Aasim Bin Bakr Roll: 12 class 06

2010 Stock Market Crash

The root causes of the 2010 stock market crash were:

1. Decrease in FDI: During the 2007-09 military backed government period, FDI decreased
in our country. On the other hand, remittance inflow increased. As a result of decreased,
investment opportunities lowered in the real sector.

2. Increase in BO Accounts: The number of BO accounts skyrocketed from 1.25mn to 3.25

in only one year. This was an increase more than 150%. However, number of stocks in the
market did not increase in the same or even close to this proportion.

3. Excess Liquidity: Due to the lack of the investments during the military government
period, banks had a significant amount of idol money liquid as there were fewer investment
opportunities during the unstable political times. As regulations were not stringent, banks started
investing highly in the stock market.

4. Expansionary Monetary Policy: After the election, Bangladesh Bank took an

expansionary monetary policy to maintain a 7-8% GDP growth rate. As a result, there was a
sudden increase in money supply but nowhere to be invested.

5. Other Reasons: Finally, lack of regulations and opportunity to whiten black money also
caused the stock market to boom

As a result of the mentioned reasons, the stock market started to boom. Consequently, more
people and institutions started investing in the market. Finally, the index reached its peak.

The Crash and Subsequent Situation

CRR was increased from 5% to 6% -> liquidity crisis -> record 194% call money rate -> started
withdrawing money from the stock market -> other institutional investors withdrew money ->
panic sell (steep decline) -> followed by IPO scandals, omnibus accounts

As Bangladesh Bank increased CRR from 5% to 6%, a liquidity crisis was faced by the banks.
As a result, they started withdrawing money from the market to meet their liquidity needs. The
first fall in the index was due to this. Back then, call money rate reached a historic high of 194%.

After the banks withdrew their money, the other institutional investors followed the suite. The
second fall was due to this. As a result of both these, retail investors started panic sell and the
index fell the most due to this. There was a steep decline in index.

Later on, the index corrected slightly but, on a decline, again for months due to other reasons
like IPO scandals and omnibus accounts.
Aasim Bin Bakr Roll: 12 class 06

Other Topics

- Inflation gets impacted by increase in monetary policy

- Main issues of the government in the early 2000s included high inflation levels, load
shedding, price hike, etc.

- Gaps in money market and capital market will lead to flow in funds from one market to
the other until they reach an equilibrium

- If price of a stock increases, my yields will decrease

- The market can be forecasted by forecasting liquidity and interest rate

- Interest rates usually increase during Qurbani time as people pull their money out of the
banks