 9578543 550942990

Tax Rate 0 0 0

Tax adjusted provision 541364447.3 546153718.8 541364447.3


Revised Capital 1376735553 1371946281 1376735553



CAR 10.32% 10.32% 10.32%

Revised CAR 7.63% 7.60% 7.63%


Here, for the first level of shock 5%, of the SMA shall be categorized under substandard,50% of the substandard shall be categorized under doubtful and 50% of the doubtful shall

be added to the bad/loss category. Then the provision has been calculated. The capital base

and RWA has been then reduced by the amount of increase in provision which lowers its

CAR, but the reduction is negligible. CARs in major shock were higher than the required

CAR level.

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Lets see what happens when there is a shift of 5%, 10% and 15% in the NPLs categories:

Original Composition Loan Portfolio

amount rate of provision Provision Required

Loans & leases (Excluding SMA) 9,326,386,911 1% 93263869.11

Special mention account (SMA) 556,109,831 5% 27805491.55

Sub-standard 57,643,951 20% 11528790.2

Doubtful 25,997,318 50% 12998659

Bad / Loss 390,978,366 100% 390978366

total Provision Requirement 536575175.9

Composition Loan Portfolio (5% Shift)



Special meni on account (SMA) 994,623,685 5% 49731184.25

Sub-standard 82,567,245 20% 16513449

Doubtful 27,579,650 50% 13789824.83

Bad / Loss 372,729,314 100% 372729313.6





Special meni on account (SMA) 1,433,137,539 5% 71656876.95

Sub-standard 107,490,539 20% 21498107.8

Doubtful 29,161,981 50% 14580990.65

Bad / Loss 354,480,261 100% 354480261.2





Special meni on account (SMA) 1,871,651,393 5% 93582569.65

Sub-standard 132,413,833 20% 26482766.6

Doubtful 30,744,313 50% 15372156.48

Bad / Loss 336,231,209 100% 336231208.8


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3. Increase of the NPLs in particular 1 or 2 sector and the respective

provisioning:The three scenarios shall explain the impact of5%, 10% and 15%

performing loans of particular 1 or 2 sectors directly downgraded to bad/loss

category having 100% provisioning requirement.

3. Increase of NPLs in particular 1 or 2 sectors:

Magnitude of Shock 5% 10.0% 15%

Total Loan in Garments & Textile Sectors 722,770,000 722,770,000 722,770,000

Increase in NPLS under B/L category 36,138,500 72,277,000 108,415,500

Increase in Provisions 36,138,500 72,277,000 108,415,500

Total eligible capital 1918100000 1,918,100,000 1,918,100,000

Revised Capital 1,881,961,500 1,845,823,000 1,809,684,500


Revised risk weighted assets 18,557,161,500 18,521,023,000 18,484,884,500

CAR 10.32% 10.32% 10.32%

Revised CAR 10.14% 9.97% 9.79%


Lanka Bangla Finance Limited has given 17.35% of its loan to large and medium scale

industry. Increase in NPLs has increased the provision by the same amount and thus

decrease the Capital base and RWA.

4. Extreme Events: In which due to increase in the certain percentage of NPLs, the

whole capital position of a bank will be wiped out to offset the increased amount ofprovision due to cover respective loan losses.

4. Fall in the value of eligible securities

Magnitude of Shock 10% 25% 50%

Weighted Value of Eligible Securities 3107134913 3107134913 3107134913

Revised Value of Eligible Securities 2796421422 2330351185 1553567457

fall in the value of Eligible Securities 310713491 776783728 1553567457

Provision Requirement 310713491 776783728 1553567457

Revised Provision Requirement 0 0 0

Increase in Provisions -310713491.3 -776783728.3 0

Tax Rate 0.425 0.425 0.425

Tax adjusted provision 0 0 0


Revised Capital 1918100000 1918100000 1918100000

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3.3 Equity Price Risk:

The stress test for equity price risk assesses the impact of the fall in the stock market index.

Here we have taken the market value of the portfolio of the bank. Appropriate shocks have

been absorbed to the respective securities if the current market value of all the on balance

sheet and off balance sheet securities listed on the stock exchanges including shares, NIT

units, mutual funds etc falls at the rate of 10%, 20% and 50% respectively. The impact of

5resultant loss has been calibrated in the CAR.

Equity price of the listed securities is very volatile in our country. The adverse and sudden

changes in share price are very much detrimental for financial institutions especially for

banking corporations.

At the time of calculating the equity price risk, equity price was taken at balance sheet date

from cost price or market value which one is lower. The cost price was below the market

value. So the cost price was taken to measure the shock.

The changes in market price of shares reduce the CAR but the CAR is still in a good position.

