Banking sector supervision won't work without qualitative political reform: Governor

No form of supervision in the banking sector will be effective without qualitative reforms in the country's political system, Bangladesh Bank Governor Ahsan H Mansur warned today.

The governor said a risk-based supervision system will be introduced from 1 January next year. Under this system, the existing supervisory framework will be dismantled and restructured into 12 divisions, through which banks will be brought under continuous monitoring. All types of financial supervision will be carried out through this mechanism.

Responding to a question from a journalist on why the central bank's guidelines and strict supervision had failed to curb irregularities in the banking sector, the governor said, "The previous government did not allow implementation of corrective actions."

In response to a question about whether the supervision system can mitigate banking risks, Ahsan H Mansur said, "This supervisory system will not be able to address political risks. To reduce political risks, politics itself must be reformed. Bangladesh Bank must be granted full autonomy. Work is underway in this regard. We will take this proposal to the government."

"The consequences of political parties that have weakened the banking sector are already evident. Creating chaos may bring short-term gains, but ultimately it does not benefit political parties. That's why efforts are underway to build a banking sector free from political influence," he noted.

Currently, pilot risk-based supervision programmes are underway in 20 banks, he informed, adding that the remaining 41 banks will also be brought under the system in phases.

On the appointment of independent directors, the governor said, "Banks must select independent directors from a panel formed by Bangladesh Bank. If a bank wants to appoint someone outside this panel, it must apply to Bangladesh Bank. After a 'fit and proper' test, the person may be added to the panel for appointment."

Addressing liquidity concerns, he said, "Liquidity support has been provided to several banks to help repay small depositors. However, it may take more time for large-scale withdrawals."

"Still, I want to assure everyone that all deposits in banks are safe," he added.

Regarding bank mergers, the governor said, "We will hold separate meetings with the six banks. If they can show good reasons, then there will be no merger. As far as we know, all six banks have been badly affected. That is why the decision to merge them has been taken."

In response to a question about the board restructuring of distressed banks, he said, "Some banks are doing very well after board restructuring. However, if the boards of those banks are not performing, if necessary, the boards will be restructured again.

"We have already written to financial institutions asking why they should not be closed. If they can show reasonable reasons and the government agrees, Bangladesh Bank will not take any strict action against them. However, I think some financial institutions will have to be closed."

He further said, "The central bank is also thinking about whether it is possible to change from the dollar-based reserve system to commodity reserve or other assets."