Bangladesh Bank Training Academy Journal

Abstract

Macroprudential policies for achieving financial stability gained global attention of the government policy makers and economists after the global financial crisis (GFC). There are challenges in applying macroprudential policies because it is difficult to identify financial system‟s vulnerability early enough and also its effectiveness depends on financial structure, developments in the financial market as well as political and economic scenario of a country. Bangladesh Bank (BB), as central bank and monetary authority of the country, uses micro as well as macroprudential tools as complementary to monetary and exchange rate policies such as prudential regulations for consumer finance and small enterprise financing, provision against loans and advances, time varying capital requirement and risk weights against various assets, open position limit etc. There appears to be a lack of dynamism in adopting key macroprudential tools to counter procyclical behavior of the banking sector, while ack of effective coordination between monetary policy measures and macroprudential tools was also observed. Macroprudential regulations of BB partially contributed to check overexposure of the banking sector to capital market at the cost of a sudden crash at the end of 2010, but failed to rein in excessive credit growth during 2010-12 and consumer credit growth during 2015-17. A reduction in provision for standard SME credit in 2012, supported growth in SME credit disbursement contributing to diversifying risks in the banking sector. Some relaxations in prudential norms for residential housing loans have positive impact on growing home loan.