Eligible Capital 1,918,100,000.00Stock Market Investment 593,701,543.00

Tax rate 42.50%

Adverse Movement 10% 25% 50%

Net Exposure 593701543 593701543 593701543

Fall in Stock Prices 59370154 148425386 296850772

Tax rate 42.50% 42.50% 42.50%

Tax adjusted loss 34137839 85344597 170689194

Loss as % of capital 1.780% 4.449% 8.899%

Revised Capital 1883962161 1832755403 1747410806Risk weighted assets 18593300000 1.8593E+10 1.8593E+10

Revised risk weighted assets 18559162161 1.8508E+10 1.8423E+10

CAR 10.32% 10.32% 10.32%

Revised CAR 10.15% 9.90% 9.49%


Risk weighted assets 18593300000 18593300000 1.8593E+10

Revised risk weighted assets 18593300000 18593300000 1.8593E+10

CAR 10.32% 10.32% 10.32%

Revised CAR 10.32% 10.32% 10.32%

Change in CAR (% age points) 0.00% 0.00% 0.00%

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3.4 Liquidity Risk:

The stress test for liquidity risk evaluates the resilience of the banks towards the fall in

liquid liabilities. The ratio liquid assets to liquid liabilities has been calculated before andafter the application of shocks by dividing the liquid assets with liquid liabilities.

Liquid assets are the assets that are easily turned into cash without the threat of loss. They

include cash, balances with Bangladesh Bank and balances with banks, call money lending,

lending under repo and investment in government securities.

Liquid liabilities include the deposits and the borrowings. Appropriate shocks have been

absorbed to the liquid liabilities if the current liquidity position falls at the rate of 5%, 7%

and 10% respectively. The ratio of liquid assets to liquid liabilities has been recalculatedunder each scenario.

Particulars Not morethan1 month term

1-3 monthsterm

3-12 monthsterm

1-5 yearsterm

above 5-yearsterm

TOTAL OUTFLOWS(A)

3,797,397,833 3,952,268,974 2,943,895,789 3,515,671,845 830,565,194

TOTAL INFLOWS (B) 105,000 962,636,179 3,152,170,360 1,152,298,197 5,738,222,506

MISMATCH -

3,797,292,833

-

2,989,632,795

208,274,571 -

2,363,373,648

4,907,657,312

MISMATCH (%) -100.00% -75.64% 7.07% -67.22% 590.88%

cumulative mismatch -3797292833 -6786925628 -6578651057 -8942024705 -4034367393

F. CUMULATIVECOUNTERBALANCINGCAPACITY (AFTERMISMATCH)

-1780037916 -6446925628 -6238651057

minor 5% moderate

7%

major

10%

gap during 1-90 day time bucket -88.42% -88.75% -89.23%

cumulative gap upto 1 year -63.59% -64.40% -65.60%

1st line of defence 680,000,000

2nd line of defence 8,386,274,584

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shock of 5%

TOTAL OUTFLOWS (A) 3995011282 3901850315 2972484592 3381416512 789036934.3

TOTAL INFLOWS (B) 99750 914509620.1 3042693651 1252291805 5508926291

MISMATCH -3994911532 -2987340695 70209059.15 -2129124707 4719889356

MISMATCH (%) -100.00% -76.56% 2.36% -62.97% 598.18%


cumulative counter balancing ability -3654911532 -6642252226 -6572043167

shock of 7%

TOTAL OUTFLOWS (A) 4074056661 3881682851 2983920113 3327714379 772425630.4

TOTAL INFLOWS (B) 97650 895258996.5 2998902967 1292289248 5417207804

MISMATCH -4073959011 -2986423855 14982854.41 -2035425131 4644782174

MISMATCH (%) -100.00% -76.94% 0.50% -61.17% 601.32%



shock of 10%

TOTAL OUTFLOWS (A) 4192624730 3851431656 3001073395 3247161180 747508674.6

TOTAL INFLOWS (B) 94500 866383061.1 2933216942 1352285413 5279630075

MISMATCH -4192530230 -2985048594 -67856452.7 -1894875767 4532121401

MISMATCH (%) -100.00% -77.50% -2.26% -58.35% 606.30%



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3.5 Insolvency Ratio :

Insolvency Ratio depicts the situation or scenario where there is a risk for the firm to be

wiped out by its capital. Under this ratio I have tried to show what would be the situation in

the capital being wiped out by change in NPL. Later I have shown the impact over the

regulatory capital when the NPL fluctuates.

Combined ShocksMagnitude of Shock Minor Moderate Major

Increase of NPL after CR-1 265831400 664578500 1329157000



Revised Regulatory Capital after CR-1 1765246945 1535967363 1153834725



Increase of NPL 109925131 264155494 506996325

Revised NPL 1035535131 1189765494 1432606325

Revised Regulatory Capital 1674647999 1584578881 1446751593

Total of NPL & Regulatory Capital 2710183130 2774344376 2879357917

Revised Infection Ratio (Revised NPL to Loans) 7.28% 8.37% 10.08%

Revised Critical Infection Ratio 19.06% 19.51% 20.25%

Revised Insolvency Ratio 38.21% 42.88% 49.75%

Infection Ratio

Total NPLs 925610000

Total Loan 14217180000

Total eligible capital 1918100000

Infection Ratio 6.51%

Critical Infection Ratio 20.00%

Insolvency Ratio 32.55%

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3.6 WAR & WIR Matrix

The following tables describe the WAR & WIR matrix showing the risk shocks under

different types of risky factors like interest rate shocks, credit risk shocks, equity risk

shocks etc.

