Theory Answer:

1.) A commercial bank renders valuable services that accelerate the pace of economic
development and create employment opportunities". Explain the statement and discuss the
services of a commercial bank.
A commercial bank renders valuable services that accelerate the pace of economic development
and create employment opportunities. Commercial banks play a crucial role in economic
development by facilitating financial transactions, mobilizing savings, and providing credit to
individuals and businesses. These activities stimulate economic growth and lead to job creation.
The services of a commercial bank typically include:
Accepting Deposits: Commercial banks accept various types of deposits, such as current
accounts, savings accounts, and fixed deposits, which mobilize idle funds from the public.
Granting Loans and Advances: They provide loans and advances to individuals, businesses,
and industries for various purposes, including working capital, expansion, and consumption,
thereby promoting economic activity.
Credit Creation: Through the process of fractional reserve banking, commercial banks create
credit, which increases the money supply in the economy and facilitates investment.
Fund Transfer Facilities: Banks offer efficient means for transferring funds from one place to
another, both domestically and internationally, which is vital for trade and commerce.
Agency Services: They act as agents for their customers, performing tasks like collecting
cheques, dividends, and interest, and making payments on their behalf.
General Utility Services: This includes services like locker facilities, ATM services, debit and
credit cards, and internet banking, which enhance convenience for customers.

2.) "Independent Central Bank plays a vital role to stable the economy for any country."
Justify the statement. Is Bangladesh Bank independent? Show your argument.
An independent Central Bank plays a vital role in stabilizing the economy of any country. An
independent central bank is generally seen as more effective in maintaining price stability and
controlling inflation because it can make decisions based on economic considerations rather than
political pressures. This independence allows the central bank to implement monetary policies
that are in the long-term interest of the economy, even if they are unpopular in the short term.
Such policies can include adjusting interest rates, managing the money supply, and regulating
financial institutions to prevent systemic risks.
Regarding the independence of Bangladesh Bank, arguments can be made on both sides.
Arguments for Independence: Bangladesh Bank has its own legal framework (Bangladesh
Bank Order, 1972) that grants it a degree of autonomy in conducting monetary policy and
regulating the financial sector. It often makes decisions regarding interest rates and credit
policies.
Arguments Against Full Independence: Like many central banks in developing countries,
Bangladesh Bank's independence might be influenced by government policies and fiscal
priorities. The government, as the owner of the central bank, can exert influence through
appointments to the board of governors and by setting broad economic objectives. There can be
instances where the central bank's monetary policy decisions might be swayed by the
government's need for financing or its desire to achieve specific growth targets, potentially
compromising its independence in pursuing price stability as its primary objective.
3.) Portray the differences between Islamic banks and Conventional banks based on
functional activities.

 Key Differences between Islamic Banks and Conventional Banks:

Feature Islamic Banks Conventional Banks

Guiding Sharia Law (interest-free, ethical
Man-made laws, profit maximization
Principles investments)
Prohibited (replaced by profit-sharing,
Central to operations (interest on
Interest (Riba)
fees) loans/deposits)
Investment Ethical, socially responsible Any legal investment, regardless of
Focus investments (Halal) ethical concerns
Risk transferred to borrowers through
Risk Sharing Emphasis on profit/loss sharing (PLS)
interest
Murabaha, Mudarabah, Musharakah,
Products Loans, mortgages, credit cards, bonds
Ijarah, Sukuk
Sharia Supervisory Board in addition Regulatory authorities only
Supervision
to regulators

4.) Portray the differences between Commercial bank and Central bank based on the
functional activities.

Feature Commercial Bank Central Bank

Primary Objective Profit maximization for Macroeconomic stability
shareholders
Issuance of Currency Does not issue currency Sole authority to issue currency
Acceptance of Deposits Accepts deposits from the Accepts deposits from commercial
public, banks and the
government
Lending Lends to the public Lends to commercial banks and the
(individuals, businesses government
Supervision Supervised by the Central Bank Supervises and regulates
commercial banks and the financial
system.

