Bangladesh University of

Professionals
Term Paper on:

" The Impact of Regulatory Changes on Capital Management in the Banking Sector: A
Comparative Study
Submitted to:

Farhana Yasmin

Assistant Professor

Department of Business Administration in Finance & Banking

Bangladesh University of Professionals

Submitted by
Mahbuba Sultana Sarah
ID: 2222151119
Department of Business Administration in Finance & Banking

Course Code & Title: Managerial Finance (FIN 2105)

Date of Submission: 22 October, 2023

Letter of Transmittal
22th October, 2023

To,
Farhana Yasmin
Assistant Professor
Department of Business Administration in Finance and Banking
Faculty of Business Studies
Bangladesh University of Professionals
Subject: Term paper submission for the course “Managerial Finance”

Dear Sir,
I am pleased to submit the report of my term paper titled " The Impact of Regulatory
Changes on Capital Management in the Banking Sector: A Comparative Study " for the
3rd-semester Managerial Finance (FIN 2105) that you asked for. I made every effort to work
on the report carefully and make it as accurate, descriptive, and informative as possible.

The study I conducted vastly enhanced my knowledge to make an executive report. This
report has given me an exceptional experience that might have immense uses in future
endeavors. I sincerely hope that it fulfills your expectations.

Lastly, I also hope that this report is by your instructions. I eagerly await your feedback for
resolving any shortcomings in my paper.
Thank you
Sincerely yours,
Mahbuba Sultana Sarah
ID: 2222151119

Signature:

ii
Acknowledgment

I take this opportunity to express my acknowledgment and deep gratitude to almighty Allah
for giving me the perseverance and strength to finish the course and write this report. I
sincerely thank our course teacher, Assistant Professor, Farhana Yasmin, Faculty of Business
Studies, Bangladesh University of Professionals for her guidance in choosing the topic of the
term paper. I firmly believe that there is always a scope for improvement, thus welcoming
any suggestions for further enriching the quality of this paper.

iii
Executive Summary
The banking sector, a cornerstone of economic stability, faces constant evolution driven by
regulatory changes. This term paper conducts a comparative analysis of the impact of
regulatory changes on capital management in the banking sector, juxtaposing Bangladeshi
banks with international counterparts. With a word limit of 200, we concisely outline the key
aspects of this study.

This research explores the effects of recent regulatory changes on capital management
practices. It begins by illuminating specific changes within the Bangladeshi banking sector
and discusses their influence on local banks. This portion focuses on regulatory nuances, their
implications for capital management, and the strategies employed by Bangladeshi banks to
adapt.

Simultaneously, this study examines significant regulatory shifts in the international banking
arena and their ramifications for global banks' capital management. We delve into the essence
of these changes and their implications for international banking institutions.

The comparative analysis that follows delineates the divergence and convergence of
regulatory impacts between Bangladeshi banks and international banks. Supported by
illustrative case studies and empirical evidence, this analysis offers a tangible understanding
of the practical implications of regulatory changes on capital management.

In sum, this study identifies key disparities and commonalities in regulatory impacts. It
underscores the significance of these findings for policymakers, banking institutions, and the
financial health of respective economies. This research equips stakeholders with valuable
insights to navigate the complex regulatory landscape and bolster their banking practices.

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Table of Contents
Acknowledgment..................................................................................................................................iii
Executive Summary..............................................................................................................................iv
Chapter 1 Introduction...........................................................................................................................1
Objective of the study........................................................................................................................1
Scope of the Study.............................................................................................................................1
Methodology.....................................................................................................................................1
Limitations........................................................................................................................................2
Chapter 2 Theoretical Context of Capital Management.........................................................................4
Capital Management..........................................................................................................................4
Importance of capital management in the banking sector..................................................................4
Significance of regulatory changes in shaping the banking industry.................................................6
Chapter 2 Regulatory Changes and its Impact.......................................................................................8
Banks of Bangladesh.........................................................................................................................8
Overview of Regulatory Changes..................................................................................................8
Impact on Capital Management in Local Banks................................................................................9
International Bank...........................................................................................................................11
Impact on Capital Management in Local Banks..............................................................................12
Chapter 3 Comparative Analysis.........................................................................................................15
Capital Adequacy............................................................................................................................15
Liquidity Standards.........................................................................................................................15
Interest Rate.....................................................................................................................................16
Findings:..........................................................................................................................................17
Capital Adequacy........................................................................................................................17
Liquidity Standards......................................................................................................................17
Interest Rate.................................................................................................................................17
Conclusion:..........................................................................................................................................18