Test-I : WAR MATRIX

Risk Shocks in Stress Testing

Risk Factors Minor Moderate Major HWAR

Zone Score Zone Score Zone Score

Weight 50% 30% 20% 100%

1. Interest RiskIncrease inInterest Rate

10% 9.64% 0 8.95% 0 8.25% 0 0

2. Credit Risk 60% 12 0 0 6

increase inNPLs 10% 9.57% 0 8.43% 0 6.47% 0 0

Downwardshift in allCategories

10% 7.63% 0 7.60% 0 7.63% 0 0

Fall in theVES

5% 0.00% 0 0.00% 0 0.00% 0 0

Increase inNPLs under B/L

category in 2sectors

15% 10.14% 12 9.97% 0 9.79% 0 6

3. Equity priceRisk Fall in

Stock Prices

10% 10.15% 8 9.90% 0 9.49% 0 4

4. Liquidity Shock 20% 1-0-0 20 1-0-0 1-0-0 20

VWAR 40% 28 0 0 0

Test-II : WIR MATRIX

Risk Shocks in Stress Testing

Risk Factors Minor Moderate Major WIR

Zone Zone Zone

Weight 50% 30% 20%

1. Credit Risk shocksIncrease in NPL

38.21% 42.88% 49.75% 0.00%

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Here is the summary of the risks providing under three situation: minor, moderate and

major -

DIFFERENT RISK (at a glance)

Risk Factors Minor Moderate Major

Interest risk 9.64% 8.95% 8.25%

Credit risk

Increase in NPLs 9.57% 8.43% 6.47%

Downward shift in all categories 7.63% 7.60% 7.63%

Increase in NPLs under B/Lcategory in 2 sectors

10.14% 9.97% 9.79%

Equity Price Risk 10.15% 9.90% 9.49%

Liquidity risk 1-0-1 1-0-1 1-0-1

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WAR MATRIX: MINOR MODERATE MAJOR

CAR SCORE CAR SCORE CAR SCORE

Interest risk 9.64% 0 8.95% 0 8.25% 0

Credit risk

Increase in NPLs 9.57% 0 8.43% 0 6.47% 0

Downward shift in all categories 7.63% 0 7.60% 0 7.63% 0

Increase in NPLs under B/L category in 2 sectors 10.14% 80 9.97% 0 9.79% 0

Equity Price Risk 10.15% 80 9.90% 0 9.49% 0

Liquidity risk 1-0-1 80 1-0-1 80 1-0-1 80

SCORE WEIGHTED SCORE

WEIGHTED AVERAGE RESILIENCE WEIGHTS MINOR MODERATE MAJOR MINOR MODERATE MAJO

Interest risk 0.1 0 0 0 0 0

Credit risk

Increase in NPLs 0.171429 0 0 0 0 0

Downward shift in all categories 0.171429 0 0 0 0 0

Increase in NPLs under B/L category in 2 sectors 0.257143 80 0 0 20.57143 0

Equity Price Risk 0.1 80 0 0 8 0

Liquidity risk 0.2 80 80 80 16 16 1

TOTAL 36.57143 16 1

WEIGHTED AVERAGE RESILIENCE 26.28571

In the above mentioned tables I have shown the Resilience of the Lanka Bangla Finance Limited (LBFL). This is calculated by

multiplying the scores with the weights of that particular risk class. The weighted average resilience here is 26.28571.

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4.0 Findings & Conclusion

It is of vital importance to understand and appreciate the risks the NBFI industry is

exposed to so that soundness and sustainability of the industry can be ensured. Earlier,

Bangladesh Bank has issued core risk management guidelines so that NBFIs can develop a

sound risk management practice while carrying out their daytoday activities.

Simple stress testing results of Lanka Bangla Finance Ltd. reveals that the its overall CAR

would stay above the required level in most of shocks. In some case the NBFI can maintain

the capital adequacy in minor and moderate shocks, but in major shocks the firm is

exposed to risk to losing capital adequacy according to the required CAR.

In testing cumulative shocks the firm only has the capacity to absorb minor shocks, the CAR

would fall below required level if moderate and major shock takes place.

Stress tests cover a range of methodologies. Complexity can vary, ranging from simple

sensitivity tests to complex stress tests, which aim to assess the impact of a severe

macroeconomic stress event on measures like earnings and economic capital.

Most risk management models, including stress tests, use historical statistical relationships

to assess risk. They assume that risk is driven by a known and constant statistical process

and historical relationships constitute a good basis for forecasting the development of

future risks. The recent financial turmoil has revealed serious flaws with relying solely on

such an approach.

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Bibliography

Bangladesh Bank, Guidelines on Stress Testing, Department of Offsite Supervision

Annual Report (2009, 2010, 2011), LankaBangla Finance Limited

Official website of LankaBangla Finance Limited

Website of Bangladesh Bank

lanka

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