Monetary Policy Implements monetary policy set Formulates and implements

by the Central Bank monetary policy.

Foreign Exchange Deals in foreign exchange on Manages the country's foreign

behalf of clients exchange reserves and exchange
rate policy.
Number Numerous commercial banks in a Only one central bank in a country
country
5.) Show the differences between Agent banking and Mobile banking based on functional activities.

Feature Agent Banking Mobile Banking

Primary Objective Uses authorized agents (e.g., Primarily uses mobile devices
shops, pharmacies) as (smartphones, feature phones) via
intermediaries apps or SMS
Physical Presence Requires a physical agent Does not require a physical
location location, services are accessible
remotely.

Services Offered Cash deposits, withdrawals, fund Often caters to unbanked /under
transfers, bill payments, account banked.Account balance inquiry,
opening, loan applications mini statements, fund transfers,bill
(limited payments, mobile top-ups
Target Audience Rural, remote, and underserved Individuals with mobile phones,
populations who lack access to including those with bank accounts
traditional bank branches. and smartphone access.

Accessibility Dependent on agent's operating Available 24/7, anywhere with

hours and location mobile network coverage.

Technology Used POS terminals, biometric Mobile apps, USSD (Unstructured

devices, connected to bank's Supplementary Service Data), SMS.
core system.

6.) What is bank fund management? Describe the area concern of Bank Fund
Management.

Bank Fund Management: Bank fund management refers to the process of efficiently acquiring
and utilizing funds by a bank to achieve its financial objectives, primarily maximizing
profitability and ensuring liquidity and solvency.
Area Concerns of Bank Fund Management: The key areas of concern in bank fund
management include:
Liquidity Management: Ensuring the bank has sufficient cash and liquid assets to meet its
short-term obligations and depositor withdrawals
Asset Management: Optimizing the deployment of funds into various earning assets such as
loans, investments, and other assets
Liability Management: Managing the bank's sources of funds, including deposits (current,
savings, fixed), borrowings from other financial institutions, and capital,
Interest Rate Risk Management: Managing the exposure of the bank's earnings and capital to
adverse movements in interest rates.
Credit Risk Management: Assessing and mitigating the risk of default by borrowers. This
involves sound lending practices, credit analysis, loan portfolio diversification, and monitoring.
Capital Management: Maintaining an adequate level of capital to absorb potential losses,
support growth,
Profitability Management: Continuously monitoring and optimizing the bank's net interest
margin, non-interest income, and operating expenses to enhance overall profitability.
7.) What is return on Asset (ROA), and why is it important? Might the ROA measure be
important to banking's key competitors?

Return on Asset (ROA): Return on Asset (ROA) is a financial ratio that indicates how
profitable a company is in relation to its total assets. It is calculated as Net Income divided by
Total Assets. In banking, it measures how efficiently a bank is using its assets to generate profit.
Importance of ROA: ROA is important because it provides insight into a bank's operational
efficiency and asset utilization. A higher ROA generally indicates that a bank is effectively
converting its assets into net income, which is a sign of strong management and profitability. It
helps investors, analysts, and regulators assess the overall financial health and performance of a
bank.
Importance of ROA to Banking's Key Competitors: Yes, the ROA measure is important to
banking's key competitors.
Benchmarking: Competitors closely watch each other's ROA to benchmark their own
performance. A significantly higher or lower ROA can signal strengths or weaknesses in a
competitor's strategy, asset management, or cost control.
Strategic Planning: Understanding competitors' ROA helps banks in their strategic planning.
Investment Decisions: For financial institutions that compete for investment, a strong ROA
indicates efficient use of capital, making a bank more attractive to potential investors or partners.
Market Positioning: A bank with a consistently strong ROA can differentiate itself in the
market, attracting more deposits and higher-quality loan customers, which further enhances its
competitive position.