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 Chapter 1 Introduction

Objective of the study

This study's goal is to compare the effects of legislative changes on capital management in
the banking industry, focusing on the differences between Bangladeshi banks and foreign
banks. This study attempts to investigate how Bangladeshi banks have modified their capital
management practices in response to domestic and global regulatory changes. The goal of the
study is to find differences and similarities between the strategies, capital structures, and risk
management techniques used by Bangladeshi banks and those of their international
competitors. The study offers insightful comparisons that deepen our understanding of how
different regulatory frameworks influence capital management strategies in the banking
industry.

Scope of the Study

The study's scope includes a thorough investigation of the effects of legislative changes on
capital management in the banking industry, with a focus on contrasting Bangladeshi banks'
experiences with those of foreign banks. The complex regulatory systems that control capital
management in Bangladesh and important foreign markets like the US and the EU will be
examined as part of this research.
To ascertain the type and scope of regulatory changes influencing capital management, the
study will include a thorough analysis of pertinent literature, policy papers, and regulatory
guidelines. To enable a comparison examination, data will also be gathered from several
Bangladeshi banks and foreign institutions.

Methodology
This study's methodology uses a systematic approach to perform a comparative analysis of
the effects of legislative changes on capital management in the banking industry, with a focus
on Bangladeshi banks and foreign banks. This study's methodology will be informed by the
following factors:
Data Collection
To obtain secondary data, a thorough analysis of the current literature, regulatory documents,
annual reports, and financial statements of the selected banks will be carried out. This
information will offer historical background and viewpoints.

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Selection of Sample Banks
Purposive sampling will be used in the study to select a representative sample of both
international and Bangladeshi banks. Size, market presence, and compliance with regulatory
standards will all be considered as selection criteria.
Data Analysis
Quantitative Analysis: To discover important financial indicators and trends connected to
capital management, quantitative data from financial reports will be studied using statistical
techniques.
Comparative Analysis
The research will use a comparative methodology, contrasting the results from Bangladeshi
banks with those from foreign banks. The differences and similarities in how they reacted to
regulatory changes will be shown by this investigation.
Ethical Considerations
Ethical standards and protocols will be upheld during the data collection process, ensuring
informed consent and data privacy for interviewees.
Research Ethics
The research will adhere to ethical guidelines and respect the confidentiality and anonymity
of respondents.
The technique used intends to give a thorough and comparative examination of the impact of
regulatory changes on capital management in Bangladeshi banks vs foreign banks,
illuminating the many strategies and modifications these institutions make in response to
regulatory developments.

Limitations
The limitations of this study are as follows:
Data Availability and Quality
The reliance on the quality and availability of data is a serious restriction. The breadth and
dependability of the comparison analysis may be impacted by differences in the accuracy and
thoroughness of the data from annual reports, financial statements, and interviews among the
chosen Bangladeshi and foreign banks.
Generalizability
While the study aims to provide valuable insights into the impact of regulatory changes on
capital management, the findings may not be fully generalizable to all Bangladeshi banks and

