STABILITY of the financial system is a long-standing responsibility of the central bank -- in our case the Bangladesh Bank. Financial system stability is the absence of financial crises, such as distress in financial institutions or disturbances in financial markets or loss of confidence of the people that are sufficiently severe to threaten the health of the economy. The central bank has a clear mandate to contribute to the maintenance of financial stability because financial crises are costly.
Recessions in which financial instability has played a role are typically severe, as demonstrated by the Asian financial crisis. This reflects the key roles the financial system plays in the provision of credit, the safekeeping of savings, and the provision of payments services to the economy. For example, shocks to financial institutions or markets that curtail the supply of funds can lead to cutbacks in other sectors of the economy and a decline in over-all economic activity. Such financial disturbances invariably result in a loss of private wealth, damage consumer confidence, and can place a substantial burden on public finances if governments are called on to recapitalise financial institutions.
Individual financial institutions can fail without precipitating a financial crisis. Nonetheless, financial system stability may be threatened if interlinkages within the financial system mean that problems at one institution spread to otherwise healthy institutions, and then to the economy more widely. Such contagious effects can also arise because the financial system is particularly prone to crises in public confidence.
There are several ways in which the central bank attempts to reduce the likelihood of financial instability. The first is by laying the foundation for low and stable inflation and sustainable economic growth. Macroeconomic stability is an important precondition for financial stability, as past experiences show that crises often have their origin in periods of rapid and prolonged credit growth, particularly when coupled with speculative activities and high asset price inflation.
Financial system stability is very critical to the maintenance of macroeconomic stability. As a matter of fact, monetary policy would not be effective in checking inflation if the financial system were not stable, for monetary policy actions are transmitted through financial institutions. In this regard, a stable financial system plays a catalytic role for financial institutions to provide the financial products for the development of the economy.
Therefore, to enhance the capacity of the financial institutions to meet the challenges of financing, among others, the public confidence reposed by the people in the banks and financial institutions need to be taken care of by the central Bank. And it is the central bank's interest to come forward and keep the media informed about their actions taken for the sake of financial stability.
Any negative reporting about financial operations particularly in the media would threaten the stability of the financial system. It was recently alleged in the media that some banks were involved in financing terrorist groups. Such allegation framed by the media disclosed that some accounts were kept without keeping KYC -- know your customers, or non-reporting thereof. And subsequently, it was alleged by the media that the banks were involved in financing terrorist groups. But the role, area of emphasis, motivation along with lawful stand taken by the central bank on this issue was different. The Bangladesh Bank knows very well the macroeconomic costs that could arise due to various financial disturbances. So, its action was clearly manifested in due course of law than in accusation and counter accusation only.
The central bank is to identify, target, disrupt, and dismantle criminal organisations and individuals engaged in fraud schemes which target our nation's financial institutions. Areas investigated in the financial institution fraud arena include: Falsification of financial information, financial institution failures, insider fraud, identity fraud, cheque fraud, counterfeit negotiable instruments, cheque kiting, loan fraud, and mortgage fraud.
For the above purposes, the effective reporting of suspected account and fraud is to be ensured first as it can offer a wide range of benefits to both government agencies and the community, particularly the financial community as a whole in perceiving threats to the financial stability. These include raising awareness of fraud victimisation, which can help create a suspected account/fraud-averse culture amongst the management and employees.
At the outset, however, we need to assess the scope of the problem of under-reporting/non-reporting of suspected account/fraud and to determine why under-reporting/non-reporting takes place. The aim is to enhance the reporting of suspected account/fraud, so that repeat victimisation can be avoided and the deterrent effects of prosecution and punishment maximised.
In looking at, we must differentiate the terrorist financing and non-reporting of transaction(s) related to any unknown person(s). Terrorist financing means the concerned organisation is deliberately using its financial resources to empower the terror groups who want to snatch the centres of powers by force. On the other hand, non-reporting of financial transaction(s) related to any unknown person(s) means opening any account or providing any kind of financial service(s) without keeping KYC i.e. 'Know Your Customers'.
It is the responsibility of the Bangladesh Bank to investigate into the matter, frame charge if found correct and award penalties, as per the laws of the land. We all know that the Bangladesh Bank is a high powered regulating body to look after and guide the financial institutions/banks of the country. All banks are scheduled banks under the Bangladesh Bank and thus customers/clients of it. The central bank has a regulatory and ethical obligation to protect their customers. There are now many clear evidences that it is neither effective nor ethical to dismiss a person from employment simply on being suspected of dishonesty without giving an opportunity of being heard. Unfortunately, a practice to the contrary still remains all too prevalent.
The Bangladesh Bank should play its role as a facilitator to all the scheduled banks to overcome any sort of problem they are facing. Penalising one is not the only job but guiding and paving the way for moving forward are the ultimate role that needs to be played led by a sense of responsibility.
Even the authorities should consider whether the official(s) at fault did not obtain the KYC intentionally or not. The intentional default needs to be criminalised. The authority may also scrutinise records to find out any involvement of the concerned financial institution in any activity of money laundering as an institution. MLPA-2002 is an enforceable law for any Bangladeshi irrespective of his or her employment with any institution.
As any nationalised bank and government institution or the Bangladesh Bank itself should not be charged with terrorist financing for the involvement of any of their employed persons in money laundering, any other private bank or institution should not be charged with terrorist financing for its employed person who was charged for violating the provision of the MLPA.
And if the lapses are non-intentional or due to ignorance, the person suspected is to be acquitted. Such acquaintance is prescribed in the section 1 of clause no. 20 of MLPA-2002. It is observed that lapses on the part of some officials in preserving the identity of the remitter(s) as per the clauses of MLPA-2002 should not be used as a tool to undermine the credibility of the institution as it would destabilise the financial system as a whole. If any person is involved, the concerned person may be identified and prosecuted. But doing any thing that may destabilise the financial system of the economy should not be allowed by the Bangladesh Bank.
It may be observed here that a lot of literature is there revealing weaknesses in some segments of the financial sector, which may lead to macro-financial vulnerability. The highly discussed variables that signify various aspects of vulnerability include growth, inflation, budget deficit, equity prices, interest rates, money supply, exchange rate, debt reserves, current account balance, credit, short-term inflows, and adverse media reporting and so on. But negative media reporting in the present context creates a large-scale impact on public opinion to enlarge the scope of vulnerability. The negative reporting in media caused acceleration of economic fallout during East-Asian financial crisis-1997. The contagious effects were generated in the economy in this way. Such negative media reporting may carry its contagious effects over the stabilisation of the financial system so far achieved.
The Bangladesh Bank would not lose its position if it plays the due role for the sake of economy. The central bank has its responsibility to clarify its position to the media so as to make the people understand the need for and importance of stabilisation of the financial system of the country. Any silence on its part may be utilised by the wrong doers to destabilise the economy as a whole.
No amount of preventative action can perfectly guard an economy from financial disturbances. So, at times, central banks are called upon to help minimise the costs of these disturbances. The Bangladesh Bank's day-to-day oversight of the payments system and the bank's operations in financial markets mean that it has an important role to play in the early detection of liquidity pressures and other forms of financial stress.
It is noticeable that the accusative role of the media instead of fact reporting might cause destabilisation of the financial system. But the effects of financial destabilisation are to be repaired immediately to escape macro-economic vulnerability. Better to avert any injury to the economy, Bangladesh Bank should inform the media about its lawful decisions. The presence of media should be utilised by the Bangladesh Bank to keep just pressure over the banks/financial institutions to keep them on track, which sometimes may not be possible by resorting to enforcement of law.
The writer is Director of the Centre for Research & Development