The Ministry of Finance has recommended that the Bangladesh Bank calculate the capital market exposure limit for banks on a cost basis.
The recommendation was made in a letter sent to the central bank on Tuesday.
Currently, the exposure limit of banks on the stock market is calculated on the market price instead of the cost price. Accordingly, if the stock market index or share price rises, the bank’s exposure limit is exceeded. Banks are therefore forced to sell shares to stay within this limit. As a result, the index fell due to selling pressure in the bullish stock market.
Banks are major institutional investors in the Dhaka and Chattogram stock exchanges, their selling pressure occasionally hampers market rallies.
Banks can invest in listed securities up to 25% of their equity on an individual basis and 50% on a consolidated basis, in accordance with the Banking Companies Act.
Previously, in coordination meetings between regulators, the Bangladesh Securities and Exchange Commission (BSEC) had asked the central bank to calculate banks’ exposure on the basis of cost price.
The new decision will only be effective after the Bangladesh Bank issues a circular in line with the ministry’s advice.
Stock market participants said that currently many banks’ investment exposure to the stock market is below the limit. However, if calculated in the purchase price, the exposure limit of a lot will increase from the current level. So even if there is some selling pressure in the beginning, it will be good for the stock market in the long run.
Earlier, on July 17, the central bank sent a letter to the Ministry of Finance seeking an opinion on a solution to the problem of banks’ exposure to capital markets.
Following the arrival of new Governor Abdur Rouf Talukder and his recent courtesy meeting with the Chairman of BSEC, Prof. Shibli Rubayat-Ul-Islam, Bangladesh Bank would lend a hand in the capital market.