2
international banks due to the selectivity of the sample. The chosen banks may not fully
represent the entire banking sector.
Time Constraints
The study may be subject to time constraints, affecting the depth of data collection and
analysis. Regulatory changes are ongoing, and the study's findings might not capture the most
up-to-date developments.
Language and Cultural Differences
Differences in language and culture between the Bangladeshi and international banks under
study may pose challenges during the interview and data collection process.
Misinterpretations or misunderstandings could impact the accuracy of the information
gathered.
Regulatory Variability
Regulatory changes across different international regions can vary significantly in terms of
scope and stringency. This variability may affect the comparability of the regulatory changes
faced by the selected banks.
Bank-Specific Factors
The study may not fully account for individual bank-specific factors that influence capital
management strategies. These factors could include bank size, ownership structure, and
customer base, which may lead to unique responses to regulatory changes.
Changes in the Regulatory Environment
The research may not capture potential shifts in the regulatory environment during the study,
as regulations are subject to change. Such changes could affect the relevance of the findings.
Acknowledging these limitations is essential to ensure a clear understanding of the
constraints under which the research operates and the potential impact on the study's
outcomes and generalizability.

3
 Chapter 2 Theoretical Context of Capital Management

Capital Management
To achieve its long-term financial objectives and optimize its financial structure, a company's
financial resources, including its stock, debt, and retained earnings, are strategically managed.
To secure the company's financial stability and expansion, it requires making choices on
raising, investing, and allocating capital efficiently.
Key aspects of capital management include:
Capital Structure
The process of assessing and choosing capital projects or expenditures is known as capital
budgeting. It focuses on choosing which long-term endeavors or assets a firm ought to invest
in order to produce future cash flows and increase the worth of the enterprise.
Capital Budgeting
The combination of a company's various long-term financing sources, such as equity
(common stock) and debt, is referred to as its capital structure (bonds, loans). It covers how
the business finances its operations and investments as well as the breakdown of its
obligations.
Working Capital Management
Managing short-term assets and liabilities to maintain liquidity and support day-to-day
operations.
Dividend Policy
The dividend policy's main objective is to decide how much of a company's profits should be
distributed to shareholders as dividends and how much should be kept reinvested in the firm.
Efficient capital management is crucial for a company's financial health, as it can impact its
ability to fund growth, manage debt, and provide returns to shareholders. It requires a balance
between risk and return, considering the company's financial goals, market conditions, and
regulatory requirements.

Importance of capital management in the banking sector

Capital management is of paramount importance in the banking sector due to its critical role
in ensuring the stability and soundness of financial institutions. Here are several key reasons
why capital management is crucial in the banking sector:

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Regulatory Compliance
Banking regulators worldwide impose minimum capital requirements on financial institutions
to ensure their ability to withstand adverse economic conditions. Compliance with these
regulations is essential to maintain a banking license and public trust.
Liquidity Support
In times of financial stress, having adequate capital can be a source of internal liquidity. It
allows banks to absorb losses without selling assets or relying solely on external sources of
funding. This is crucial for maintaining a bank's solvency during crises.
Facilitating Growth
Adequate capital provides banks with the financial capacity to expand their operations, make
strategic investments, and acquire other financial institutions. It supports the bank's growth
and diversification efforts.
Enhancing Stakeholder Confidence
Shareholders, depositors, and other stakeholders have greater confidence in a bank with a
strong capital position. This trust can help attract investors and depositors and reduce the
likelihood of bank runs during periods of financial stress.
Capital Adequacy Assessments
Regulators conduct stress tests and capital adequacy assessments to evaluate a bank's ability
to withstand adverse scenarios. Strong capital levels are essential for passing these
assessments and demonstrating financial resilience.
Alignment with Risk Profile
Effective capital management should align with a bank's risk profile. Banks with riskier
activities or portfolios should hold higher levels of capital to cover potential losses.
Market and Competitive Positioning
Banks that maintain strong capital positions can seize opportunities in the market and have a
competitive advantage over institutions with weaker capital positions. They are better
positioned to adapt to changing market conditions.
Protection of Depositors
One of the fundamental roles of capital in banking is to protect depositors. In many countries,
deposit insurance schemes may provide a safety net, but having sufficient capital is the first
line of defense against losses.

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Overall, capital management is integral to the long-term viability and stability of banks. By
maintaining the right balance of capital, banks can safeguard their operations, protect the
interests of stakeholders, and contribute to the overall health and stability of the financial
system. It's a critical component of prudent risk management in the banking sector.