8.) Define Monetary Policy. Describe the impact of monetary policy on the economy of
Bangladesh.
Monetary Policy: Monetary policy refers to the actions undertaken by a central bank or other
regulatory committee to influence the availability and cost of money and credit in an economy.
The primary goals of monetary policy typically include controlling inflation, stabilizing the
currency, promoting economic growth, and maintaining full employment. It is implemented
through various tools such as adjusting interest rates, conducting open market operations, and
setting reserve requirements for banks.
Impact of Monetary Policy on the Economy of Bangladesh: In Bangladesh, monetary policy,
primarily managed by Bangladesh Bank, significantly impacts the economy in several ways:
Controlling Inflation: Bangladesh Bank uses tools like the repo rate and reverse repo rate to
influence commercial banks' lending rates. By increasing these rates, it makes borrowing more
expensive, which can reduce aggregate demand and thus help to curb inflation.
Influencing Economic Growth: An accommodative monetary policy (lower interest rates,
increased money supply) can stimulate investment and consumption, thereby promoting
economic growth.
Exchange Rate Stability: Monetary policy can indirectly influence the exchange rate of the
Bangladeshi Taka. Bangladesh Bank intervenes in the foreign exchange market to manage the
Taka's stability.
Financial Market Stability: By regulating banks and financial institutions and acting as a
lender of last resort, Bangladesh Bank ensures the stability of the financial system, which is
crucial for overall economic health.
Foreign Exchange Reserves Management: Monetary policy decisions, particularly those
affecting interest rates and the exchange rate, have implications for the country's foreign
exchange reserves.
9.) Identify and Illustrate the causes of the collapses of Signature Bank and Silicon Valley
Bank of America.
The collapses of Signature Bank and Silicon Valley Bank (SVB) in early 2023 were primarily
attributed to a combination of factors, including:
Rapid Growth and Concentrated Deposit Base: Both banks experienced rapid growth,
particularly during the low-interest-rate environment of the pandemic. SVB, in particular, had a
highly concentrated deposit base, with a significant portion of its funds coming from venture
capital firms and tech startups.

Interest Rate Risk and Asset-Liability Mismatch:

SVB: The bank invested a large portion of its deposits into long-dated, low-yielding US
Treasury bonds and mortgage-backed securities when interest rates were very low. This created
significant unrealized losses on their balance sheet.
Signature Bank: Similar to SVB, Signature Bank also held a substantial portfolio of long-
duration fixed-income securities that depreciated in value as interest rates rose.
Lack of Diversification and Unique Business Models:
SVB: Its focus on the tech and venture capital sectors, while a growth driver, also made it highly
susceptible to downturns in that specific industry.
Signature Bank: A significant portion of its deposits were linked to the crypto currency
industry.

10.) Portray the effects of bank collapses if any happens in Bangladesh. What lessons should
Bangladesh learn from US bank collapses?
Effects of Bank Collapses in Bangladesh:
Loss of Public Confidence: Bank collapses severely erode public trust in the financial system,
leading to panic withdrawals and a reluctance to deposit funds, which can trigger further
instability.
Economic Contagion: The failure of one bank can create a domino effect, leading to liquidity
crises and failures in other financial institutions, particularly if they are interconnected through
interbank lending or shared exposures.
Credit Crunch: Banks become more cautious in lending, reducing the availability of credit to
businesses and individuals. This can stifle investment, consumption, and overall economic
growth.
Increased Unemployment: Businesses facing a credit crunch may struggle to operate, leading
to layoffs and increased unemployment.
Government Bailouts and Fiscal Burden: The government may be forced to intervene with
bailouts to prevent systemic collapse, placing a significant burden on public finances and
potentially diverting funds from other essential sectors.
Reduced Foreign Investment: Bank failures can deter foreign investors, who perceive the
country's financial system as unstable, impacting capital inflows and economic development.
Social Unrest: Widespread financial losses and economic hardship can lead to social unrest and
political instability.

