Understanding of the financial system of Bangladesh and USA

Comparative financial system analysis of Bangladesh and USA:

A financial system can be defined at the global, regional or firm-specific level and is a set of
implemented procedures that track financial activities. On a regional scale, the financial system
is the system that enables lenders and borrowers to exchange funds. A financial system is the
system that covers financial transactions and the exchange of money between investors, lender
and borrowers. A financial system can be defined at the global, regional or firm specific level.
Financial systems are made of intricate and complex models that portray financial services,
institutions and markets that link depositors with investors. The financial system of USA is much
more different from that of Bangladesh. But in Bangladesh the financial system of Bangladesh is
subdivided into some more sectors.

Financial System of Bangladesh:

The financial system of Bangladesh consists of three broad sectors. They are

1. Formal sector
2. Semi-formal sector
3. Informal sector

The sectors have been categorized in accordance with their degree of regulation. The formal
sector includes all regulated institutions like banks, non-bank financial institutions (FIs), insurance
companies, capital market Intermediaries like brokerage houses, merchant banks etc.; micro
finance institutions (MFIs).

The semi-formal sector includes those institutions which are regulated otherwise but do not fall
under the jurisdiction of Central Bank, Insurance Authority, Securities and Exchange Commission
or any other enacted financial regulator. This sector is mainly represented by Specialized
Financial Institutions like House Building Finance Corporation (HBFC), Palli Karma Sahayak
Foundation (PKSF), Samabay Bank, Grameen Bank etc., Non-governmental organizations (NGOs)
and discrete government programs.

The informal sector includes private intermediaries which are completely unregulated.

Financial System of USA:

In finance, the financial market encompasses the part of the free market economic system in
which people and entities can trade securities, commodities and other goods at low transaction
costs that reflect supply and demand. The financial markets facilitate a number of things that are
essential to the workings of a market economy, an economy which heavily relies on interactions
between buyers and sellers for the allocation of resources.

The money markets are the part of the financial market used for raising short-term finance, the
segment in which financial instruments with high liquidity and short maturities are traded. It is
used by investors for borrowing and lending in the short term. As of December 2018, the interest
rate of three-month treasury bills was 2.37 percent and 2.48 percent for six-month treasury bills.

The stock market also plays a role in the financial market. NYSE and NASDAQ, the two main stock
exchanges in the United States, were the largest stock exchange operators worldwide by market
capitalization of listed companies as of April 2018.

Mutual funds are vehicles pooling investors’ money and locating them on financial markets in
accordance with the objectives specified in the fund prospectuses. In 2017, there were 9,356
mutual funds, which managed almost 18.75 trillion U.S. dollars’ worth of assets. In that year, 44.5
percent of households owned mutual funds in the U.S.

Foreign direct investment is a measure of investments undertaken by companies from one

country in another country. Usually it involves the ownership of at least ten percent of the foreign
company. In 2017, direct investment position of the United States abroad amounted to 6.01
trillion U.S. dollars.
The central bank of the United States is the Federal Reserve System. The Federal Reserve System
came into being in 1913, after the passage of the Federal Reserve Act and largely in response to
the bank panic of 1907. Since the formation of the Fed, Congress has passed numerous additional
laws adding or altering the powers and responsibilities of the Fed, including: the Glass-Steagall
Act, the Bank Holding Company Act, the Federal Reserve Reform Act, the Gramm-Leach-Bliley
Act and the Dodd-Frank Act.

While arguably initially created to enhance the stability of the banking system and the economy,
the Federal Reserve serves many different simultaneous functions. The Fed is the means by which
the United States conducts monetary policy, as well as a regulator of banks, and a service
provider to the financial system and government of the United States. Although the Fed is
supposed to be an independent body, and its decisions are not ratified by the President or
Congress, there is often a large degree of consultation and cooperation between the bodies.
 Regulators of Financial Market of Bangladesh and USA

Financial systems are strictly regulated because they directly influence financial markets. The
stability of the financial markets plays a crucial role in the monetary protection of consumers.
These financial systems are mostly handled by financial institutions which include commercial
banks, central banks, public banks and cooperative banks. Cooperative banks and development
banks managed by states are also listed under financial institutions that have heavily regulated
financial systems.

Regulator of financial market of Bangladesh:

The financial market in Bangladesh is mainly of following types:

