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Investment Banking in USA and Bangladesh

Scope for Innovation

Thesis April 2014

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 Investment Banking in USA and Bangladesh
Scope for Innovation

Md. Shakhawat Hossain1

Abstract

I discuss briefly the purposes and activities of Investment banking in USA and Bangladesh.
The overall performance and structures of investment banks in USA and Bangladesh are
shown in this report. Financial system of a country is always getting advanced and complex.
Banking system in todays world has evolved over long period of time. There have been lots
of ups and downs or we can call financial crisis in this time period. One of the heavily
regulated sectors in world economy is banking sector. This report focuses on how a bank
performs in advanced economy and moderately advanced economic situation. There is a
significant scope for Bangladeshi investment bank to compete in global market. Several
studies have shown that investment banks play a major role along with government and in
public finance.

1. East West University, Department of Business Administration. This project preparation is for academic and final year
submission to project supervisor Quazi Sagota Samina.

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The Evolution of Banking

Banks are just one part of the world of financial institutions, standing alongside investment
banks, insurance companies, finance companies, investment managers and other companies
that profit from the creation and flow of money. As financial intermediaries, banks stand
between depositors who supply capital and borrowers who demand capital. Given how much
commerce and individual wealth rests on healthy banks, banks are also among the most
heavily regulated businesses in the world.

Banks have been around since the first currencies were minted, perhaps even before that, in
some form or another. Currency, particularly the use of coins, grew out of taxation. In the
early days of ancient empires, a tax of on healthy pig per year might be reasonable, but as
empires expanded, this type of payment became less desirable. Additionally, empires began
to need a way to pay for foreign goods and services, with something that could be exchanged
more easily. Coins of varying sizes and metals served in the place of fragile, impermanent
paper bills.

Adam Smith famously described capitalism as an invisible hand guiding the market in its
allocation of goods and services. The financial engines of this hand during the 18th and 19th
centuries were European merchant banks, such as Hope & Co., Baring Brothers and Morgan
Grenfell. For a time, the Netherlands, and later Great Britain, ruled the waves of global
commerce in far-flung ports of call such as India and Hong Kong. The merchant banking
model then crossed the Atlantic and served as the inspiration for the financial firms founded
by prominent families in what could perhaps be called the emerging market of the day - the
United States. The structure and activities of early U.S. firms such as JP Morgan & Co. and
Dillon Read and Drexel & Co. reflected those of their European counterparts and included
financing new business opportunities through raising and deploying investment capital.

The Romans, great builders and administrators in their own right, took banking out of the
temples and formalized it within distinct buildings. During this time moneylenders still
profited, as loan sharks do today, but most legitimate commerce, and almost all governmental
spending, involved the use of an institutional bank. Julius Caesar, in one of the edicts
changing Roman law after his takeover, gives the first example of allowing bankers to
confiscate land in lieu of loan payments. This was a monumental shift of power in the

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relationship of creditor and debtor, as landed noblemen were untouchable through most of
history, passing debts off to descendants until either the creditor's or debtor's lineage died out.
The Roman Empire eventually crumbled, but some of its banking institutions lived on in the
form of the papal bankers that emerged in the Holy Roman Empire and with the Knights of
the Temple during the Crusades. Small-time moneylenders that competed with the church
were often denounced for usury.

World War II may have saved the banking industry from complete destruction. WWII, and
the industriousness it generated, lifted the American and world economy back out of the
downward spiral. For the banks and the Federal Reserve, the war required financial
maneuvers using billions of dollars. This massive financing operation created companies with
huge credit needs that in turn spurred banks into mergers to meet the new needs. These huge
banks spanned global markets. More importantly, domestic banking in the United States had
finally settled to the point where, with the advent of deposit insurance and mortgages, an
individual would have reasonable access to credit.

Banks have come a long way from the temples of the ancient world, but their basic business
practices have not changed. Banks issue credit to people who need it, but demand interest on
top of the repayment of the loan. Although history has altered the fine points of the business
model, a bank's purpose is to make loans and protect depositors' money. Even if the future
takes banks completely off your street corner and onto the internet, or has you shopping for
loans across the globe, the banks will still exist to perform this primary function.

The Rise of the Modern Investment Bank:

Over time, two somewhat distinct models arose from this. The old merchant banking model
was largely a private affair conducted among the privileged denizens of the clubby world of
old European wealth. The merchant bank typically put up sizable amounts of its own (family-
owned) capital along with that of other private interests that came into the deals as limited-
liability partners. Over the 19th century, a new model came into popular use, particularly in
the United States. Firms seeking to raise capital would issue securities to third-party
investors, who would then have the ability to trade these securities in the organized securities
exchanges of major financial centers such as London and New York. The role of the financial
firm was that of underwriter - representing the issuer to the investing public, obtaining

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interest from investors and facilitating the details of the issuance. Firms engaged in this
business became known as investment banks.

Firms like JP Morgan didn't limit themselves to investment banking, but established
themselves in a variety of other financial businesses including lending and deposit taking (i.e.
commercial banking). The stock market crash of 1929 and ensuing Great Depression caused
the U.S. government to reach the conclusion that financial markets needed to be more closely
regulated in order to protect the financial interests of average Americans. This resulted in the
separation of investment banking from commercial banking (the Glass-Steagall Act of 1933).
The firms on the investment banking side of this separation - such as Morgan Stanley,
Goldman Sachs, Lehman Brothers and First Boston - went on to take a prominent role in the
underwriting of corporate America during the postwar period; the largest gained fame as the
so-called "bulge bracket".

The term "merchant bank" came back into vogue in the late 1970s with the nascent private
equity business of firms like Kohlberg, Kravis & Roberts (KKR). Merchant banking in its
modern context refers to using one's own equity (often accompanied by external debt
financing) in a private transaction, as opposed to underwriting a share issue via publicly
traded securities on an exchange - the classic function of an investment bank. Many of the
large global firms today conduct both merchant banking (private equity) and investment
banking.

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Introduction

According to Glass-Steagall Act 1933 until 1999 (GrammLeachBliley Act) the United
States maintained a separation between investment banking and commercial banks.
Investment banks are non-depository institute. They are more likely consulting institute for
large private institutes. Also investment banks in USA have ability to perform proprietary
trading but commercial banks do not have the right to do so. Top investment banks in USA
are as follows- JP Morgan Chase, Goldman Sachs, Bank of America Merrill Lynch (Acquired
by Bank of America), Morgan Stanley, Citigroup etc.

Many European and American investment banks are public companies, meaning that their
shares trade on stock exchanges and anyone who purchases these shares owns a piece of the
bank. However, that many investment banks are controlled by a handful of investors who
own large slices of the available shares. Major investors in public or private investment banks
could include other financial institutions, governments through sovereign wealth funds,
wealthy individuals, family groupings, and even directors of the bank. Some smaller
investment banks remain privately owned or are structured as partnerships.

A pure investment bank does not only consult private institutions or firms that seek help in
critical situation. But also manages their business strategically. Key activities of investment
banks are share underwriting, merger, acquisition, proprietary trading, equity or market
research, business consulting. The main clients of investment banks are

Corporates: operating companies in sectors including energy, retail, construction, technology,

media, healthcare, food and drink and chemicals and other financial services organizations.

Funds: investment vehicles which pool investors assets and follow a particular investment
strategy, including pension funds, hedge funds, and private equity funds.

Sovereigns: governments, but also quasi-governmental institutions such as export credit

agencies and sovereign wealth funds.

High net worth individuals: usually defined as those with investable assets worth over $1
million.

The bank itself: some of a banks trading and investment activities are conducted not for an
external client but to make profits for itself, or to protect the bank against risks.

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Advisor of Investment banks in USA must be regulated by U.S Securities & Exchange
Commission (SEC) and Financial Industry Regulatory Authority (FINRA) regulation.
Financial advisors or broker-dealer without license are subject to legal action and lawsuit.
After financial crisis in 2008, top investment banks converted themselves to commercial bank
but still they run their investment activity which significantly reduced after their conversion.

Investment banking is split into front office, middle office, and back office activities. While
large service investment banks offer all lines of business both "sell side" and "buy side",
smaller sell-side investment firms such as boutique investment banks and small broker-
dealers focus on investment banking and sales/trading/research, respectively. Investment
banks offer services to both corporations issuing securities and investors buying securities.
For corporations, investment bankers offer information on when and how to place their
securities on the open market, an activity very important to an investment bank's reputation.
Therefore, investment bankers play a very important role in issuing new security offerings.

