The Bangladesh stock market experiencedsignificant volatility in late 2010 and early 2011 whichtook stock values high above fundamentals and threatened thestability of the financial system. This note takes asystematic look at the capital markets underpinnings inBangladesh, including the regulatory framework, therule-making bodies and enforcement issues. It also addressessystemic weaknesses responsible for market instability whichwas observed at the end of 2010 and early 2011. The noteanalyses the outlines specific areas of potentialvulnerabilities of securities markets, as assessed againstappropriate practice guidelines for stability,sustainability, transparency, and enforcement. A plan ofaction going forward is also suggested. This note draws on aconsiderable amount of prior analytical work. Bangladeshcapital markets remain ineffective. The government debtsecurities markets are illiquid preventing the Bangladeshfinancial 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 limitedbecause these instruments, along with treasury bonds, makeup the statutory liquidity reserve and are thereforegenerally held until maturity by commercial banks and otherfinancial institutions. Trading is also thin in repurchaseagreements, for two main reasons. First, commercial bankshave a weak treasury function, and most do not activelymanage liquidity. Second, there is no standard masterrepurchase agreement, a gap that should be addressed tosupport orderly development of the repo market.
PDF
download
878987797
028-85220240