Lessons Bangladesh Should Learn from US Bank Collapses (Signature Bank and Silicon
Valley Bank):
Diversify Funding Sources: Banks should avoid over-reliance on concentrated deposit bases
(e.g., from a single industry or a few large depositors).
Effective Interest Rate Risk Management: Banks must actively manage their exposure to
interest rate fluctuations.
Robust Asset-Liability Management (ALM): Banks need sophisticated ALM frameworks to
ensure that the maturity and repricing characteristics of their assets are aligned with their
liabilities.
Strong Supervision and Regulation: Regulators (like Bangladesh Bank) should conduct
rigorous oversight, paying close attention to banks' risk management practices, liquidity
positions, and concentration risks..
Communication and Transparency: In times of crisis, clear, timely, and transparent
communication from regulators and banks can help manage public perception and prevent panic.
Deposit Insurance Limits: While Bangladesh has a deposit insurance scheme, the US collapses
highlighted how large uninsured deposits can trigger rapid bank runs.

11.) Define CAMELS rating. Illustrate the five categories of composite rating under
CAMELS rating analysis.

CAMELS Rating: The CAMELS rating system is a supervisory rating system used by banking
regulators to assess the overall financial health and operational soundness of financial
institutions. It provides a standardized framework for evaluating a bank's performance in six key
areas, with each area assigned a rating from 1 (strongest) to 5 (weakest).

Five Categories of Composite Rating under CAMELS Rating Analysis: The composite
rating summarizes the individual component ratings and reflects the overall condition and risk
profile of a bank. The five composite rating categories are:

Rating 1 (Strong): Financial institutions in this category are in a strong financial condition and
are well-managed. They exhibit strong performance, have robust risk management systems, and
are highly resilient to economic downturns or unexpected events.

Rating 2 (Satisfactory): Banks in this category are fundamentally sound, with satisfactory
performance and risk management. While there may be some minor weaknesses or moderate
levels of risk exposure,

Rating 3 (Fair/Marginal): Institutions rated 3 exhibit some degree of supervisory concern.

While they may still be profitable, they have moderate to significant weaknesses in their
financial condition, risk management, or compliance.

Rating 4 (Marginal/Needs Improvement): Banks in this category have serious financial or

operational deficiencies that pose a threat to their viability without immediate corrective action.
Rating 5 (Unsatisfactory/Critical): This is the lowest and most severe rating. Institutions rated
5 are critically deficient in multiple areas and pose an imminent threat to the deposit insurance
fund.
12) What three major questions or issues must a lender consider in evaluating nearly all
loan requests?
The three major questions or issues a lender must consider in evaluating nearly all loan requests
are:
1. Is the borrower creditworthy? This assesses the borrower's ability and willingness to
repay the loan, often by examining their credit history, financial statements, and
character.
2. Can the loan agreement be properly structured and written? This involves designing
the loan terms, conditions, collateral requirements, and repayment schedule to mitigate
risks and align with the borrower's needs and the lender's policies.
3. Can the bank collect the loan in the event of a default? This considers the availability
and quality of collateral, guarantees, and other recourse options to ensure the bank can
recover its funds if the borrower fails to repay.

Decision as an Investor:
 The expected stock price of the bank is $810.
 The current stock price is $800.
 Since the expected stock price ($810) is greater than the current stock price ($800), the
stock is undervalued.
 Therefore, as an investor, you should buy the stock.