The Buy Side vs. Sell Side of an Investment Bank

Investment banks are often divided into two camps: the buy side and the sell side. Many
investment banks offer both buy side and sell side services. The sell side typically refers to
selling shares of newly issued IPOs, placing new bond issues, engaging in market making
services, or helping clients facilitate transactions. The buy side, in contrast, worked with
pension funds, mutual funds, hedge funds, and the investing public to help them maximize
their returns when trading or investing in securities such as stocks and bonds.

See Akerlof and Shiller (2009) and Shefrin (2009) for more extensive psychology-based accounts of the crisis.

6
Financial Products of Banks

JP Morgan Chase:

JP Morgan chase is the oldest financial institute in the United States. It operates in 60
countries with more than 260,000 employees and asset totaling $2.4 trillion. It is a major
provider of financial services and according to Forbes magazine is the world's third largest
public company based on a composite ranking. The hedge fund unit of JPMorgan Chase is
the second largest hedge fund in the United States. The company was formed in 2000, when
Chase Manhattan Corporation merged with J.P. Morgan & Co.

Their consumer businesses include: Branch, ATM, Telephone and Online Banking, Credit
Cards, Small Business, Home Finance and Home Equity Loans, Auto Finance, Education
Finance, Retirement & Investing, Retail Checking, Merchant Services.

The commercial banking businesses include: Middle Market Banking, Business Credit,
Equipment Finance, Commercial Term Lending, Community Development Banking,
Corporate Client Banking, Government Not-for-Profit and Healthcare Banking, Real Estate
Banking, International Banking.

Corporate & Investment Bank:

As the financial markets have experienced rapid change and new challenges in recent years,
J.P. Morgan has secured its place as a global leader, ranking #1 in many key industry-wide
benchmarks. As a global financial institution, J.P. Morgan has a responsibility to facilitate a
healthy and productive global economy, to ensure the availability of credit and to provide
liquidity in the markets. And they take this responsibility extremely seriously. When they
lend to a manufacturer so it can gear up to meet orders that loan helps create jobs. When J.P.
Morgan provides cash management services for a corporation with receivables in multiple
currencies, it helps bolster the clients profitability.

In 2014 and beyond, several global macroeconomic trends that will affect the wholesale
banking industry. Some of these will present challenges, but many others should abet global
bulge bracket players like J.P. Morgan. Dodd-Frank implementation, Basel capital rule
changes and Volcker- Vickers are just a few examples of the regulatory changes in the works
that together represent a real challenge. J.P. Morgan is well on the way to meeting these
requirements. In particular, to deal with the impact of Basel III regulations, the bank

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increased the allocated capital to the corporate and investment banking to $56.5 billion as of
January 1, 2013.

On the client front, continued globalization, accelerating cross-border trade flows and the
deepening of capital markets present attractive growth opportunities. While client needs for
capital are growing, some competitors have been retrenching. For example, many European
banks have been deleveraging due to the stresses brought about by persistent slow economic
growth, tightening regulatory requirements and sovereign debt concerns. As a result,
companies increasingly will turn to the capital markets to finance their operations and
growth, creating opportunities for global leaders in capital markets underwriting.

J.P. Morgan will continue to strengthen their ability to provide Global Corporate Bank and
Treasury Services solutions around the world, ensuring that the full integration of foreign
exchange and payments products is available in an age when trade is increasingly global.
They plan to continue to expand international Prime Brokerage offering for clients who more
and more demand global execution. And J.P. Morgan plan to expand over-the counter (OTC)
clearing platform and launch collateral management solutions for clients as OTC clearing
mandates roll out globally. J.P. Morgan plan to continue focusing on strong risk management
and controls, talent management and investment discipline, which are key underpinnings of
industry leadership. Although they are certainly are proud of what their employees and the
CIB heritage businesses already have accomplished, J.P. Morgan even more optimistic about
firms market-leading capabilities to assist clients into the future.

Accomplishments:

61% of the CIBs clients and 48% of revenue (excluding DVA) of $35.3 billion are
international (outside North America)

52,000+ employees in close to 60 countries serving approximately 7,600 clients

13% compound annual growth rate in the number of significant international clients
generating more than $1 million annually in revenue since 2009

Raised or provided $70 billion of capital for nonprofit and governmental clients, including
states, municipalities, hospitals and universities (Source: Thomson Financial, internal
sources)

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 Traded more than 125 million equity shares and 60,000 fixed income securities daily on
average Ranked #1 in U.S. dollar wire clearing with a 20% share of Fed and CHIPS
(Source: Federal Reserve and Clearing House Interbank Payments System, CHIPS) Record
assets under custody of $18.8 trillion, up 12% from 2011

Ranked #1 in Global IB Fees; based on volumes, ranked #1 in Global Debt, Equity &
Equity Related, #1 in Global Syndicated Loans, and #2 in Global M&A Announced

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The Goldman Sachs Group

This bank is leading global investment banking, securities and investment management firm
that provides a wide range of financial services to a substantial and diversified client base that
includes corporations, financial institutions, governments and high-net-worth individuals.
Founded in 1869, the firm is headquartered in New York and maintains offices in all major
financial centers around the world.

There are four business segments of Goldman Sachs. These business segments are discussed
briefly below with their 2012 annual report analysis.

Investment Banking: Provide a broad range of investment banking services to a diverse

group of corporations, financial institutions, investment funds and governments. Services
include strategic advisory assignments with respect to mergers and acquisitions, divestitures,
corporate defense activities, risk management, restructurings and spin-offs, and debt and
equity underwriting of public offerings and private placements, including domestic and cross-
border transactions, as well as derivative transactions directly related to these activities. Net
revenues in Investment Banking increased compared with 2011, reflecting significantly
higher net revenues in underwriting business, due to strong net revenues in debt underwriting.
Net revenues in debt underwriting were significantly higher compared with 2011, primarily
reflecting higher net revenues from investment-grade and leveraged finance activity. Net
revenues in equity underwriting were lower compared with 2011, primarily reflecting a
decline in industry-wide initial public offerings. Net revenues in Financial Advisory were
essentially unchanged compared with 2011.

Institutional Client Services: Facilitate client transactions and make markets in fixed income,
equity, currency and commodity products, primarily with institutional clients such as
corporations, financial institutions, investment funds and governments. Also make markets in
and clear client transactions on major stock, options and futures exchanges worldwide and
provide financing, securities lending and other prime brokerage services to institutional
clients. Net revenues in Institutional Client Services increased compared with 2011,
reflecting higher net revenues in Fixed Income, Currency and Commodities Client Execution.
The increase in Fixed Income, Currency and Commodities Client Execution compared with
2011 reflected strong net revenues in mortgages, which were significantly higher compared
with 2011. In addition, net revenues in credit products and interest rate products were solid
and higher compared with 2011. These increases were partially offset by significantly lower

10
net revenues in commodities and slightly lower net revenues in currencies. Although broad
market concerns persisted during 2012, Fixed Income, Currency and Commodities Client
Execution operated in a generally improved environment characterized by tighter credit
spreads and less challenging market-making conditions compared with 2011. Net revenues in
Equities were essentially unchanged compared with 2011. Net revenues in securities services
were significantly higher compared with 2011, reflecting a gain of approximately $500
million on the sale of our hedge fund administration business. In addition, equities client
execution net revenues were higher than 2011, primarily reflecting significantly higher results
in cash products, principally due to increased levels of client activity. These increases were
offset by lower commissions and fees, reflecting lower market volumes. During 2012,
Equities operated in an environment generally characterized by an increase in global equity
prices and lower volatility levels. The net loss attributable to the impact of changes in our
own credit spreads on borrowings for which the fair value option was elected was $714
million ($433 million and $281 million related to Fixed Income, Currency and Commodities
Client Execution and equities client execution, respectively) for 2012, compared with a net
gain of $596 million ($399 million and $197 million related to Fixed Income, Currency and
Commodities Client Execution and equities client execution, respectively) for 2011.

Investing and Lending: Invest in and originate loans to provide financing to clients. These
investments and loans are typically longer term in nature. They make investments, some of
which are consolidated, directly and indirectly through funds that managed by them, in debt
securities and loans, public and private equity securities, and real estate entities. Net revenues
in Investing & Lending were $5.89 billion and $2.14 billion for 2012 and 2011, respectively.
During 2012, Investing & Lending net revenues were positively impacted by tighter credit
spreads and an increase in global equity prices. Results for 2012 included a gain of $408
million from their investment in the ordinary shares of Industrial and Commercial Bank of
China Limited (ICBC), net gains of $2.39 billion from other investments in equities,
primarily in private equities, net gains and net interest income of $1.85 billion from debt
securities and loans, and other net revenues of $1.24 billion, principally related to
consolidated investment entities. Results for 2011 included a loss of $517 million from
investment in the ordinary shares of ICBC and net gains of $1.12 billion from other
investments in equities, primarily in private equities, partially offset by losses from public
equities. In addition, Investing & Lending included net revenues of $96 million from debt
securities and loans. This amount includes approximately $1 billion of unrealized losses

11
related to relationship lending activities, including the effect of hedges, offset by net interest
income and net gains from other debt securities and loans. Results for 2011 also included
other net revenues of $1.44 billion, principally related to consolidated investment entities.

