Bangladesh - Non-Lending Technical Assistance on Capital Markets

Abstract

The Bangladesh stock market experienced
 significant volatility in late 2010 and early 2011 which
 took stock values high above fundamentals and threatened the
 stability of the financial system. This note takes a
 systematic look at the capital markets underpinnings in
 Bangladesh, including the regulatory framework, the
 rule-making bodies and enforcement issues. It also addresses
 systemic weaknesses responsible for market instability which
 was observed at the end of 2010 and early 2011. The note
 analyses the outlines specific areas of potential
 vulnerabilities of securities markets, as assessed against
 appropriate practice guidelines for stability,
 sustainability, transparency, and enforcement. A plan of
 action going forward is also suggested. This note draws on a
 considerable amount of prior analytical work. Bangladesh
 capital markets remain ineffective. The government debt
 securities markets are illiquid preventing the Bangladesh
 financial system from relying on a market-based yield curve.
 Bangladesh has yet to develop an active money market.
 Trading of treasury bills in the secondary market is limited
 because these instruments, along with treasury bonds, make
 up the statutory liquidity reserve and are therefore
 generally held until maturity by commercial banks and other
 financial institutions. Trading is also thin in repurchase
 agreements, for two main reasons. First, commercial banks
 have a weak treasury function, and most do not actively
 manage liquidity. Second, there is no standard master
 repurchase agreement, a gap that should be addressed to
 support orderly development of the repo market.