Calculation at cost prices recommended

The finance ministry has suggested the central banks’ exposure to the stock market at cost prices instead of market prices of the shares.

“As per the Bank Company Act, 1991, the bank’s exposure to the stock market can be calculated at cost prices instead of the market prices of stocks,” said the ministry in a letter sent to the Bangladesh Bank on Tuesday night.

The ministry’s recommendation came in response to the central bank’s seeking opinion from it on the bank’s exposure calculation method.   

The recommendation was a long-cherished demand of the securities regulator BSEC and stakeholders. The move was apparently taken to increase the greater flow of money to the market.

The central bank and securities regulator locked horns over the issue several times in the past. The decades-old debate over the banks’ exposure to the stock market comes to the surface whenever the indexes keep sliding or going up.

Last year, the BSEC proposed the BB to calculate the banks’ exposure at cost prices of the shares to help boost the cash flow to the market. In response, the BB said the BSEC’s proposal went against the Bank Company Act fearing that banks’ exposure to the stock market may cross the regulatory limit, deviating from their core banking which was evident in the past.

The DSE Brokers Association of Bangladesh (DBA) had also earlier written to the BB for considering the calculation of exposure limit at the cost prices instead of market prices of shares.

Currently, banks are allowed to invest 25 per cent of their capital in the capital market, which is called the exposure limit. The calculation of the exposure limit is based on the cost price instead of the market price.

On Sunday, BSEC Chairman Professor Shibli Rubaiyat Ul Islam, however, said investment by banks in the stock market will now be calculated at the purchase prices instead of the market prices.

“The decision was made in a recent meeting where the finance secretary, I and the BB governor were present,” he said.

He said the Bangladesh Bank will soon issue a circular in this regard.