Significance of regulatory changes in shaping the banking industry

Regulatory changes have a profound and far-reaching impact on the banking industry,
shaping it in several significant ways:
Financial Stability
Regulatory changes are often aimed at enhancing the stability of the banking sector. After the
global financial crisis of 2008, for example, regulatory reforms such as Basel III were
introduced to strengthen capital adequacy requirements, risk management, and liquidity
standards. These changes help mitigate the risk of bank failures and systemic crises.
Risk Management
Regulations impose risk management practices on banks, ensuring they have robust systems
in place to identify, assess, and manage various risks, including credit risk, market risk,
operational risk, and compliance risk. Effective risk management helps banks protect
themselves and their stakeholders from financial losses.
Consumer Protection
Regulatory changes often include measures to protect consumers from predatory lending
practices, unfair fees, and other abusive behaviors by financial institutions. This improves
customer trust and safeguards the interests of the public.
Compliance Standards
Regulations set standards for anti-money laundering (AML) and know-your-customer (KYC)
procedures, helping banks prevent illicit activities, such as money laundering and terrorist
financing. Compliance with these regulations is essential to maintaining a bank's reputation
and legal standing.
Capital Adequacy
Capital adequacy standards, such as the Basel Accords, play a significant role in determining
how much capital banks are required to hold. These standards are crucial for ensuring that
banks have sufficient financial cushion to absorb losses and meet their obligations,
contributing to financial stability.
Technology and Cybersecurity

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As the banking industry evolves and adopts new technologies, regulations often adapt to
address the associated risks. Regulations are introduced to ensure the security and privacy of
customer data, safeguard against cyber threats, and promote the responsible use of technology
in banking.
Market Competition
Some regulatory changes are designed to foster greater competition in the banking sector. For
example, open banking initiatives and fintech regulations aim to enable new entrants and
innovative solutions, providing consumers with more choices and driving innovation.
International Coordination
The global nature of banking requires international cooperation in regulatory matters.
Changes in international standards and agreements, such as the Basel Accords, help
harmonize banking regulations across borders, making it easier for banks to operate
internationally.
Financial Inclusion
Regulations can also promote financial inclusion by requiring banks to offer services to
underserved or marginalized populations. This contributes to economic development and
broadens access to financial services.
Compliance Costs
Regulatory changes can increase compliance costs for banks, influencing their business
models and profitability. Banks may need to adapt their operations, pricing, and services to
adhere to new regulations.
In conclusion, regulatory changes are instrumental in shaping the banking industry by
enhancing stability, risk management, consumer protection, competition, and international
cooperation. The evolving regulatory landscape continues to influence how banks operate,
adapt to technological advancements, and provide financial services to the public.

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 Chapter 2 Regulatory Changes and its Impact

Banks of Bangladesh

Overview of Regulatory Changes

Here are some regulatory changes in Bangladesh’s banking sector:

COVID-19 Response Measures

In response to the COVID-19 pandemic, the Bangladesh Bank introduced various measures
to support the banking sector, including loan restructuring facilities for affected borrowers
and relaxing some regulatory requirements to ensure the flow of credit and liquidity.
Single Borrower Exposure Limit
The Bangladesh Bank has reduced the single borrower exposure limit to 25% of a bank’s
capital from 35% as part of its measures to contain the concentration of loans among a small
group of people. From now on, no bank will be allowed to provide more than 15% funded
and more than 10% non-funded loans to a person or an organization.
Capital Adequacy Ratio (CAR)
Capital Adequacy Ratio regulatory measures are imposed on financial institutions, such as
banks and other depository institutions, to ensure they have a sufficient level of capital to
cover potential losses and risks. Banks in Bangladesh have been maintaining the lowest
capital base in South Asia for the past several years. Local banks maintained a CAR of 10.8
percent in 2017, 10.5 percent in 2018, 11.6 percent in 2019, and 11.8 percent in 2021, which
grew to 11.83 percent in 2022.
Agent Banking Guidelines
The Bangladesh Bank issued guidelines to facilitate agent banking operations. Without
having approval from Bangladesh Bank no bank shall be allowed to undertake agent banking
business. 2. Banks willing to launch Agent Banking Business shall seek prior approval from
Bangladesh Bank, with full details of the services including a tentative implementation
schedule.
Green Banking Initiatives
Bangladesh Bank launched Policy Guidelines for Green Banking for banks for green banking
activities in 2011. The central bank encouraged banks to adopt green banking practices and
introduced guidelines for environmental and social risk management in lending operations.