Investment Management: Provide investment management services and offer investment

products (primarily through separately managed accounts and commingled vehicles, such as
mutual funds and private investment funds) across all major asset classes to a diverse set of
institutional and individual clients. Also offer wealth advisory services, including portfolio
management and financial counseling, and brokerage and other transaction services to high-
net-worth individuals and families. Revenues in Investment Management increased compared
with 2011, due to significantly higher incentive fees, partially offset by lower transaction
revenues and slightly lower management and other fees. During the year, assets under
supervision 1 increased $70 billion to $965 billion. Assets under management increased $26
billion to $854 billion, reflecting net market appreciation of $44 billion, primarily in fixed
income and equity assets, partially offset by net outflows of $18 billion. Net outflows in
assets under management included outflows in equity, alternative investment and money
market assets, partially offset by inflows in fixed income assets 2. Other client assets
increased $44 billion to $111 billion, primarily due to net inflows 2, principally in client
assets invested with third-party managers and assets related to advisory relationships.

Business Environment overview

Global economic conditions generally weakened in 2012, as real gross domestic product
(GDP) growth slowed in most major economies. Market sentiment was affected by continued
broad market concerns and uncertainties, although positive developments helped to improve
market conditions. These developments included certain central bank actions to ease
monetary policy and address funding risks for European financial institutions. In addition, the
U.S. economy posted stable to improving economic data, including favorable developments
in unemployment and housing. These improvements resulted in tighter credit spreads, higher
global equity prices and lower levels of volatility. However, concerns about the outlook for
the global economy and continued political uncertainty, particularly the political debate in the
United States surrounding the fiscal cliff, generally resulted in client risk aversion and lower

12
activity levels. Also, uncertainty over financial regulatory reform persisted. These concerns
weighed on investment banking activity, as completed mergers and acquisitions activity
declined compared with 2011, and equity and equity-related underwriting activity remained
low, particularly in initial public offerings. However, industry-wide debt underwriting
activity improved compared with 2011.

Financial instruments owned, at fair value and Financial instruments sold, but not yet
purchased, at fair value (i.e., inventory), as well as certain other financial assets and financial
liabilities, are reflected in our consolidated statements of financial condition at fair value (i.e.,
marked-to-market), with related gains or losses generally recognized in consolidated
statements of earnings. The use of fair value to measure financial instruments is fundamental
to risk management practices and is most critical accounting policy. The fair value of a
financial instrument is the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. In
determining fair value, the hierarchy under U.S. generally accepted accounting principles
(U.S. GAAP) gives (i) the highest priority to unadjusted quoted prices in active markets for
identical, unrestricted assets or liabilities (level 1 inputs), (ii) the next priority to inputs other
than level 1 inputs that are observable, either directly or indirectly (level 2 inputs), and (iii)
the lowest priority to inputs that cannot be observed in market activity (level 3 inputs). Assets
and liabilities are classified in their entirety based on the lowest level of input that is
significant to their fair value measurement.

The fair values for substantially all of financial assets and financial liabilities are based on
observable prices and inputs and are classified in levels 1 and 2 of the fair value hierarchy.
Certain level 2 and level 3 financial assets and financial liabilities may require appropriate
valuation adjustments that a market participant would require to arrive at fair value for factors
such as counterparty and the firms credit quality, funding risk, transfer restrictions, liquidity
and bid/offer spreads. Valuation adjustments are generally based on market evidence. Absent
evidence to the contrary, instruments classified within level 3 of the fair value hierarchy are
initially valued at transaction price, which is considered to be the best initial estimate of fair
value. Subsequent to the transaction date, the banks use other methodologies to determine fair

13
value, which vary based on the type of instrument. Estimating the fair value of level 3
financial instruments requires judgments to be made. These judgments include-

Determining the appropriate valuation methodology and or model for each type of level 3
financial instrument.

Determining model inputs based on an evaluation of all relevant empirical market data,
including prices evidenced by market transactions, interest rates, credit spreads volatilities
and correlations.

Determining appropriate valuation adjustments related to illiquidity or counterparty credit

quality. Regardless of the methodology, valuation inputs and assumptions are only changed
when corroborated by substantive evidence.

The fair value hierarchy is as follows:

Level 1- Inputs are unadjusted quoted prices in active markets to which the firm had access at
the measurement date for identical, unrestricted assets or liabilities.

Level 2- Inputs to valuation techniques are observable, either directly or indirectly.

Level 3- One or more inputs to valuation techniques are significant and unobservable.

Market makers and investment professionals in revenue-producing units are responsible for
pricing our financial instruments. Control infrastructure is independent of the revenue-
producing units and is fundamental to ensuring that all of their financial instruments are
appropriately valued at market-clearing levels. In the event that there is a difference of
opinion in situations where estimating the fair value of financial instruments requires
judgment (e.g., calibration to market comparable or trade comparison, as described below),
the final valuation decision is made by senior managers in control and support functions that
are independent of the revenue-producing units (independent control and support functions).
This independent price verification is critical to ensuring that financial instruments are
properly valued.

14
The use of generally accepted accounting principles requires management to make certain
estimates and assumptions. In addition to the estimates we make in connection with fair value
measurements, and the accounting for goodwill and identifiable intangible assets, the use of
estimates and assumptions is also important in determining provisions for losses that may
arise from litigation, regulatory proceedings and tax audits. The bank estimate and provide
for potential losses that may arise out of litigation and regulatory proceedings to the extent
that such losses are probable and can be reasonably estimated. In accounting for income
taxes, they estimate and provide for potential liabilities that may arise out of tax audits to the
extent that uncertain tax positions fail to meet the recognition standard under FASB
Accounting Standards Codification 740. Significant judgment is required in making these
estimates and their final liabilities may ultimately be materially different. Total estimated
liability in respect of litigation and regulatory proceedings is determined on a case-by-case
basis and represents an estimate of probable losses after considering, among other factors, the
progress of each case or proceeding, experience and the experience of others in similar cases
or proceedings, and the opinions and views of legal counsel.

Investment banking segment is comprised of

Financial Advisory: Includes strategic advisory assignments with respect to mergers and
acquisitions, divestitures, corporate defense activities, risk management, restructurings and
spin-offs, and derivative transactions directly related to these client advisory assignments.
Underwriting: Includes public offerings and private placements, including domestic and
cross-border transactions, of a wide range of securities, loans and other financial instruments,
and derivative transactions directly related to these client underwriting activities.

Institutional Client Services segment is comprised of:

Fixed Income, Currency and Commodities & Client Execution Includes: Client execution
activities related to making markets in interest rate products, credit products, mortgages,
currencies and commodities.

Generate market-making revenues in these activities, in three ways:

15
In large, highly liquid markets (such as markets for U.S. Treasury bills or certain mortgage
pass-through certificates), we execute a high volume of transactions for our clients for modest
spreads and fees.

In less liquid markets (such as mid-cap corporate bonds, growth market currencies or certain
non-agency mortgage-backed securities), we execute transactions for our clients for spreads
and fees that are generally somewhat larger.

We also structure and execute transactions involving customized or tailor-made products that
address our clients risk exposures, investment objectives or other complex needs (such as a
jet fuel hedge for an airline).

Investing & Lending Investing & Lending includes: Investing activities and the origination of
loans to provide financing to clients. These investments and loans are typically longer-term in
nature. Bank make investments, directly and indirectly through funds that we manage, in debt
securities and loans, public and private equity securities, real estate, consolidated investment
entities and power generation facilities.

Investment Management provides investment management services and offers investment

products (primarily through separately managed accounts and commingled vehicles, such as
mutual funds and private investment funds) across all major asset classes to a diverse set of
institutional and individual clients. Investment Management also offers wealth advisory
services, including portfolio management and financial counseling, and brokerage and other
transaction services to high-net-worth individuals and families. Assets under supervision
include assets under management and other client assets. Assets under management include
client assets where they earn a fee for managing assets on a discretionary basis. This includes
net assets in their mutual funds, hedge funds, credit funds and private equity funds (including
real estate funds), and separately managed accounts for institutional and individual investors.
Other client assets include client assets invested with third-party managers, private bank
deposits and assets related to advisory relationships where they earn a fee for advisory and
other services, but do not have discretion over the assets. Assets under supervision do not
include the self-directed brokerage accounts of their clients. Assets under management and
other client assets typically generate fees as a percentage of net asset value, which vary by

16
asset class and are affected by investment performance as well as asset inflows and
redemptions. In certain circumstances, they also entitled to receive incentive fees based on a
percentage of a funds return or when the return exceeds a specified benchmark or other
performance targets. Incentive fees are recognized only when all material contingencies are
resolved.

