Banking System in Bangladesh: Stable or Vulnerable? – A Macro-prudential Assessment

World economies during the last century have witnessed a number of financial and banking crises resulting in tremendous loss in inflicted economies. The severity of these losses prompted Prudential authorities (World Bank, European Central Bank, International Monetary Fund -IMF and Central Banks of many other countries) to develop comprehensive sets of Macro prudential Indicators (MPI) to assess the financial and banking system soundness to devise an early warning system of future impending crisis. This paper draws on MPI framework of IMF to evaluate the current soundness and stability of the banking system of Bangladesh. The evaluation shows that the Bangladesh banking system remains vulnerable to future crisis emanating from three pronged risks: macroeconomic epidemic. micro only epidemic and endemic crisis of entrenched government permeation. Though foreign commercial banks (FCB) and some private commercial banks (PCB) stand on sound footing, crisis may start from nationalized portion of commercial banks (NCB), development financial institutions (DFI) and from a few problems inflicted private banks. In terms of macro economic indicators the country's banking system may encounter instability emanating from asset price and lending boom, high inflation and volatile exchange rate, deteriorating terms of trade and continuous adverse trade and current account balance.