13) What are the principal sources of external capital for a financial institution? What
factors should management consider in choosing among the various sources of external
capital?
Principal Sources of External Capital for a Financial Institution:
Common Stock: Issuing new common shares to existing or new investors.
Preferred Stock: Issuing preferred shares, which typically have fixed dividends and preferential
claims over common stock in case of liquidation.
Subordinated Debt (Subordinated Notes and Debentures): Long-term debt that has a lower
priority than other debt in the event of liquidation.
Sale of Assets: Selling off some of the bank's existing assets to generate capital.
New Debt Issues (Bonds): Issuing various types of bonds to raise long-term funds from
institutional investors and the public.
Factors Management Should Consider in Choosing Among Various Sources of External
Capital:
Cost of Capital: The explicit (e.g., interest payments on debt, dividends on preferred stock) and
implicit (e.g., dilution of ownership for common stock) costs associated with each source.
Risk Profile of the Financial Institution: How additional capital sources affect the bank's
overall risk, considering leverage and solvency.
Impact on Control: Whether issuing new shares will dilute existing shareholder control.
Regulatory Requirements: Compliance with capital adequacy regulations (e.g., Basel III) set
by central banks and other supervisory bodies.
Market Conditions: The prevailing interest rates, investor demand, and overall economic
climate, which can affect the feasibility and cost of issuing different types of capital.
Flexibility and Restrictive Covenants: The degree of flexibility offered by each capital source
and any covenants or restrictions imposed on the bank's operations.
Maturity Structure: The repayment period of debt instruments and whether it aligns with the
bank's asset maturities.
Tax Implications: The tax deductibility of interest payments on debt versus dividends on equity.
14) What do you mean by principles of sound lending? Identify and describe the
components of sound lending.
Principles of Sound Lending: Principles of sound lending refer to the fundamental guidelines
and practices that commercial banks and other financial institutions should follow to ensure the
safety, profitability, and effectiveness of their lending operations. These principles aim to
minimize credit risk, maintain asset quality, and contribute to the overall stability and
profitability of the bank.
Components of Sound Lending: The key components of sound lending often include:
Creditworthiness Assessment (The 5 Cs of Credit): This is a comprehensive evaluation of the
borrower's ability and willingness to repay the loan. The "5 Cs" are:
Character: The borrower's integrity, honesty, and reputation, reflecting their willingness to
repay.
Capacity: The borrower's financial ability to repay the loan from their cash flow. This involves
analyzing income statements, cash flow statements, and debt-to-income ratios.
Capital: The borrower's financial strength and investment in the business or project, indicating
their commitment and cushion against losses. This is assessed through the balance sheet and
equity.
Collateral: Assets pledged by the borrower to secure the loan, providing a secondary source of
repayment if the primary source fails.
Loan Documentation: Ensuring that all loan agreements, collateral documents, and other legal
papers are complete, accurate, legally enforceable, and properly filed to protect the bank's rights.
Loan Pricing: Setting an appropriate interest rate and fees that adequately compensate the bank
for the risk taken, cover its costs, and contribute to profitability while remaining competitive.
Loan Monitoring and Control: Continuously monitoring the borrower's financial condition,
adherence to loan covenants, and market developments throughout the loan's life.

5. a) Outline the types of loans typically made by banks.