Regulatory Developments, The U.S. Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act), enacted in July 2010, significantly altered the financial
regulatory regime within which Goldman Sachs operate. The implications of the Dodd-Frank
Act for their businesses will depend to a large extent on the rules that will be adopted by the
Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), the SEC, the U.S.
Commodity Futures Trading Commission (CFTC) and other agencies to implement the
legislation, as well as the development of market practices and structures under the regime
established by the legislation and the implementing rules. Other reforms have been adopted
or are being considered by other regulators and policy makers worldwide and these reforms
may affect Goldman Sachss businesses.

Risk-Weighted Assets RWAs under the Federal Reserve Boards risk-based capital
requirements are calculated based on the amount of credit risk and market risk. RWAs for
credit risk reflect amounts for on-balance sheet and offbalance sheet exposures. Credit risk
requirements for on-balance sheet assets, such as receivables and cash, are generally based on
the balance sheet value. Credit risk requirements for securities financing transactions are
determined based upon the positive net exposure for each trade, and include the effect of
counterparty netting and collateral, as applicable. For off-balance sheet exposures, including
commitments and guarantees, a credit equivalent amount is calculated based on the notional
amount of each trade. Requirements for OTC derivatives are based on a combination of
positive net exposure and a percentage of the notional amount of each trade, and include the
effect of counterparty netting and collateral, as applicable. All such assets and exposures are
then assigned a risk weight depending on, among other things, whether the counterparty is a
sovereign, bank or a qualifying securities firm or other entity (or if collateral is held,
depending on the nature of the collateral).

17
Overview and Structure of Risk Management, Goldman Sachs believes that effective risk
management is of primary importance to the success of the firm. Accordingly, they have
comprehensive risk management processes through which they monitor, evaluate and manage
the risks the bank assumes in conducting our activities. These include market, credit,
liquidity, operational, legal, regulatory and reputational risk exposures. Goldman Sachs risk
management framework is built around three core components: governance, processes and
people.

Market Risk Management Overview, Market risk is the risk of loss in the value of inventory
due to changes in market prices. It hold inventory primarily for market making for clients and
for investing and lending activities. And their Inventory changes based on client demands and
their investment opportunities. Inventory is accounted for at fair value and therefore
fluctuates on a daily basis, with the related gains and losses included in Market making,
and Other principal transactions.

Risk Measures, Market Risk Management produces risk measures and monitors them against
market risk limits set by firms risk committees. These measures reflect an extensive range of
scenarios and the results are aggregated at trading desk, business and firm wide levels. The
bank use a variety of risk measures to estimate the size of potential losses for both moderate
and more extreme market moves over both short-term and long-term time horizons. Risk
measures used for shorter-term periods include VaR and sensitivity metrics. For longer-term
horizons, primary risk measures are stress tests. Their risk reports detail key risks, drivers and
changes for each desk and business, and are distributed daily to senior management of both
revenue-producing units and independent control and support functions.

Credit Risk Management Overview, Credit risk represents the potential for loss due to the
default or deterioration in credit quality of a counter party (e.g., OTC derivatives counterparty
or a borrower) or an issuer of securities or other instruments they hold. Exposure to credit
risk comes mostly from client transactions in OTC derivatives and loans and lending
commitments. Credit risk also comes from cash placed with banks, securities financing
transactions (i.e., resale and repurchase agreements and securities borrowing and lending
activities) and receivables from brokers, dealers, clearing organizations, customers and

18
counterparties. Credit Risk Management, which is independent of the revenue-producing
units and reports to the firms chief risk officer, has primary responsibility for assessing,
monitoring and managing credit risk at the firm. The Credit Policy Committee and the Firm
wide Risk Committee establish and review credit policies and parameters. In addition, bank
holds other positions that give rise to credit risk (e.g., bonds held in inventory and secondary
bank loans). These credit risks are captured as a component of market risk measures, which
are monitored and managed by Market Risk Management, consistent with other inventory
positions. Policies authorized by the Firm wide Risk Committee and the Credit Policy
Committee prescribe the level of formal approval required for the firm to assume credit
exposure to a counterparty across all product areas, taking into account any applicable netting
provisions, collateral or other credit risk mitigates.

19
Citibank

Global Consumer Banking

Citis Global Consumer Banking (GCB) serves more than 100 million clients across the
world through its unique footprint and capabilities, its presence in and understanding of local
markets, and the ability to deliver a consistent and enhanced banking experience.
Strategically positioned in the worlds top cities with the highest consumer banking growth
potential, Global Consumer Banking operates across Citis four regions Asia Pacific;
Europe, the Middle East and Africa; Latin America; and North America. The primary
business lines are Credit Cards, Retail Banking, Mortgage and Commercial Banking. The
collective GCB businesses account for $337 billion in deposits, $295 billion in loans, $154
billion in assets under management in Retail Banking and approximately 4,0001 branches
worldwide. Global Consumer Banking earnings continued to grow in 2012. Pretax operating
earnings increased by 48% to $10.1 billion nearly half of Citi overall. Net income2 grew
6% to $8.1 billion its highest level ever. Revenues of $40 billion, over the last 12 months,
reached a new milestone. Additionally, average loans grew 5% globally, with 9%
international growth and 2% growth in North America.

Retail Banking

Centered in the worlds top cities with high consumer banking growth potential, Citibank
serves a full range of consumer banking needs, including checking and savings accounts,
loans and small business services. The optimization of the Citibank branch network
continued throughout 2012 to further concentrate its presence in major metropolitan areas and
focus on target consumer segments. Their renowned Citi Smart Banking branches, with
innovative technologies and concierge-style client services, expanded in the Philippines,
Malaysia and the U.S. Citis Banamex franchise serves close to 21 million customers and has
a leading position in consumer lending, deposit, retirement and mutual fund industries in
Mexico. Citis wealth management business provides investment and financial advisory
services, including mutual funds, managed portfolios, stocks, bonds, insurance products and
retirement solutions. Citigold combines banking with wealth management to deliver
exceptional personalized service, special benefits and preferred access to Citis network.

20
Citigold International is dedicated to serving the needs of globally connected clients by
offering access to multicounty financial services.

Institutional Clients Group

Citis Institutional Clients Group serves multinational and local corporations, financial
institutions, governments and privately held businesses in more than 160 countries and
jurisdictions. Their talented professionals build enduring relationships with clients and help
them achieve their goals by offering a full suite of strategic advisory and financing products,
services and solutions.

Corporate and Investment Banking

Citis Corporate and Investment Banking franchises provide comprehensive relationship

coverage service to ensure the Institutional Clients Group is client driven. With strong
presence in numerous countries Citi has been in many markets for more than 100 years
leverage the country, sector and product expertise to deliver Citis global capabilities to
clients wherever they choose to compete. Citis Corporate and Investment Banking client
teams are organized by industry and by country. Each team comprises two parts: Strategic
Coverage Officers, who focus on mergers and acquisitions and equity and related financing
solutions; and Corporate Bankers, along with their Capital Markets product partners and with
support from their Global Subsidiaries Group, who deliver corporate banking/finance
services to global, regional and local clients.

Capital Markets Origination

Citis Capital Markets Origination business, focused on raising debt and equity, is the first
choice among issuers for their underwriting needs due to an unmatched global footprint,
diverse range of products and track record of executing transactions for its clients amid
unprecedented market conditions. Issuers turn to Citi for inaugural issuances; repeat business;
and their largest, landmark transactions, strongly demonstrating Citis structuring and
execution expertise to meet client needs. In the equity capital markets over the last year, Citi

21
led the market both in terms of proceeds raised and in innovation in the capital markets. Citi
is the clear choice for debt capital markets transactions, based on its continued underwriting
leadership in transactions across a broad range of currencies and markets, displaying
consistent dominance and success in navigating challenging fixed income conditions.

Markets

Citi Markets provides financial products and services as diverse as the needs of the
corporates, institutions, governments and investors they serve. The breadth, depth and
strength of their underwriting, sales and trading, distribution and research capabilities span a
broad range of asset classes and currencies, sectors and industries. Products offered include
equities, commodities, credit, futures, foreign exchange (FX), emerging markets, G10 rates,
municipals, prime finance and securitized markets. Their research and analysis group helps
institutional clients navigate a complex global marketplace with the highest quality corporate,
sector, economic and geographical insights from equity and fixed income research to
market and product analysis. On trading floors in more than 80 countries in Asia, Europe, the
Middle East, Africa, Latin America and North America, we work around the clock to enrich
the relationships, products, liquidity and technology that define our market- making presence.
Their state-of-the art Citi VelocitySM platform delivers electronic access to Citis global
footprint and world-class innovation, giving clients unprecedented access to our capital
markets intelligence and services across equities, futures, FX, emerging markets, rates, credit,
commodities, securitized markets, municipals, prime finance and research. Through their
web, mobile and trading applications, clients can find proprietary data and analytics, Citi
research and commentary; fast, seamless and stable execution for FX and rates trades; and a
suite of sophisticated, post-trade analysis tools everything clients need to make the most of
the market.

