Bangladesh’s banking sector has long been plagued by structural weaknesses. High non-performing loans, corruption, liquidity shortages and weak corporate governance have eroded public confidence. Many banks struggle to operate sustainably due to inadequate capital, risky lending practices and poor management.
Existing legal frameworks such as the Bank Company Act and the Bangladesh Bank Order have proven insufficient for the swift restructuring or orderly resolution of distressed banks. Consequently, crises often persist, requiring costly state intervention.
Against this backdrop, the government repealed the Bank Resolution Ordinance 2025 and enacted the Bank Resolution Act 2026. The landmark legislation, aligned with international best practices, aims to establish discipline, stability and accountability in the banking sector.
The primary objective of the law is to safeguard financial stability and protect depositors. In the past, delays and ineffective rescue measures undermined trust in the financial system, often forcing the use of taxpayer funds to bail out failing banks, thereby creating moral hazard.
The new law marks a significant shift by introducing the principle that losses should first be borne by shareholders and creditors, with government support serving only as a last resort.
Under the Act, Bangladesh Bank is designated as the central resolution authority. Its role extends beyond closing failing institutions; it seeks to preserve critical banking functions, maintain asset value and uphold market confidence.
The law incorporates the No Creditor Worse Off principle, ensuring that creditors are not left in a worse position than they would have been under liquidation.
A notable feature of the Act is the introduction of modern resolution tools.
These include the bail-in mechanism, which allows losses to be absorbed by shareholders and certain creditors while keeping the bank operational, the establishment of bridge banks to ensure continuity of essential services and the transfer of assets and liabilities to facilitate rapid restructuring.
These tools are widely used and internationally recognised as effective crisis management mechanisms.
The law also grants Bangladesh Bank broad powers to restructure capital and manage liabilities. It can issue new shares, alter ownership structures and convert debt into equity. Importantly, individuals or entities involved in misconduct or corruption are excluded from participating in such restructuring, reinforcing accountability and governance standards.
Additionally, the Act provides for the creation of a Bank Restructuring and Resolution Fund to support crisis management.
The fund may be financed by the government, the banking sector and international partners. However, the law clearly stipulates that public funds will be used only as a last resort, thereby minimising the burden on taxpayers and promoting financial discipline.
From a judicial standpoint, the law limits court intervention in the resolution process to ensure timely decision making. While this enhances efficiency, it may raise concerns regarding transparency and fairness. Therefore, maintaining a balance between speed and accountability is essential.
One of the most debated provisions of the Act is Section 18A, which introduces a second chance mechanism. Under the provision, previous shareholders or Bangladesh Bank-approved individuals may, under strict conditions, reacquire a bank’s shares, assets and liabilities.
The conditions are stringent. Applicants must repay funds provided by the government and Bangladesh Bank, inject fresh capital, settle liabilities to depositors and creditors, pay all taxes and ensure sound governance.
An upfront payment of 7.5 per cent is required, with the remainder payable within two years along with interest. Furthermore, Bangladesh Bank will closely supervise the institution for two years.
The government justifies the provision on several grounds, including ensuring continuity of banking operations, promoting market-based solutions and preserving asset value. However, it has also sparked significant controversy.
Critics argue that allowing previous shareholders to regain control may create moral hazard, encouraging reckless or unethical behaviour by signalling that failure carries limited consequences.
There are also concerns about conflicts of interest, as Bangladesh Bank serves both as the resolution authority and the approving body for reacquisition. The potential for political influence further complicates the issue.
From an economic perspective, risks remain. Applicants may make overly optimistic commitments that are difficult to fulfil, and the return of former management could lead to a recurrence of past irregularities. This, in turn, could undermine depositor and investor confidence.
Despite these concerns, the provision does offer potential benefits. Competent and honest former shareholders may facilitate quicker recovery, leveraging their experience to restore stability without relying on public funds.
Internationally, such opportunities are rare and typically subject to rigorous fit and proper assessments.
For Bangladesh, the key is to ensure that the mechanism is implemented with strict oversight, transparency and independent evaluation. Establishing an independent review committee, excluding individuals involved in past misconduct and ensuring public disclosure can help mitigate associated risks.
In conclusion, the Bank Resolution Act 2026 represents a milestone in Bangladesh’s financial sector reform. It introduces a comprehensive framework for managing bank failures while prioritising stability and accountability.
However, its ultimate success will depend on effective implementation. By ensuring transparency, strong governance and rigorous regulatory oversight, the Act has the potential to strengthen the banking sector and restore public confidence.
The author is a banker and financial sector analyst.
The views expressed in this article are solely those of the author.