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Policy Guidelines for Green Banking were also issued to the Non-Bank Financial Institutions
(NBFIs).

Interest Rate Regulations

Bangladesh Bank has formulated a flexible interest policy f. According to that, banks are free
to charge/fix their deposit and Lending) rates except for specific categories like pre-shipment
export credit and agricultural lending. banks can differentiate interest rates up to 3%
considering comparative risk elements involved among borrowers in the same lending
category.
Deposit Insurance
The deposit insurance scheme (DIS) was introduced in Bangladesh in August 1984 to act as a
safety net for depositors. According to new instructions regarding premium rates, problem
banks are required to pay 0.09 percent and private banks other than the problem banks and
state-owned commercial banks are required to pay 0.07 percent where the percent coverage
of the deposits is one hundred thousand per depositor per bank. With this end in view, BB has
already advised the banks to bring DIS to the notice of the public by displaying the same on
their display board.
Financial Inclusion Initiatives
Bangladesh Bank is pursuing its financial inclusion initiatives not only in its attempt to
contribute to the national goal of inclusive growth but also to strengthen and reinforce the
development of the financial networks by reaching the underserved regions and the unbanked
population of the country.

Impact on Capital Management in Local Banks

The regulatory changes in the Bangladeshi banking sector, as mentioned previously, have had
significant impacts on capital management in local banks. Here's how these changes
influenced capital management:
Single Borrower Exposure Limit decrease
The decrease in the single-borrower exposure limit restricts local banks from extending larger
loans to a single borrower or group of related borrowers. This change can impact capital
management by potentially reducing the need to allocate substantial capital for such loans.
Capital adequacy ratios may become more favorable, as less capital is tied up in
accommodating larger loans, potentially strengthening the bank's overall capital structure.

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Capital Adequacy Requirements
A low CAR suggests that banks might have limited capacity to absorb losses and adequately
manage risks. To strengthen capital management, local banks in Bangladesh may need to
consider strategies such as raising additional capital through equity or retaining earnings to
enhance their capital base. This would help ensure their ability to withstand economic
downturns and meet regulatory requirements, ultimately promoting financial stability in the
region.
Agent Banking
The guidelines issued by the Bangladesh Bank regarding agent banking operations have
substantial implications for capital management. Before any bank can engage in agent
banking business, it is mandated to obtain prior approval from the Bangladesh Bank. This
requirement ensures that banks conform to specific regulatory standards and maintain
compliance. Proper capital allocation is fundamental to supporting agent banking operations,
as it involves investments in technology, infrastructure, and agent training.
Additionally, agent banking introduces operational and credit risks, necessitating adequate
capital to absorb potential losses and manage risks effectively. The bank's capital
management strategy should align with expansion plans for agent banking, whether in terms
of services offered or the number of agents employed. Effective capital management is
essential not only for the financial viability of agent banking services but also for the overall
financial health of the bank, as it allows the bank to generate revenue from these services
while sustaining capital reserves for other banking activities.

Interest Rate Regulations

Bangladesh Bank's flexible interest rate policy, permitting banks to independently set deposit
and lending rates, significantly influences capital management. This policy empowers banks
to adapt to market conditions, competition, and perceived risk elements within lending
categories. Capital management is impacted through precise risk assessment, prudent capital
allocation, consideration of profit margins, and adherence to regulatory standards. Effective
capital management is essential to balance these factors while ensuring financial stability and
profitability for banks.
Green Banking Initiatives
Banks pursuing green banking initiatives may invest in renewable energy and sustainable
projects. Capital allocation for these initiatives can help banks diversify their asset portfolio,

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improve risk management, and align with environmental objectives. However, it can also
impact their overall capital allocation strategies.