Citi Transaction Services

Citi Transaction Services (CTS) provides cash management, trade, securities and fund
services to multinational corporations, financial institutions, governments and public sector

22
organizations in more than 140 countries. Ninety four percent of Fortune 100 companies and
81% of Fortune Global 500 companies count on Citi to support their financial operations with
global solutions. Every day, Citi Transaction Services intermediates more than $3 trillion in
financial, commercial and capital flows. Access to technology platforms, regulatory
knowledge and data-driven expertise enables clients to manage financial operations
efficiently with visibility and control, maximize the value of capital, protect the integrity of
supply chains and manage risk. Uniquely placed to support clients expansion in the
developing markets, CTS meets their evolving needs through sustained investment in
technology and digital innovation. Citis clients depend on the scale and consistency of CTS
global platforms, connectivity to market infrastructures and proven operating expertise in
developed and growth markets. They provide working capital solutions and transaction
processing to supply chain financing, correspondent banking, securities services, issuer
services, and investment administration and servicing across traditional and alternative
investment strategies, asset classes and geographies.

Credit Risk

Credit risk is the potential for financial loss resulting from the failure of a borrower or
counterparty to honor its financial or contractual obligations. Credit risk arises in many of
Citigroups business activities, including:

Wholesale and retail lending;

Capital markets derivative transactions;

Structured finance; and

Repurchase agreements and reverse repurchase transactions.

Credit risk also arises from settlement and clearing activities, when Citi transfers an asset in
advance of receiving its counter-value, or advances funds to settle a transaction on behalf of a
client. Concentration risk, within credit risk, is the risk associated with having credit exposure
concentrated within a specific client, industry, region or other category.

Credit Risk Management

23
Credit risk is one of the most significant risks Citi faces as an institution. As a result, Citi has
a well-established framework in place for managing credit risk across all businesses. This
includes a defined risk appetite, credit limits and credit policies, both at the business level as
well as at the firm-wide level. Citis credit risk management also includes processes and
policies with respect to problem recognition, including watch lists, portfolio review,
updated risk ratings and classification triggers. With respect to Citis settlement and clearing
activities, intra-day client usage of lines is closely monitored against limits, as well as against
normal usage patterns. To the extent a problem develops, Citi typically moves the client to
a secured (collateralized) operating model. Generally, Citis intra-day settlement and clearing
lines are uncommitted and cancellable at any time.

To manage concentration of risk within credit risk, Citi has in place a concentration
management framework consisting of industry limits, obligor limits and single-name triggers.
In addition, as noted under Management of Global RiskRisk Aggregation and Stress
Testing above, independent risk management reviews concentration of risk across Citis
regions and businesses to assist in managing this type of risk.

Credit Risk Measurement and Stress Testing

Credit exposures are generally reported in notional terms for accrual loans, reflecting the
value at which the loans are carried on the Consolidated Balance Sheet. Credit exposure
arising from capital markets activities is generally expressed as the current mark-to-market,
net of margin, reflecting the net value owed to Citi by a given counterparty. The credit risk
associated with these credit exposures is a function of the creditworthiness of the obligor, as
well as the terms and conditions of the specific obligation. Citi assesses the credit risk
associated with its credit exposures on a regular basis through its loan loss reserve process as
well as through regular stress testing at the company-, business-, and geography- and product
levels. These stress-testing processes typically estimate potential incremental credit costs that
would occur as a result of either downgrades in the credit quality, or defaults, of the obligors
or counterparties.

24
Investment Banks in Bangladesh:

During the year 2012, the Banking Sector of Bangladesh showed remarkable resilience.
Bangladesh Bank implemented a number of important policy measures throughout the year to
foster a sound, efficient and stable financial system. The total deposit in the banking sector
excluding inter-bank deposits stood at Tk. 5,006,827 million at the end of December, 2012 as
against Tk. 4,173,516 million in 2011 marking a growth of 19.97%. The total banking sector
credit stood at Tk. 5,447,307 million at the end of December, 2012 as against Tk. 3,773,470
million of 2011 registering a growth of 44.36%. Despite severe liquidity crisis, like the
preceding years, Private Commercial Banks (PCBs) retained their leadership both in
procuring deposits and disbursing loans and advances.

IFIC Bank

Products & Services

IFIC Bank has focused on technology based modern banking facility including Real-time
Online Banking, ATM, SMS Banking, POS, Credit Card, Debit Card and Prepaid Card in
addition to traditional products/services.

Corporate Banking

IFIC Bank offers a wide range of advisory, financing and operational services to its corporate
clients through extensive branch network all over the country. Our dedicated & experienced
Relationship Managers have competent managerial skill and in-depth professional knowledge
of corporate & institutional business environment of the country. To expedite our client's
business growth, we provide complete range of solutions to meet Corporate Customers'
requirement. Our Corporate Banking solutions include extensive range of products and
services backed by modern technologies. Products and services for corporate are Working
Capital Finance, Project Finance, Trade Finance, Lease Finance, Syndication Loan, Off-shore
banking etc.

25
Lease Financing

IFIC Bank extends customized lease finance facility to Corporate Business Units and SME in
the manufacturing and service industries sectors. IFIC offers asset backed financing against
industrial machinery, commercial equipment, office equipment, generators, vehicles, sea or
river vessels, engines, construction equipment, agriculture equipment etc.

Syndication Finance

Syndication allows any of the lenders to provide large loans, while maintaining prudent and
manageable risk exposure. Syndicated finance diversifies the risk of one bank on a single
borrower and increases the quality of loan through collective judgment and monitoring of
different banks / financial institutions. IFIC Bank has an extensive and successful track
record acting as both lead bank and partner in loan syndication for long-term, large-scale
projects. To raise and meet huge credit need of leading corporate house, IFIC Bank has been
raising fund from the banking sector on behalf of the customer through syndication
arrangement.

Project Finance

The industrial sector has historically been the sector that has driven growth as countries have
moved from low to middle-income status. This is because industry can provide high-wage
employment for large numbers of workers and can raise social productivity by producing
high-value goods on a mass scale. Project finance/Industrial credit is the long-term financing
of infrastructure and industrial projects based upon the projected cash flows of the project.
IFIC Bank Ltd. has been financing Term Loan (Industrial) facility for establishing new
project and/or expansion of various projects in the sectors viz. Textile, Spinning, RMG,
power, Steel, Telecom, Pharmaceuticals, Food Processing, Packaging, Fast Moving
Consumer Goods (FMCG), Health, CNG refueling, Real estate.

26
MSME Financing

As per the directives of Bangladesh Bank and to foster the growth of MSME Enterprises,
IFIC Bank Limited has been financing in Micro, Small & Medium Enterprises. During the
year 2012, total disbursement in MSME Sector was Tk.1546.42 crore and outstanding
MSME Loan of IFIC Bank Ltd was Tk.1931.77 crore, which is 25.18% of the total loan
portfolio of the bank.

Financing to Women Entrepreneurs

In order to facilitate financing to the women entrepreneurs @ 10% interest p.a., IFIC Bank
Ltd. has already designed a new asset product named JOYEETA. Joyeeta is a platform of
women entrepreneurs at grass root level, across the country, initiated by the Ministry of
Women & Children Affairs, Govt. of the Peoples Republic of Bangladesh. In addition, IFIC
Bank Ltd. has Dedicated Desks for Women Entrepreneurs.

Agriculture/ Rural Financing

Agriculture is the backbone of Bangladesh Economy. In order to give priority in Agriculture

Sector, Bangladesh Bank has given special emphasis, by way of fixing targets for
disbursement of Agriculture/ Rural Credit to all commercial banks of the country. As part of
this program, IFIC Bank Ltd. has fixed a disbursement target of Agri Loan of Tk.97.00 crore
during last fiscal year 2011-2012 (July11 to June12). As against the target, IFIC Bank Ltd.
disbursed an amount of Tk. 102.19 crore, which is 105% of the target. The Bank earned
Letter of Appreciation from the Honourable Governor of Bangladesh Bank, for achieving
the agri. Loan disbursement target for the year 2011-2012. The Bank has fixed a loan
disbursement target of Tk.122.00 crore for the fiscal year 2012-2013.

