Banks asked to keep 5% OBS to mitigate unexpected risk

Bangladesh Bank (BB) on Tuesday issued policy guidelines on the off-balance sheet (OBS) exposure in banks, asking to keep a maximum of 5 per cent provision instead of 1 per cent to strengthen their financial health.

The BB official said that OBS exposures in banks have been increasing in recent years, to mitigate their (Banks) unexpected financial risks.

The OBS item is a term for assets or liabilities that do not appear on a balance sheet. Although not recorded on the balance sheet, they are still assets and liabilities of banks. Off-balance sheet items are typically those not owned by or are a direct obligation of banks.

For example, when loans are securitized and sold off as investments, the secured debt is often kept off the bank's books.

For instance, letters of credit (LCs) issued by banks are considered an off-balance sheet item. But when a business people can't settle the LCs on time, banks create a loan favoring the individual or entity such that the loan can be settled timely.

Indeed, a bank has limited control over its obligation of commitments of funds. Thus, certain types of portfolio risk are involved with OBS activities of the banks; i.e. credit risk, interest rate risk, exchange rate risk, liquidity risk, etc.

With a view to strengthening risk management of escalating OBS business operations of banks and thereby further enhancing the stability of the banking sector, the BB instructed banks to keep a 5 per cent provision for off-balance sheet exposures.