Bank stress test guidelines in offing
KATHMADU, JUL 28 -
Nepal Rastra Bank (NRB) is preparing the draft guidelines on stress testing banks and financial institutions (BFIs).
Stress testing gives the picture of to what extent BFIs are facing stress due to liquidity situation, deposit decline and asset (loan) quality, along with problems in the country’s economic sector and environment outside the country.
The central bank is preparing the draft guidelines with the technical assistance of the International Monetary Fund (IMF).
Although stress testing is a regular trend in western countries, it is new for Nepal. The central bank continued the policy of stress testing this year too. It was announced last year.
“Initially, we are considering looking into ‘deposit withdrawal’ and ‘asset quality deterioration’ as the major internal factors while conducting stress test in BFIs,” said a senior NRB official.
Because of huge deposit withdrawals, some FIs landed in trouble requiring the central bank’s emergency relief measures. “The baseline while testing deposit withdrawal could be either five or 10 percent withdrawal,” said the official.
NRB is also planning to include a provision on how deterioration of loan quality could lead the BFIs to risk. “We will see to what extent BFIs will have to face stress when a certain percent of good loans turns substandard, and provisioning should be made,” said the NRB official.
A stress testing of Nepali BFIs conducted by IMF in 2010, had stated that a 30 percent fall in real estate prices is estimated to increase banks’ non-performing loans (NPLs) by more than 20 percent points and reduce capital of 14 private banks below the minimum capital adequacy ratio.
IMF had pointed out loan classification errors behind lower exposure to realty sector. “Bank’s total exposure to real estate, including loans secured by land and buildings, is approximately 70 percent,” it had stated.
According to the IMF report, banks’ liquidity positions are vulnerable to standard shocks. “Five to nine banks would become illiquid within 3 to 5 days of deposit withdrawals at a daily rate of 8-10 percent,” it had stated, adding, “A stronger shock of 15 percent would result in a majority of banks becoming illiquid.”
Developed and modern economies consider factors such as shrinking of economic growth, unemployment rate and others while conducting stress tests. “Since our financial system is less integrated with the different sector of the economy, we will look into limited components,” the NRB official said.
The monetary policy has said that NRB has already conducted its pilot testing. The central bank said it will also bring a guideline that would allow BFIs to conduct stress test themselves.
According to the NRB source, the central bank is aiming at formulating a first draft of the guidelines within this fiscal year and put it for discussions with stakeholders.
Source: Kantipur
Nepal Rastra Bank (NRB) is preparing the draft guidelines on stress testing banks and financial institutions (BFIs).
Stress testing gives the picture of to what extent BFIs are facing stress due to liquidity situation, deposit decline and asset (loan) quality, along with problems in the country’s economic sector and environment outside the country.
The central bank is preparing the draft guidelines with the technical assistance of the International Monetary Fund (IMF).
Although stress testing is a regular trend in western countries, it is new for Nepal. The central bank continued the policy of stress testing this year too. It was announced last year.
“Initially, we are considering looking into ‘deposit withdrawal’ and ‘asset quality deterioration’ as the major internal factors while conducting stress test in BFIs,” said a senior NRB official.
Because of huge deposit withdrawals, some FIs landed in trouble requiring the central bank’s emergency relief measures. “The baseline while testing deposit withdrawal could be either five or 10 percent withdrawal,” said the official.
NRB is also planning to include a provision on how deterioration of loan quality could lead the BFIs to risk. “We will see to what extent BFIs will have to face stress when a certain percent of good loans turns substandard, and provisioning should be made,” said the NRB official.
A stress testing of Nepali BFIs conducted by IMF in 2010, had stated that a 30 percent fall in real estate prices is estimated to increase banks’ non-performing loans (NPLs) by more than 20 percent points and reduce capital of 14 private banks below the minimum capital adequacy ratio.
IMF had pointed out loan classification errors behind lower exposure to realty sector. “Bank’s total exposure to real estate, including loans secured by land and buildings, is approximately 70 percent,” it had stated.
According to the IMF report, banks’ liquidity positions are vulnerable to standard shocks. “Five to nine banks would become illiquid within 3 to 5 days of deposit withdrawals at a daily rate of 8-10 percent,” it had stated, adding, “A stronger shock of 15 percent would result in a majority of banks becoming illiquid.”
Developed and modern economies consider factors such as shrinking of economic growth, unemployment rate and others while conducting stress tests. “Since our financial system is less integrated with the different sector of the economy, we will look into limited components,” the NRB official said.
The monetary policy has said that NRB has already conducted its pilot testing. The central bank said it will also bring a guideline that would allow BFIs to conduct stress test themselves.
According to the NRB source, the central bank is aiming at formulating a first draft of the guidelines within this fiscal year and put it for discussions with stakeholders.
Source: Kantipur
