Off-shore Banking Unit:

Key Operational & Risk Management aspect

1.

Source & uses of Fund: Foreign Currency sources of Fund was always expensive
for the local bankers. Whenever a bank wants to borrow from the overseas Money
Market for Short term he has to pay a good amount of country risk premium. On the
other hand in every banks balance sheet there will always be foreign currency
liabilities in the form of General FCY, RFCD, NFCD, ERQ and Margin on
Acceptance (for Back to Back payment). Uses of this fund were limited only
choice was to maintain clearing a/c Balance with Central Bank and Placement with
Foreign Banks. This generates a very small amount of return. Virtually for every FC
balance which is treated as core deposit bank has to maintain CRR in BDT. This
cost is not even covered on that USD return.

2.

Alternative Solution: Foreign currencies held with Commercial Bank are short
term in nature hence banks cannot engage in term financing through OBU. Recent
Central Bank permission for Bills Discounting and Financing has created an unique
opportunity for local banks to use this foreign currency for shorter term for B & C
type customers.

3.

General Framework for Liquidity Risk Management: Bank has to engage in

some sort of exercise to determine the core balance for at least last 12 months and
maturity schedule for FC funds. Based upon that result the minimum core balance
may be lent out through OBU for shorter term financing. On top of it bank should
keep in mind that the risk associated with lending in such operation is purely
liquidity risk. Hence for any fall back situation banks might need to square their
position through purchasing USD against BDT. For that reason a relationship with
Open Position Limit and lending to OBU may be prescribed by Central Bank.

4.

General Framework for Interest Rate Risk Management: Funding in OBU

always associated with interest rate risk. Lending is usually short term in nature
while the borrowing/ sourcing of the same is short term in nature. For minimizing
the risk bank have to have a clear cut policy/ ALCO initiative for regular
reviewing interest rate movement.

5.

General Framework for Operational Risk Management: Operational aspect in

OBU is similar to DBU. Basic operation evolves against Treasury and Trade
operation in OBU. Treasury operation involves lending, borrowing, buy and
sell. Trade operation involves similar to DBU operation. Separate Nostro and
associated reconciliation has to be in the right place.