Financial Incentive
The pursuit of financial inclusion initiatives by Bangladesh Bank (BB) affects capital
management in several ways. It involves allocating capital to underserved regions and
unbanked populations, managing increased risks, ensuring compliance with regulations,
maintaining sustainability, and balancing social and economic impact with financial health.
Effective capital management is crucial for the success and sustainability of these initiatives
while meeting regulatory requirements.
Deposit Incentive
This policy has implications for capital management. Firstly, banks need to allocate capital
for these premiums. The varying premium rates for different banks can affect the distribution
of capital resources.
Secondly, the requirement to display DIS information publicly ensures transparency but may
also impact a bank's reputation and customer confidence, indirectly influencing capital
management through customer behavior.
In summary, the DIS premium rates and the public display requirement impact capital
management by affecting capital allocation and the bank's public image, which can, in turn,
have financial implications.
In general, these regulatory adjustments have brought forth a variety of opportunities and
challenges for capital management in Bangladeshi banks. The capital implications of
regulatory requirements, technology investments, and innovative lending practices must be
carefully considered by banks. Compliance, financial stability, company growth, and meeting
the changing needs of Bangladesh's banking sector all depend on effective capital
management. A developing regulatory environment, also demands a delicate balancing act to
distribute capital optimally between taking on risk and capital preservation.

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International Bank
International Banking Regulation-Basel III is a set of international banking regulations
developed by the Bank for International Settlements (BIS) with the primary goal of
enhancing the stability and security of the international financial system. It builds upon the
earlier Basel Accords, notably Basel I and Basel II, which were established to address various
issues related to banking and financial sector risks. Here are some key regulations
Capital Adequacy Ratio
Under Basel III, all banks are required to have a Capital Adequacy Ratio of at least 8%.
Stress Testing
Regulators have mandated stress tests to assess banks' resilience to economic downturns and
financial shocks, ensuring they can absorb losses without destabilizing the financial system.
Liquidity Standards
The minimum liquidity coverage ratio that banks must have under the new Basel III
standards is phased in beginning at 70% in 2016 and steadily increasing to 100% by 2019.
The year-by-year liquidity coverage ratio requirements for 2016, 2017, 2018, and 2019 are
70%, 80%, 90% and 100%, respectively.
Environmental, Social, and Governance (ESG) Regulations
There is a growing focus on ESG-related disclosures and risk assessments, with regulations
aimed at promoting sustainable and responsible banking practices.
Interest Rate
As of September 2019, proposed Basel III norms asked for ratios of: 7–9.5% (4.5% + 2.5%
(conservation buffer) + 0–2.5% (seasonal buffer)) for common equity and 8.5–11% for Tier 1
capital and 10.5–13% for total capital.
These regulatory changes have had a profound impact on international banks by influencing
their capital adequacy, risk management practices, compliance procedures, business models,
and strategic planning. Banks are continually adapting to this evolving regulatory landscape
to ensure they remain competitive, resilient, and in compliance with international standards.

Impact on Capital Management in Local Banks

The significant regulatory changes in the international banking sector have had a profound
impact on capital management practices in global banks. Here's how these changes have
influenced capital management:

