International Journal of Economics and Financial Issues ISSN: 2146-4138 available at http: www.econjournals.com International Journal of Economics and Financial Issues, 2018, 8(3), 75-85. International Journal of Economics and Financial Issues | Vol 8 • Issue 3 • 2018 75 The Vulnerability Trends of the Banking Sector of Bangladesh: A Stress Testing Approach Niluthpaul Sarker 1,2 *, Shamsun Nahar 2 1 School of Management, Huazhong University of Science and Technology, Wuhan, Hubei, P. R. China, 2 Department of Accounting and Information Systems, Jagannath University, Dhaka, Bangladesh, *Email: niluthpaul@yahoo.com ABSTRACT The study investigates the stress test report of the banks to assess the vulnerability of the banking sector as a whole on extreme but plausible shock scenarios. The regulatory pressure and extreme market competition bound the banking sector to assess their risk and show the sensitivity based on hypothetical extreme scenarios. It refers to the stability of the bank in disaster situations so that the economy can withstand negative externality by protecting the preventive measures. It is found that the bank credit is vulnerable and volatile due to higher defaults and more concentration. The mandatory practice of stress test will give better information to the market about the sensitivity of banks that will automatically adjust to the market value of the share. This is one of the techniques by which market gambling can be reduced. The study is emphasized its importance and mandatory practice in the market. Keywords: Bank Risk, Stress Test, Bangladesh JEL Classifcations: G2, G21 1. INTRODUCTION Corruption and debt irregularities are going on like a tradition. There is a lot of credit fraud evidence in many banks. Especially due to the unprecedented aggressive banking of Farmers Bank, the entire banking sector is at risk. Besides, serious irregularities and corruption are being published in the media every day. Debt forgery has made the sector more troubling. As a result, the rebalancing of default money cannot be dragged in any way. It seems that there is no one to take strong action against the debt forgery and the defaulters. Of the existing 57 commercial banks, 18 banks are currently at fnancial risk. Of these, more than a dozen banks are very vulnerable. The rest of the “risk squares” are in and out. Thus, there has been a lot of unrest in the fnancial sector for a long time. Now, most of the depositors of banks have become more concerned about this situation. The whole chapter tried to explain the stress test scenarios especially focus on Bangladeshi banking sector. The ability or persistence of the fnancial instruments or institution in the scenarios of an economic meltdown or fnancial crisis is evaluated by analysis is called test stress testing or simulation. It is the best technique in describing situations rather than best estimation where it shows the robustness of the fnancial instruments under certain crashes. Within is a very short period of time, it becomes popular and took keen attention to the government bodies, like Prudential Regulatory Authority (PRA), European Banking Authorities (EBA), International Monetary Fund (IMF), as a regulatory requirements in the case of testing capital adequacy levels whether it can cover the probable losses in the extreme, but plausible, events. Stress testing is not only used for individual stressors but also for a combination of events. 2. EVALUATION OF BANK STRESS TESTING The bank stress testing is based upon the examination of the relevant bank’s balance sheet. At the inception of the stress testing or simulation analysis is adopted as an internal control tool for the banks in the early 1990s (Quagliariello, 2009). However, the Basel capital accord amendment in the year of 1994 and emphasized on testing the ability of banks in adverse