It goes without saying that risks to financial stability have increased across the world in the midst of the highest inflation in decades. The ongoing Russian war in Ukraine has ramped up the risks as the negative impact of war already spread out to European and global energy markets. The market liquidity is already poor and there is also a risk that a sudden and confused tightening in financial conditions may act together with already-existing vulnerabilities.
This is the near-summarised version of the International Monetary Fund (IMF)'s latest Global Financial Stability Report (GFSR), released in the second week of this month, crammed with dos and don'ts. The report also pointed out that, in the emerging markets or developing countries, rising rates, weak fundamentals, and large outflows of assets had already pushed up the cost of borrowing, particularly for frontier economies. Thus, it has also increased risk of additional defaults on debts.
The core message of the IMF report is that rising inflation and monetary measures to curb the inflation have combined to create a difficult situation which already destabilised the financial market. In other words, global financial stability has weakened and no country is immune from the situation which may aggravate all too soon.
It is noteworthy here that financial stability is a comprehensive issue. The European Central Bank (ECB) defined financial stability as a condition in which the financial system - comprising financial intermediaries, markets and market infrastructures - is capable of withstanding shocks and the unravelling of financial imbalances. 'This mitigates the prospect of disruptions in the financial intermediation process that are severe enough to adversely impact real economic activity.'
So, a sound and stable financial system is critical for any economy to function smoothly. Maintaining the financial stability is also challenging as there are always some risks of exogenous and endogenous shocks. That's why a consistent review of the financial situation of any economy is helpful to dealing with any unstable or uncertain situation.
In Bangladesh, as in most countries, the central bank is mainly responsible for maintaining the financial stability and monitors the situation. Other financial regulators like securities and exchange commission (SEC) also play an important role and support the central bank. As part of the critical task, Bangladesh Bank also publishes a report on the financial stability annually. Last week, it unveiled 'Financial Stability Report 2021' which is the 12th annual edition of the series. Introduced in 2010, the report also becomes one of the flagship publications of the central bank.
The maiden report had mentioned that 'a financial system can be treated as stable if it fulfils its functions and is able to withstand the shocks to which it is exposed.' The financial system of Bangladesh is made up of banks, non-bank financial institutions (NBFIs), insurance companies, stock market and micro-credit organisations.
The latest report 'contains the assessment of the recent challenges, and prospects of different segments of the financial system of Bangladesh to convey the stakeholders the state of overall financial stability of the economy. It discusses global as well as domestic macroeconomic environment along with the performance of banks and other financial intermediaries and their resilience to uphold stable financial ecosystem.' The report covers the development of the country's financial system in 2021.
Besides covering the macroeconomic development in the last year, the report focuses on performances of the banking sector and financial institutions (FI) as well as risks and resilience of the banks and FIs. The report further shed lights on money, capital and foreign- exchange markets, financial infrastructure, insurance sector and microfinance institutions. So, anyone who wants to get a comprehensive picture of the country's overall financial sector needs to go through the report.
So, what are the core findings and messages of the report? It finds that, after experiencing an increasing trend in asset growth during 2019 and 2020, the banking sector experienced a modest growth in 2021. The asset quality of the banking sector, however, deteriorated slightly as gross non-performing loan (NPL) ratio had increased marginally in the past year. The liquidity situation in the banking industry remained buoyant in 2021, according to the report, and the overall risk of the banking sector declined slightly.
Bangladesh Bank's assessment also found that the banks and FIs would 'remain moderately resilient to different shock scenarios' though the 'uptrend in NPL, provisioning shortfall, decline in equities and profitability' likely to pose some concerns for FIs.
It seems that the central bank team took utmost caution on making comments on any critical area of the financial sector. Though the comments or concluding remarks on any area are based on updated data and careful analyses, in most cases the restrained approach to drawing any conclusion is clear. By doing so, the report appears to have covered up or avoided some vulnerabilities in the financial sector.
The report's ultimate conclusion is: (a) the financial system of Bangladesh was resilient in 2021, thanks to supportive measures from government and financial-sector regulators and (b) the country's financial stability may come under threat in the near future due to geopolitical tension and inflation and so prudence is necessary to deal with the threat.
A problem with the latest financial stability report (FSR) is that it is published more than nine months after the end of the year 2021. As the lag of time is long and many things have changed in the last nine months, various data and developments included in the report may seem less relevant. It is difficult to comprehend why the publication of an important document like the financial stability report has been so delayed. Even in 2018, the report was published in May while most of the previous reports were made public within June or July. In this connection, the central bank needs to pay attention so that the report could be published after three to four months of a year. There is also no reason why it will not be possible as collection and compilation systems of data have improved significantly. Only some bureaucratic complications may delay the process, which is undesirable.