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Capital Adequacy Ratio
The Basel III requirement of a minimum Capital Adequacy Ratio (CAR) of at least 8% has
significant implications for capital management within banks. This regulatory mandate means
that banks must ensure that a substantial portion of their capital is dedicated to covering
potential losses and risks. Capital management becomes a critical aspect of a bank's
operations, as they need to maintain a CAR of 8% or higher at all times. Effective capital
management is essential for several reasons, including risk management, capital allocation,
profitability, regulatory compliance, capital raising, and dividend payments. In summary,
Basel III's Capital Adequacy Ratio requirement impacts capital management by necessitating
thorough risk assessment, prudent capital allocation, and careful monitoring to ensure
regulatory compliance and financial stability. Capital management is a fundamental aspect of
a bank's operations, as it directly influences the institution's ability to absorb losses, maintain
solvency, and contribute to financial system stability.
Stress Testing
Stress testing requirements, another regulatory change, necessitate a proactive approach to
capital management. Banks are now regularly subjected to stress tests to assess their ability to
withstand adverse economic scenarios. This has led to enhanced capital planning and risk
mitigation strategies.
Liquidity Standards
The incremental increase in LCR requirements from 70% in 2016 to 100% by 2019
necessitates careful management of liquid assets by banks. Banks must allocate capital to
meet these LCR requirements, which has implications for their capital allocation strategies.
The gradual progression allows banks time to adjust their balance sheets and funding
structures to meet these regulatory obligations while maintaining capital adequacy ratios.
This measured approach helps ensure financial stability and provides banks with a buffer to
absorb liquidity shocks. Effective capital management is essential for banks to align with
LCR requirements, promoting resilience and reducing liquidity risk in the global banking
system.
ESG Considerations
Regulations related to ESG factors have influenced capital allocation, as global banks are
increasingly investing in sustainable projects and addressing environmental and social risks.

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Capital is directed toward ESG initiatives, such as green financing and social impact
projects.
Interest Rate
Transitioning away from LIBOR has affected capital management practices by requiring
banks to allocate resources to update systems and products to use alternative benchmark
rates.
In conclusion, these legislative reforms have increased the complexity and demands of capital
management for international banks. In addition to maintaining bigger capital buffers, banks
are also required to distribute capital more wisely in accordance with their risk exposure,
liquidity requirements, and compliance standards. For banks to maintain financial stability,
adhere to regulatory requirements, and react to the changing banking landscape, effective
capital management is crucial. Additionally, it is essential to meet the demands of customers,
investors, and regulators while striking a balance between risk and return.

14
 Chapter 3 Comparative Analysis

Comparative Analysis of the Impact of Regulatory Changes on Capital Management in

Bangladeshi Banks and International Banks:

Capital Adequacy
The Capital Adequacy Ratio (CAR) is a regulatory measure imposed on financial institutions,
including banks and depository institutions, to ensure they have sufficient capital to cover
potential losses and risks. In Bangladesh, local banks have faced a trend of maintaining a
relatively low CAR compared to some other countries in South Asia.
In 2017, the CAR was 10.8%, which increased slightly to 10.5% in 2018. Subsequently, there
was a significant improvement in 2019, with the CAR reaching 11.6%. In 2021, it further
increased to 11.8%, and by 2022, it reached 11.83%. This upward trajectory in the CAR
suggests that local banks have been taking measures to strengthen their capital positions over
the years.
In comparison, Basel III, which is an international regulatory framework, mandates that all
banks maintain a minimum CAR of at least 8%. This requirement is in place to ensure that
banks worldwide have a sufficient capital buffer to absorb potential losses and remain
financially stable.
The comparative analysis indicates that Bangladeshi banks have consistently exceeded the
Basel III minimum CAR requirement in recent years. This reflects efforts by these banks to
enhance their capital management and align with global regulatory standards, contributing to
financial stability and resilience in the banking sector. It also demonstrates a commitment to
prudential banking practices and risk management.

Liquidity Standards
The phased LCR requirements of Basel III, starting at 70% in 2016 and reaching 100% by
2019, contrast with the reported LCR of 87.7% in Bangladesh at the end of 2022, which falls
short of the 100% regulatory requirement. This comparison underscores the variance in
regulatory compliance, risk management, and prudential supervision between international
standards and the actual LCR performance in Bangladesh. The gradual implementation under
Basel III aims to ensure banks' readiness for liquidity challenges, while the end-2022 LCR