27
Green Financing

IFIC Bank has signed a participation Agreement of Tk.200.00 crore with Bangladesh Bank
for re-financing in Solar Energy, Bio-Gas & Effluent Treatment Plant (ETP). It is intended to
help increase the use of solar energy and environment friendly alternative renewable energy
to maintain ecological balance.

IFIC Visa Cards

Card is powered by VISA, worlds largest electronic payments network. IFIC Bank has been
issuing VISA branded Credit Card, Debit Card & Prepaid Card which can be used both at
home & abroad. Customer can choose any of the above cards according to his/her need.
Local cards can be used at any ATM displaying VISA Logo for withdrawal of cash and at
any POS displaying VISA Logo for purchase of goods & services within Bangladesh.
International cards can be used globally through worldwide VISA network. The Bank has
been issuing credit cards including gold and classic cards for both local and international use.
International credit cards are dual currency cards having two separate accounts against same
plastic one of which is in USD and the other is in BDT. The BDT account is maintained for
the transactions made in Bangladesh and USD account is maintained for transactions made
outside Bangladesh. The Bank has been issuing debit cards against individual savings/current
account maintained with any branch of IFIC Bank Limited for use in Bangladesh only. Debit
card provides an alternative method of cash withdrawal from the ATMs or payment against
purchase of goods & services instead of issuing cheque. The payments are made directly
from the bank account. IFIC Business Debit Cards are also issued against Current/STD
account of proprietorship concern maintained with any branch of IFIC Bank Limited for use
in Bangladesh only. The Bank has been issuing prepaid cards by the branches against instant
deposit for use in Bangladesh only. This is suitable for the customers who have not
maintained any account with the bank. IFIC Travelers Card, a VISA branded International
prepaid card - a dual currency card and can be used both at home & abroad. IFIC Travelers
Cards are issued against personal Travel Quota entitlement as well as Foreign Currency
accounts maintained with the bank.

28
Risk Management

A Bank is a unique commercial organization for its diversity and complexity of financial
activities. Globalization of financial activities, emergence of new financial products and
increased level of competition has necessitated a need for an effective and structured risk
management in a financial institution. A banks ability to measure, monitor, and steer risks
comprehensively is becoming a decisive parameter for its strategic positioning. Continuing
technological innovation and competition among the existing banking organizations and new
entrants have allowed for a much wider array of banking products and services to become
accessible and delivered to retail and wholesale customers through different distribution
channel. A structured risk management framework is needed for a bank to address properly
so that the risks associated in different areas can be minimized. IFIC Bank, as per guidelines
of the Bangladesh Bank, has introduced risk management policies and strategies to address
the six core risks viz., Credit, Money Laundering, Asset Liability, Foreign Exchange, Internal
Control and Compliance and Information & Communication Technology Risks. IFIC Bank
has already introduced necessary guidelines and framework to address the issue. The Bank
has different committees for risk management, viz. Credit Committee, Asset Liability
Committee (ALCO), Investment Committee which regularly meet to review the market,
credit and liquidity related factors and recommend vis-a-vis implement appropriate measures
to counter associated risks. Appropriate internal control measures are also in place to
minimize the operational risks. A Risk Management Committee has also been constituted to
address the overall risks. Implementation of the BASEL-II accord under the supervision of
Central Bank is going on. In addition to credit risk, Basel II also covers operational and
market risk. The risk weighted assets as well as capital requirement under BASEL-II are
increased significantly. However, minimum capital requirement has been fulfilled by the
Bank. As per directives of Bangladesh Bank, IFIC Bank has set up a separate Risk
Management Division to review and monitor continuously the Banks Risk Management
Policies, methodologies, guidelines and procedures for risk identification, measurement and
acceptance level of risk. Various analysis including VaR analysis and stress testing are being
done on a regular basis. IFIC Bank shall comply fully with Basel II standards as per
approaches chosen by the Central Bank for implementation of Basel II accord in Bangladesh.

29
Credit Risk Management

IFIC Banks Credit Risk Management policy rests on its sound and prudent bank
management culture and complies largely with industry standard, interest rate and liquidity
management requirements, corporate governance principles and carries with it best practices
within the banking profession. Last year, in the process of evaluation and adaptation of its
risk management strategy, IFIC Bank has reviewed its CRM Policy Guideline, Lending cap,
Delegation Authority and restructured the Organogram & Corporate Risk Unit. Online loan
origination process for Retail & SME products has been implemented. As per Bangladesh
Bank guideline, Environmental Risk Rating is adopted in the approval process for our
commitment to green banking. Creating awareness among the corporate houses dealing with
our bank regarding relevance of Credit Rating for ultimate introduction of risk based pricing
vis--vis minimizing capital requirement of the bank.

Assessment of Minimum Capital Requirement (MCR)

Banks are to maintain a minimum Capital Adequacy Ratio (CAR) of 10% of Risk Weighted
Assets (RWA) which is derived as follows:-

CAR X 0%

where total RWA is determined by multiplying Capital Charge for Market Risk and
Operational Risk by a factor of 10 (reciprocal of the minimum capital adequacy ratio of 10%)
and adding the result to the sum of RWA for Credit Risk. i.e. Total RWA = RWA for Credit
Risk + 10 x Capital Charge for ( Market + Operational) Risks

MCR = 10% of Total RWA. Tier 1 (Core)) Capital must be at least 5% of RWA. MCR may
be changed from time to time by Bangladesh Bank.

30
IDLC

IDLC Finance Limited was established in Bangladesh in 1985, as the first-ever leasing
company of the country, through the collaboration of IFC, German Investment and
Development Company (DEG), Kookmin Bank and Korean Development Finance
Corporation, the Aga Khan Fund for Economic Development, the City Bank Limited, IPDC
of Bangladesh Limited, and Sadharan Bima Corporation. As the company evolved over the
years, the foreign shareholding gradually moved out and the last foreign shareholding was
bought out by local sponsors in 2009. IDLCs strong focus on revenue diversification has led
to the establishment of different client segments in the Corporate, Retail, SME and Capital
Markets of Bangladesh. The current product portfolio consists of Corporate and Structured
Finance solutions for local and multinational corporate houses; Personal financing products
such as deposits, home loans, car loans, personal loans etc.; financing facilities for Small and
Medium Enterprises; Merchant Banking solutions such as Portfolio Management and
Investment Banking (IPO, RPO, Bond Issuance, Rights Shares Offering etc.); and Brokerage
services. With this diversified array of products, IDLC Finance Limited is at present the
largest multi-product Non- Bank Financial Institution in Bangladesh, having two wholly-
owned subsidiaries, IDLC Investments Limited and IDLC Securities Limited for carrying out
its capital market operations. The Group is represented by over 609 employees working in 26
branches in the major cities of the country. IDLC is highly respected by its clients, peers,
employees and regulators for its professional pool of resources, its progressive and enabling
work environment, and its strong ethical practices. With significant growth in its business and
profit over the last few years, the company has consistently demonstrated exemplary
corporate governance and strict statutory compliance, and is a standard bearer in this regard
in the financial sector of Bangladesh.

31
Products and Services

Flexible Term Deposit Package

Term deposits are an extremely safe investment and are therefore very appealing to
conservative, low-risk investors. By having the money tied up you'll generally get a higher
rate with a term deposit compared with a demand deposit.

Regular Earner Package

Lease Financing

A legal document outlining the terms under which one party agrees to rent property from
another party. A lease guarantees the lessee (the renter) use of an asset and guarantees the
lessor (the property owner) regular payments from the lessee for a specified number of
months or years. Both the lessee and the lessor must uphold the terms of the contract for the
lease to remain valid. Leases are the contracts that lay out the details of rental agreements in
the real estate market. For example, if you want to rent an apartment, the lease will describe
how much the monthly rent is, when it is due, what will happen if you don't pay, how much
of a security deposit is required, the duration of the lease, whether you are allowed to have
pets, how many occupants may live in the unit and any other essential information. The
landlord will require you to sign the lease before you can occupy the property as a tenant.

Working Capital Arrangement

Implementing an effective working capital management system is an excellent way for many
companies to improve their earnings. The two main aspects of working capital management
are ratio analysis and management of individual components of working capital. A few key
performance ratios of a working capital management system are the working capital ratio,
inventory turnover and the collection ratio. Ratio analysis will lead management to identify
areas of focus such as inventory management, cash management, accounts receivable and
payable management.

32
Term Loan Financing

A loan from a bank for a specific amount that has a specified repayment schedule and a
floating interest rate. Term loans almost always mature between one and 10 years.