The types of loans typically made by banks include:
Real Estate Loans: These are loans secured by real property and are often the largest category
of loans for many banks. They include:
Residential Mortgage Loans: Loans to individuals for purchasing homes.
Commercial Mortgage Loans: Loans to businesses for acquiring or developing commercial
properties.
Construction Loans: Short-term loans to finance the construction of residential or commercial
properties.
Commercial and Industrial (C&I) Loans: Loans to businesses for various purposes, such as:
Equipment Loans: For purchasing machinery or equipment.
Term Loans: For longer-term financing of assets or business expansion.
Agricultural Loans: Loans to farmers and agricultural businesses for purposes like:
Farm Real Estate Loans: For acquiring or improving farm land.
Consumer Loans (Individual Loans): Loans made to individuals for personal, family, or
household purposes, such as:
Auto Loans: For purchasing vehicles.
Credit Card Loans: Revolving credit lines.
Personal Loans: Unsecured or secured loans for various personal needs.
Education Loans: To finance higher education.
Lease Financing: While not strictly a loan, banks often engage in direct lease financing, where
they purchase assets and lease them to customers.
Loans to Financial Institutions: Loans made by one financial institution to another, often for
liquidity management purposes (e.g., Federal Funds sold).
Interbank Loans: Short-term loans between banks to manage their liquidity positions.
5. b) Describe the role of credit analysis in lending decisions.
Credit analysis plays a fundamental and crucial role in lending decisions by evaluating the
creditworthiness of a borrower and the risks associated with extending credit. Its primary
purpose is to assess the likelihood of a borrower repaying a loan according to the agreed-upon
terms and to identify potential factors that could lead to default.
Here's a breakdown of its key roles:
Risk Assessment: Credit analysis helps lenders quantify and qualify the credit risk inherent in a
loan request. By examining financial statements, credit history, industry trends, and management
quality, analysts identify potential weaknesses or red flags that could jeopardize repayment.
Decision Making (Approve/Reject/Modify): Based on the assessment, credit analysis provides
the basis for the lending decision. It helps determine whether to approve a loan, reject it,
Loan Structuring: The insights gained from credit analysis are vital for structuring the loan
appropriately. This includes determining the loan amount, maturity, repayment schedule, interest
rate, fees, and collateral requirements
Pricing Loans: Credit analysis directly influences loan pricing. Higher-risk borrowers typically
face higher interest rates and fees to compensate the bank for the increased probability of default.
Compliance and Due Diligence: It ensures that the lending decision complies with regulatory
guidelines, internal credit policies, and risk limits..
Portfolio Management: Credit analysis contributes to sound loan portfolio management. By
understanding the risk characteristics of individual loans, banks can manage their overall
portfolio risk, diversify exposures,

3. c) Describe strategies a liquidity manager needs to take to maintain liquidity in

the bank
A liquidity manager's primary goal is to ensure the bank can meet its financial obligations as they
fall due without incurring unacceptable losses. Key strategies include:
1. Asset-Side Liquidity Management (Primary Reserves & Secondary Reserves):
Maintaining Primary Reserves: Holding sufficient cash, balances with the central bank and
correspondent banks.Managing Secondary Reserves: Investing in highly marketable, short-
term, low-risk securities (e.g., Treasury bills, short-term government bonds, interbank loans
Loan Portfolio Management: Designing loan policies that consider liquidity needs.
2. Liability-Side Liquidity Management (Purchased Liquidity):
Diversifying Funding Sources: Relying on a broad base of funding sources reduces dependence
on any single source. This includes retail deposits (core deposits), wholesale deposits (CDs,
brokered deposits), federal funds, repurchase agreements, commercial paper, and long-term debt.
Managing Deposit Mix: Encouraging stable, low-cost core deposits (e.g., demand deposits,
savings accounts) from retail customers, as these are generally less volatile than large corporate
or wholesale deposits.
3. Liquidity Risk Measurement and Monitoring:
Cash Flow Projections: Developing accurate daily, weekly, and monthly cash flow forecasts to
anticipate inflows and outflows, identifying potential liquidity gaps.Liquidity Ratios:
Monitoring key liquidity ratios such as the Liquidity Coverage Ratio (LCR) and Net Stable
Funding Ratio (NSFR) (as per Basel III) to ensure regulatory compliance and adequate liquid
buffers.
4. Contingency Funding Plan (CFP):
Developing a Robust CFP: A detailed plan outlining strategies, actions, and responsibilities for
managing a liquidity crisis.
Identifying Emergency Funding Sources: Pre-arranging lines of credit with other banks,
central bank facilities (discount window), and identifying assets that can be readily pledged for
collateralized borrowing.
5. Pricing for Liquidity Risk:
Reflecting Liquidity Costs: Incorporating the cost of holding liquid assets and the cost of
maintaining diversified funding sources into the pricing of loans and other bank products.
Incentivizing Stable Deposits: Offering competitive rates or features that attract and retain
stable, less volatile deposits.
6. Central Bank Relationship:
Maintaining Strong Relationship: A good relationship with the central bank is vital, as it acts
as the lender of last resort and provides liquidity facilities during crises.
.