1. Money Market: The money market comprises banks and financial institutions as
intermediaries, 20 of them are primary dealers in treasury securities. Interbank clean and
repo based lending, BB's repo, reverse repo auctions, BB bills auctions, treasury bills
auctions are primary operations in the money market, there is also active secondary trade
in treasury bills (up to 1 year maturity).
2. Capital market: The primary issues and secondary trading of equity securities of capital
market take place through two (02) stock exchanges-Dhaka Stock Exchange and
Chittagong Stock Exchange. The instruments in these exchanges are equity securities
(shares), debentures and corporate bonds. The capital market is regulated by Bangladesh
Securities and Exchange Commission (BSEC).
3. Taka Treasury Bond market: The Taka Treasury bond market consists of primary issues
of treasury bonds of different maturities (2, 5, 10, 15 and 20 years), and secondary trade
therein through primary dealers. 20 banks performing as Primary Dealers participate
directly in the primary auctions. Other bank and non-bank investors can participate in
primary auctions and in secondary trading through their nominated Primary Dealers. Non-
resident individual and institutional investors can also participate in primary and
secondary market, but only in treasury bonds.
4. Foreign Exchange Market: Towards liberalization of foreign exchange transactions, a
number of measures were adopted since 1990s. Bangladeshi currency, the taka, was
declared convertible on current account transactions (as on 24 March 1994), in terms of
Article VIII of IMF Article of Agreement (1994). As Taka is not convertible in capital
account, resident owned capital is not freely transferable abroad. Repatriation of profits
or disinvestment proceeds on non-resident FDI and portfolio investment inflows are
permitted freely. Direct investments of non-residents in the industrial sector and portfolio
investments of non-residents through stock exchanges are repairable abroad, as also are
capital gains and profits/dividends thereon. Investment abroad of resident-owned capital
is subject to prior Bangladesh Bank approval, which is allowed only sparingly. Bangladesh
adopted Floating Exchange Rate regime since 31 May 2003. Under the regime, BB does
not interfere in the determination of exchange rate, but operates the monetary policy
prudently for minimizing extreme swings in exchange rate to avoid adverse repercussion
on the domestic economy. The exchange rate is being determined in the market on the
basis of market demand and supply forces of the respective currencies. In the forex
market banks are free to buy and sale foreign currency in the spot and also in the forward
markets. However, to avoid any unusual volatility in the exchange rate, Bangladesh Bank,
the regulator of foreign exchange market remains vigilant over the developments in the
foreign exchange market and intervenes by buying and selling foreign currencies
whenever it deems necessary to maintain stability in the foreign exchange market.

So, from the above discussion we can see that the money market of Bangladesh is
regulated by Bangladesh and the Capital market is regulated by Bangladesh Security and
Exchange Commission.
Regulator of the financial market of USA:

In USA, the money market is regulated by the Federal Reserve System. On the other hand, the
capital market is regulated by the U.S Securities and Exchange Commission.

Federal Reserve System:

The Federal Reserve, commonly referred to as the Fed, is the central bank of the United States.
The Fed is responsible for regulating the U.S. monetary system (i.e. how much money is printed,
and how it is distributed), as well as monitoring the operations of holding companies, including
traditional banks and banking groups. Broadly speaking, its mandate is to promote stable prices
and economic growth.

The Federal Reserve exerts regulatory oversight in a few different ways:

Board of Governors: The national component of the Federal Reserve System is run by a seven-
person Board of Governors, commonly called the Federal Reserve Board. This group is managed
by a chairman (currently Ben S. Bernanke) and vice chairman (Donald L. Kohn). Its main
responsibility is to guide monetary policy by coordinating with the Federal Open Markets
Committee (FOMC) and regional reserve banks. Toward this end, the board organizes a wide
range of research and analytical operations. The board is also charged with overseeing the U.S.
government’s system of payments; supervising the financial services industry, including
approving bank presidents and setting requirements for the amount of cash banks must hold in
reserve; and coordinating and overseeing the actions of regional reserve banks.

Federal Open Markets Committee: The FOMC is the Fed’s primary monetary policymaking body.
It consists of twelve members, including the seven members of the Board of Governors, the
president of the Federal Reserve Bank of New York, and the presidents of four other regional
banks (who serve on a rotating basis). The FOMC typically meets eight times a year and is charged
with assessing the economic and financial landscape and setting the "federal funds rate," the
benchmark interest rate at which the Fed loans money to banks.
Reserve banks: The Federal Reserve banking system encompasses twelve regional banks with
twenty-five total branches. These banks are regional arms of the U.S. central bank that act as
intermediaries between local banks and the U.S. reserve banking system. They store and
distribute reserves, process checks and other forms of interbank payments, and generally
supervise the operations of commercial banks in their region. Reserve banks have additional
regulatory authority over the 38 percent of U.S. commercial banks (mainly larger banks, including
all national banks) that are members of the Federal Reserve system. These banks are considered
stockholders of their local reserve bank and thus are required to hold 3 percent of their total
capital at that bank.

The U.S. Securities and Exchange Commission (SEC:

The U.S. Securities and Exchange Commission (SEC) is an independent federal government
agency responsible for protecting investors, maintaining fair and orderly functioning of
the securities markets, and facilitating capital formation. It was created by Congress in 1934 as
the first federal regulator of the securities markets. The SEC promotes full public disclosure,
protects investors against fraudulent and manipulative practices in the market, and monitors
corporate takeover actions in the United States.
 Comparative analysis of the financial instruments of Bangladesh and USA

Instruments of Money Market in Bangladesh and USA:

Bangladesh USA
 Treasury Bill  Short Term debts and securities

 Commercial Paper  Federal Agency Notes

 Certificate of Deposit  Eurodollar Deposits

 Bankers Acceptance  Treasury Bill

 Commercial Paper

 Certificate of Deposits

 Bankers Acceptance

 Repurchase Agreement

Instruments of Capital Market in Bangladesh and USA:

Bangladesh USA
 Corporate Bond  Government Bond

 Debenture  Municipal Bond

 Treasury Bond  Debenture