Risk Management

IDLC defines risk as the levels of potential losses or profits foregone due to internal or
external factors. Risk is an integral part of financing business. Risk management entails the
adoption of several measures to strengthen the ability of an organization to cope with the
vagaries of the complex business environment in which it operates. Disciplined risk
management and control are essential to our success. The approach to risk is founded on
strong Corporate Governance practices that are intended to strengthen the enterprise risk
management of IDLC, whilst also positioning IDLC to manage the changing regulatory
environment in an effective and efficient manner. Risk management governance starts with
our Board, which plays an important role in reviewing and approving risk management
policies and practices. The companys governance structure provides the protocol and
responsibility for decision-making on risk management issues and ensures implementation of
those decisions. We maintain strong communication about risk and we have a culture of
collaboration in decision-making among the revenue-producing units, independent control
and support functions, committees and senior management. In addition to have the industry
best practices for assessing, identifying and measuring risks, IDLC also considers Guidelines
for Managing Core Risks of financial institutions issued by the Countrys Central Bank,
Bangladesh Bank; vide FID Circular No. 10 dated September 18, 2005 for management of
risks.

Market Risk: The risk of loss resulting from changes in market variables such as interest
rates, prices of securities, equity index levels, exchange rates, commodity prices and general
credit spreads.

Liquidity and Funding Risk: The risk of being unable either to meet our payment
obligations when due or to borrow funds in the market at an acceptable price to fund actual or
proposed commitments.

33
 Operational Risk: The risk of loss resulting from inadequate or failed internal processes,
people and systems, or the risk of a loss resulting from external causes, whether deliberate,
accidental or natural.

Processing risk

The risk related to the execution and maintenance of transactions, and the various aspects of
running a business, including products and services.

People risk

The risk of loss intentionally or unintentionally caused by an employee e.g. employee error,
employee misdeeds or involving employees, such as in the area of employment disputes.

Systems risk

The risk of loss caused by piracy, theft, failure, breakdown or other disruption in technology,
data or information; also includes technology that fails to meet business needs.

External risk

The risk of loss due to damage to physical property or assets from natural or nonnatural
causes. This category also includes the risk presented by actions of external parties, such as
the perpetration of fraud, or in the case of regulators, the execution of change that would alter
the companys ability to continue operating in certain markets. IDLC distinguishes between
quantifiable risks those to which a value can normally be attached in financial statements or
in regulatory capital requirements and non-quantifiable types of risk such as
strategic/business, reputational, and compliance risk. Certain business risks arise from the
commercial, strategic and economic risks inherent in our business activities. These are
overseen and managed by the firms respective business and group management.

Business Volume Risk

At IDLC, business volume risk may arise in the form of risk of falling business volumes and
market share, risk of being overtaken and losing leadership position and risk of over trading
which may affect profitability due to volatile revenues and reduced spread earnings, credit
rating and reputation. Risk of over trading may lead to insufficient capital.

34
 Reputational Risk

The risk related to the trustworthiness of business. Damage to a firms reputation can result in
lost revenue or destruction of shareholder value, even if the company is not found guilty of a
crime. Reputational risk can be a matter of corporate trust, but serves also as a tool in crisis
prevention.

Project Risk

This is about particular risks associated with the undertaking of a project. If projects
undertaken by the company is not compatible with it and not feasible because of existing
market scenario, the company may run the risk of encumbered by loss projects.

Technology Risk

It is the process of managing the risks associated with implementation of new technology. If a
new technology is not compatible with business function of the company, the company may
suffer in the long run. A non-compatible technology

Credit Risk Measurement

IDLCs main objective of credit risk measurement is to use various tools to support
quantitative risk assessment from the level of individual facilities up to the total portfolio,
including element of the credit approval process, ongoing credit risk management,
monitoring and reporting and portfolio analysis. IDLC searches for credit report from the
Credit Information Bureau (CIB) of Bangladesh Bank. The report is scrutinized by CRM and
CEC to understand the liability condition and repayment behavior of the client. Depending on
the report, bankers opinions are taken from clients banks. Suppliers and buyers opinion
are taken to understand the market position and reputation of our proposed customers.
Ongoing active monitoring and management of credit risk positions is an integral part of the
credit risk management activities. Research team of CRM regularly reviews market situation
and exposure of IDLC in various industrial sub-sectors. IDLC aims to identify counterparties
that demonstrate the likelihood of problems well in advance, on the basis of the application of
the risk management tools in order to effectively manage the credit exposure and maximize
the recovery. Measurement tools include credit rating systems, which are used in the
calculation of regulatory and economic capital, and stress testing.

35
Eastern Bank Limited

Bangladesh Banking Sector has grown from strength to strength over the past one decade and
is fiercely competitive, especially in the Consumer Banking segment. EBL offers a wide
range of depository, loan and card products to cater virtually for every customer segment.
From Student Banking to Priority Banking to Platinum card EBL has almost all banking
products in its repertoire. The product basket is rich in content featuring different types of
Savings and Current Accounts, Personal Loans, Debit Cards, Credit Cards, Pre-paid Cards,
Internet Banking, Corporate Banking, SME Banking, Investment Banking, Treasury &
Syndication services. The customers are served through a network of 71 Branches, 158
ATMs and 42 Billspay countrywide. EBL has its presence in 11 major cities/towns in the
country including Dhaka, Chittagong, Sylhet, Khulna, Rajshahi & Coxs Bazar. EBL is also
the first bank to introduce Priority Banking in Bangladesh. In priority segment, EBL offers
high quality products and services and dedicated Relationship Managers is committed to help
manage financial health, preserve lifestyle and maintain priorities of the customers wherever
life takes them. EBL is known for its product innovation in the market. During the past five
years, EBL introduced 12 new-to-Bangladesh financial products and services. EBL
Matribhumi the bundle product for expatriate Bangladeshis, insurance covered monthly
savings scheme, VISA corporate cards, remittance card and mobilebased remittance solution
are just a few of them. On the SME banking window EBL offered customerfriendly and
groundbreaking products like EBL Uddom and EBL Mukti. At present, EBL Consumer,
SME and Corporate Banking units are capable of handling every kind of customer financial
needs.

Investment Banking Unit (IBU)

EBLs capital market operations are conducted by Investment Banking Unit. IBU capitalizes
the huge growth potential therein and diversifies the business to maximize the risk adjusted
return. This unit makes investment in the capital markets and contributes towards fee-based
income and capital gains by taking acceptable level of risk. EBL Investment Banking Unit,
within a very short span of time, has been active in doing the followings:

36
Managing own portfolio, Participation in Pre-IPO Placements, Participation in Book-
Building Process, Sponsoring Mutual Funds, Trustee Services, Acting as Main Banker for
IPO, Acting as Banker to the Issue, Participation in IPO Underwriting.

Treasury & Investment Banking Operations

The team of Treasury & Investment Banking Operations of EBL has been functioning
independently to render high quality services of product solutions related with treasury,
investment banking and other wholesale operations, e.g., Syndication, Corporate and SME
refinancing activities etc. Some of the notable achievements are:

-Successful management of 35% transaction growth in FX and Money Market treasury deals.

-Efficiently handled significant volume of Govt. Securities (Treasury Bills / Bonds) worth
BDT 2,300 Crore. A noteworthy fact is that EBL is one of the most active participants in the
Securities market operations in Bangladesh.

-Effectively communicated large pull of data to internal as well as external stakeholders

through 28 reports & returns; majority of which are highly sensitive in view of purpose and
time.

-Integration of SWIFT messaging with FX module, which made FX deal processing 100%
automated.

Corporate Banking

Eastern Bank Limited provides integrated corporate banking solutions to large local
corporates, multinationals, development organizations, financial institutions, Non-bank
financial institutions and public corporations. EBL serves more than 2,000 clients- including
many of the industry leaders- through our dedicated relationship teams, industry specialists
and product experts. EBL Corporate Banking is committed to deliver the full spectrum of
banking solutions, from simple transactional products to complex structured finance that
eventually helps the customer to achieve their financial goal.

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Working Capital Solutions

Provides flexible financing to smooth and improve cash flow, full range of working capital
products can help customers to meet day-to-day financial obligations and fund business
growth. Working capital solutions comprises of full range of trade solutions. Trade solution is
designed to enhance trading status and to help achieving customers domestic and
international trade objectives.

Treasury Products

Treasury products are Money market; Call money, Term Money, Foreign Exchange SWAP,
Repo/Reverse Repo, Promissory Note.

