Building Vulnerability Predictive Indicator for the Banking Sector: Perspective of Bangladesh

For risk and capital measurement, banks and other financial institutions need to meet approaching regulatory requirements. It is a major issue to meet the regulatory requirements is a sole or even the foremost important reason for the establishment of a scientific risk management system. To direct capital towards activities with best reward/risk ratios, managers need reliable risk measures. They need mechanisms in order to monitor positions and create incentives for prudent risk-taking by divisions and individuals. This research focuses on the economic vulnerability faced by the banks in financial sector in terms of the crises issues and economic distress. Here, the methodology followed is based on the CAMELS framework variables. CAMELS is an abbreviation for: capital adequacy (C), asset (A), management (M), earnings (E), liquidity (L) and sensitivity to market risk (S). Based on these terminologies, a couple of variables should be selected, such as capital asset ratio, non-performing loan, cost income ratio,non-interest income as component series and return on equity (RoE) as reference series to identify the detecting turning points as identification of economic vulnerability in banking sector of Bangladesh. Thus, by forecasting the directional changes it could make policymakers aware of changes in financial markets and banking economy and allow them to undertake preventive steps for remedial purposes. The constructed MPI should have a remarkable lead time of about an average of6 months in case of predictionagainst the leading for reference Series.