Central bank on stress testing spree
KATHMANDU:
The central bank is undertaking the stress tests of all the licensed financial institutions to assess their soundness in case of adverse scenarios.
“We have already carried out stress tests of few financial institutions,” spokesperson for Nepal Rastra Bank (NRB) Bhaskar Mani Gyanwali.
“We will conduct stress test of all the financial institutions gradually and on the need basis,” he said, adding that the stress tests determine the robustness of the bank and financial institutions whether it will be able to withstand unfavourable economic scenarios.
Usually, regulatory authorities carry out the stress testing as a part of their regulatory oversight and in some cases even banks themselves also undertake such test as part of risk management strategy.
The stress tests determine whether a bank has enough capital to withstand the impact of adverse developments like during economic downturn.
Gyanwali informed that the central bank has prepared a standard module to carry out stress test that include assessment of their soundness in case of the key risks like credit risk, market risk, and liquidity risk.
“The domestic market case might be different as the financial institutions have specific vulnerable feature,” he said, adding that the statistics show that some have liquidity problem, others have high toxic assets. “The test will give insight into a portfolio’s vulnerabilities too.”
The tests are meant to detect weak spots in the banking system at an early stage, so that preventive action can be taken.
The central bank will be prescribing the measures to tackle the weaknesses based on the results.
The central bank has licenced 31 class ‘A’ commercial banks, 87 class ‘B’ development banks, 79 class ‘C’ finance companies and 21 class ‘D’ microfinance institutions to conduct banking services to the public.
However, the financial sector has lately been more vulnerable.
One development bank -Nepal Bikas Bank and one finance company -Samjhana Finance is in the process of liquidation, while more than half a dozen are undergoing central bank’s Prompt Corrective Action (PCA) due to their bad financial health.
The bad corporate governance, over exposure to single sector, and liquidity tight situation due to assets-liability mismatch and greed for super profit drove some of them almost to the insolvency. “Thus stress test will help detect the problems before it gets out of hand,” he said, adding that Monetary Policy has also imphasised on it.
The bank stress tests attracted a great deal of attention in 2009, as the worst global financial crisis since the Great Depression left many banks and financial institutions severely under-capitalised.
The Monetary Policy of the last fiscal year has brought the concept.
Source: THT
The central bank is undertaking the stress tests of all the licensed financial institutions to assess their soundness in case of adverse scenarios.
“We have already carried out stress tests of few financial institutions,” spokesperson for Nepal Rastra Bank (NRB) Bhaskar Mani Gyanwali.
“We will conduct stress test of all the financial institutions gradually and on the need basis,” he said, adding that the stress tests determine the robustness of the bank and financial institutions whether it will be able to withstand unfavourable economic scenarios.
Usually, regulatory authorities carry out the stress testing as a part of their regulatory oversight and in some cases even banks themselves also undertake such test as part of risk management strategy.
The stress tests determine whether a bank has enough capital to withstand the impact of adverse developments like during economic downturn.
Gyanwali informed that the central bank has prepared a standard module to carry out stress test that include assessment of their soundness in case of the key risks like credit risk, market risk, and liquidity risk.
“The domestic market case might be different as the financial institutions have specific vulnerable feature,” he said, adding that the statistics show that some have liquidity problem, others have high toxic assets. “The test will give insight into a portfolio’s vulnerabilities too.”
The tests are meant to detect weak spots in the banking system at an early stage, so that preventive action can be taken.
The central bank will be prescribing the measures to tackle the weaknesses based on the results.
The central bank has licenced 31 class ‘A’ commercial banks, 87 class ‘B’ development banks, 79 class ‘C’ finance companies and 21 class ‘D’ microfinance institutions to conduct banking services to the public.
However, the financial sector has lately been more vulnerable.
One development bank -Nepal Bikas Bank and one finance company -Samjhana Finance is in the process of liquidation, while more than half a dozen are undergoing central bank’s Prompt Corrective Action (PCA) due to their bad financial health.
The bad corporate governance, over exposure to single sector, and liquidity tight situation due to assets-liability mismatch and greed for super profit drove some of them almost to the insolvency. “Thus stress test will help detect the problems before it gets out of hand,” he said, adding that Monetary Policy has also imphasised on it.
The bank stress tests attracted a great deal of attention in 2009, as the worst global financial crisis since the Great Depression left many banks and financial institutions severely under-capitalised.
The Monetary Policy of the last fiscal year has brought the concept.
Source: THT