Foreign exchange and corporate sales

Spot/ Forward in USD/BDT

Spot/Forward in major cross currencies

Derivative products in major currencies

Derivative products in Commodities

Derivative products based on Interest Rate

International Regulation

As markets and economies tend to be interdependent, countries have sought to harmonize

some of the standards between them. The Basel Committee was formed in 1974 by the Group
of Ten, to develop guidelines for bank regulations and best practices recommendations. The
first Basel Accord (Basel I), came out in 1988 and largely dealt with recommended capital
ratios and risk weightings. The Basel Committee published Basel II in 2004 and was intended
to introduce international standards for minimum capital requirements, supervisory review
and disclosure requirement. In response to the perceived gaps, loopholes and deficiencies of
the Basel II system, new regulations called Basel III are on the way. Broadly speaking, Basel

38
III is going to increase bank capital requirements, place additional limitations on leverage and
improve liquidity. The proposed Basel III rules will more than double the requirement for
common equity (4.5% versus 2%), increase Tier 1 capital requirements by 50% (from 4 to
6%), introduce a minimum 3% leverage ratio, and create additional buffers to reduce the
likelihood of bank runs and liquidity traps, in the future. There is no requirement for any
country to adopt the Basel standards, wholly or in part. That said, regulators in most of the
developed world are broadly supportive of the Basel proposals. One complicating factor in
implementing the standards is the risk that the banks of a country that do not implement the
regulations, or use a less conservative version, will have a competitive advantage over those
that do. While there is a counterargument that the debt and equity market will enforce a
uniform level of discipline, by charging a premium for the credit default swaps of less-
regulated banks, for instance, the reality is that banks have to abide by the rules of each
country and any cross-border "competitive advantage" is limited.

Innovation and New Scope for Investment Bank in Bangladesh

Now that we have seen, investment banks in USA have much more wider range for business
activity. More than 49% of their citizens are directly or indirectly involved in money market.
This creates more scope for banks. Mortgage finance had great impact, before financial
meltdown in 2008. But its not stopped them to do business in real estate sectors. Bangladeshi
Investment banks can focus their work area on real estate financing for middle class. This
should be long term period financing. For instance 15 years to 30 years loan policy for
middle class family. The fixed installation payment per month will be lowered and middle
class family can easily bear the amount. Such system would create mortgage finance market.
These types of mortgage finance agreement could be traded between financial institutions.
But originator must hold certain percent of the issued mortgage finance agreement for
securitization process.

Some countries, of course, experienced dramatic increases in real estate prices even in the absence of much
securitized finance. In these cases, the over-extrapolation hypothesis, while essentially the same, may take a
simpler form: that banks extrapolated the low past rates of mortgage default too far into the future and, as a
result, made many imprudent loans.

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Securities Research

Lots of brokerage firms are already doing that in Bangladesh to attract investors in stock
market. Securities include equities, bonds, and various other financial instruments, and can be
categorized by the security type or whether they are buy-side or sell-side. Equity research is
conducted by sell-side analysts at investment banks and independent equity research
boutiques. On the buy-side, investors also perform buy-side research; however, this is often
not published and is inconsistent. Professional researchers focus on particular industries and
regularly attend quarterly earnings conference calls. Sell-side research is offered as part of a
broad set of financial services including broking and corporate finance. Sell-side research is
very expensive for retail investors to obtain. It is typically purchased by institutional investors
through Thomson Reuters subscription services or Bloomberg terminals. Consultancy
service in investment decision making is not widely used yet. This can be a major new
innovation.

Proprietary Trading

This should be limited certain types of banks. BSEC (Bangladesh Securities and Exchange
Commission) must closely monitor activity of banks and guide them through Basel accords.
Commodity market trading can be a challenging job for banks. One of the main strategies of
trading, traditionally associated with banks, is arbitrage. In the most basic sense, arbitrage is
defined as taking advantage of a price discrepancy through the purchase/sale of certain
combinations of securities to lock in a profit. Many people confuse arbitrage with what is
essentially a normal investment. The difference between arbitrage and a typical investment is
the amount of reward: the risk in what is known as arbitrage today (to distinguish it from
theoretical arbitrage, which effectively does not exist) is market neutral. From the moment all
legs of an arbitrage trade are executed, a profit is locked in. The trade will remain subject to
various non-market risks, such as settlement risk and other operational risks. Investment
banks, which are often active in many markets around the world, constantly watch for
arbitrage opportunities.

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Investment management

Institutions often control huge shareholdings. In most cases they are acting as fiduciary
agents rather than principals (direct owners). The owners of shares theoretically have great
power to alter the companies via the voting rights the shares carry and the consequent ability
to pressure managements, and if necessary out-vote them at annual and other meetings. The
different asset class definitions are widely debated, but four common divisions are stocks,
bonds, real-estate and commodities. The exercise of allocating funds among these assets (and
among individual securities within each asset class) is what investment management firms are
paid for. Asset classes exhibit different market dynamics, and different interaction effects;
thus, the allocation of money among asset classes will have a significant effect on the
performance of the fund. Some research suggests that allocation among asset classes has
more predictive power than the choice of individual holdings in determining portfolio return.
Arguably, the skill of a successful investment manager resides in constructing the asset
allocation, and separately the individual holdings, so as to outperform certain benchmarks

Global Banking: Correspondent bank

Bangladeshi banks are heavily dependent on Barclays and other European banks.
Establishing international branch in major business location can make difference in Asian
zone. Correspondent banks are used by domestic banks in order to service transactions
originating in foreign countries, and act as a domestic bank's agent abroad. This is done
because the domestic bank may have limited access to foreign financial markets, and cannot
service its client accounts without opening up a branch in another country. Commonly,
correspondent accounts are the accounts of foreign banks that require the ability to pay and
receive the domestic currency. The accounts allow them to pay others from the account or
receive money from others into the account. This allows the bank to offer various services to
their customers such as foreign exchange and foreign currency denominated loans and
deposits, despite them not having a bank license for the foreign country in that country's
currency.

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Mergers and Acquisitions

There is no activity in this division for Bangladesh. Large company can acquire new or small
company in order to increase or add the value to customers. A general term used to refer to
the consolidation of companies. A merger is a combination of two companies to form a new
company, while an acquisition is the purchase of one company by another in which no new
company is formed. Corporate acquisitions can be characterized for legal purposes as either
"asset purchases" in which the seller sells business assets to the buyer, or "equity purchases"
in which the buyer purchases equity interests in a target company from one or more selling
shareholders. Asset purchases are common in technology transactions where the buyer is
most interested in particular intellectual property rights but does not want to acquire liabilities
or other contractual relationships.

Conclusion

Not all financial innovation can be benefited in perspective to economy of Bangladesh. This
will take long period of time and regulation from Bangladesh Bank. To make it work
properly, this requires involvement of large portion of people as client. Sometimes it is said
that investment bankers are "traveling money salesman." Modern financial innovations are
called nothing but paper shuffling. But on the contrary, investment banks should act as
supporting pillars for public finance. The term Finance not only represent private sector but
public sector as well. Moral hazard in financial sectors does matter. New innovation comes
with greater risk. For that unforeseen future it is recommended to take extensive analysis
before making risky decision. As the late, great Milton Friedman might have put it: there
aint no such thing as a free risk.

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 References:

Prins, Nomi (2004) Other Peoples Money: The Corporate Mugging of America (New York:
The New Press).

Morrison, Alan and William Wilhelm Jr. (2007) Investment Banking: Institutions, Politics
and Law, Oxford: Oxford University Press.

Annual Report 2012 Goldman Sachs, JP Morgan Chase, Citibank, IFIC Bank, IDLC, EBL

Kregel, J. (2010) No Going Back: Why We Cannot Restore Glass- Steagalls Segregation of
Banking and Finance, Levy Institute Public Policy Brief Highlights, 107A.

Kotz, D.M. (2010) Financialization and Neoliberalism, in G. Teeple and S. McBride (eds.),
Relations of Global Power: Neoliberal Order and Disorder (Toronto: University of Toronto
Press).

Foster, J.B. (2010) The Age of Monopoly-Finance Capital, Monthly Review, 61(9): 113.

Coats, W. (2008) The U.S. Mortgage Market: The Good, the Bad, and the Ugly. USAID
Report prepared for the Association of Banks in Jordan

Braithwaite, T. (2010) Regulators Warned on New Bank Legislation, Financial Times, 4

November: 15.

Anonymous (2007) Black Boxes, The Economist, 383(8529): 11.

Dorn, J. (2008) Creating Financial Harmony: Lessons for China. Cato Journal 28 (3): 535
53.

Gorton, Gary B. and Andrew Metrick (2009) Securitized Banking and the Run on the Repo,
Yale International Center for Finance Working Paper, No. 09-14.

Islam, Md. Shafiqul; Das, Prahallad Chandra. Green Banking practices in Bangladesh.
IOSR Journal of Business and Management (IOSR-JBM); e-ISSN: 2278-487X.Volume 8,
Issue 3 (Mar. - Apr. 2013), PP 39-44; http://iosrjournals.org/iosr-jbm/papers/Vol8-
issue3/G0833944.pdf

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