15
reveals the current state of risk management and prudential oversight in the Bangladeshi
banking sector.
Interest Rate
The flexible interest policy introduced by the Bangladesh Bank and the Basel III capital
adequacy requirements for international banks represents distinct regulatory approaches
within the financial sector.
the flexible interest policy in Bangladesh provides local banks with flexibility in setting
interest rates and managing risk, addressing the dynamics of the domestic market. In contrast,
Basel III establishes international standards to ensure capital adequacy and enhance financial
stability within the global banking system. These policies serve different purposes but are
essential components of the financial sector, addressing both local and international financial
stability and prudential banking practices.
In summary, while there are similarities in the impact of regulatory changes on capital
management for both Bangladeshi and international banks, there are also differences based
on the scale, complexity, and maturity of the banking sectors. Both face the challenge of
higher capital adequacy requirements, enhanced risk sensitivity, and the need for prudent
capital allocation. However, international banks often have more extensive experience with
advanced risk management practices, while Bangladeshi banks are adapting to evolving
regulatory standards in a developing banking environment.

16
Findings:
Capital Adequacy
Local banks in Bangladesh have shown a consistent trend of improving their Capital
Adequacy Ratio (CAR) over the years, with the CAR surpassing the Basel III minimum
requirement of 8%.
The upward trajectory of CAR reflects a commitment by Bangladeshi banks to strengthen
their capital positions and align with global regulatory standards.
The CAR is a crucial indicator of financial stability and resilience, and the efforts of local
banks contribute to the overall strength of the banking sector in Bangladesh.
Liquidity Standards
The comparison between Basel III's phased Liquidity Coverage Ratio (LCR) requirements
and Bangladesh's reported LCR at the end of 2022 reveals a variance.
Bangladesh's LCR of 87.7% falls short of the 100% regulatory requirement, indicating room
for improvement in terms of liquidity risk management and regulatory compliance.
Basel III's gradual implementation aims to enhance banks' readiness for liquidity challenges,
while Bangladesh's LCR performance reflects the state of risk management and prudential
oversight in the local banking sector.
Interest Rate
The flexible interest policy in Bangladesh provides local banks with autonomy in setting
interest rates and managing risk, catering to the dynamics of the domestic market.
Basel III, in contrast, establishes international standards to ensure capital adequacy and
enhance financial stability globally.
Both policies serve distinct purposes, contributing to local and international financial stability
and prudential banking practices.
In summary, this comparative analysis underscores the positive trend in capital management
by Bangladeshi banks as they consistently exceed Basel III's CAR requirements. It also
highlights the need for further improvement in liquidity risk management in the country's
banking sector. Additionally, the analysis emphasizes the differences in regulatory
approaches and objectives between local and international banks, acknowledging that while
both face challenges related to capital adequacy and risk management, they do so within their
unique contexts. International banks often possess more advanced risk management practices,
while Bangladeshi banks are adapting to evolving regulatory standards in a developing
banking environment.

17
Conclusion:
In conclusion, the comparative analysis reveals important insights into the regulatory
landscape and the financial stability efforts of both local and international banks.
First, local banks in Bangladesh have made commendable strides in enhancing their Capital
Adequacy Ratio (CAR) over the years. This consistent improvement not only demonstrates
their commitment to adhering to global regulatory standards but also strengthens the overall
financial stability and resilience of the Bangladeshi banking sector.
Second, while local banks have shown progress in capital adequacy, there is room for
improvement in terms of liquidity risk management. The reported Liquidity Coverage Ratio
(LCR) of 87.7% at the end of 2022 falls short of the 100% regulatory requirement, indicating
the need for further enhancements in this critical aspect of risk management.
Finally, the analysis highlights the distinction between the regulatory approaches of local and
international banks. The flexible interest policy in Bangladesh caters to the dynamics of the
domestic market, offering local banks flexibility in setting interest rates. In contrast, Basel
III's international standards are designed to ensure capital adequacy and enhance global
financial stability. Both policies serve unique purposes and contribute to financial stability in
their respective contexts.
Overall, this comparative analysis underscores the importance of adapting to evolving
regulatory standards, regardless of the scale and maturity of the banking sector. It also
emphasizes the significance of effective risk management practices to ensure the resilience
and stability of the banking industry, both domestically and on the global stage. As the
regulatory landscape continues to evolve, local and international banks must remain
committed to prudent banking practices and risk management to navigate the complexities of
the financial sector successfully.

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