NRB asks banks to conduct regular stress test
KATHMANDU,JAN 14:
The commercial banks have been directed to conduct stress testing on the quarterly basis to detect strength of the banks in the face of adversities.
The central bank today made stress testing mandatory for all the class ‘A’ financial institutions starting third quarter of the current fiscal year issuing guidelines for the commercial banks to for stress test.
“The banks are required to conduct stress test on a regular basis,” according to the guideline. “The results of the stress tests should be discussed in the board and senior management level and reported to central bank’s Offsite Division-Bank Supervisions Department on a quarterly basis within 30 days of every quarter end.”
The stress tests of the banks determine the robustness of the bank and whether it will be able to withstand unfavourable economic scenarios. Usually, regulatory authorities also carry out the stress testing as a part of their regulatory oversight.
The central bank had been undertaking the stress tests of licensed financial institutions to assess their soundness in case of adverse scenarios, but there was no specific calendar and being done on the need basis, Nepal Rastra Bank’s spokesperson Bhaskar Mani Gyanwali, said, without disclosing the names of financial institutions undergone the test.
The central bank has prepared a standard module to carry out stress test of the banks based on the framework of Internationl Monetary Fund (IMF) and Basel Committee on Banking Supervision. “The banks need to assess their soundness in case the key risks like credit risk, market risk, and liquidity risk,” he informed.
According to the guidelines, the credit risk based test will simulate the capital and earnings of the bank with the increase in the level of non-performing loans, whereas market risk scenario will judge the relationship between change in the market risk factor like interest rate shocks, exchange rate shocks and equity price shocks and the bank’s capital position. While liquidity risk test will asses the banks ability to pay its liabilities during the stressed events like mass withdrawal or withdrawal by top depositors.
The banking sector is being considered vulnerable at present as the instances of financial institutions going bad rose alarmingly in last few years. Two financial institutions are in the process of liquidation while more than half a dozen are undergoing NRB’s Prompt Corrective Action due to their financial troubles.
The bad corporate governance, over exposure to single sector and liquidity issues drove some of the financial institutions almost to the insolvency.
Thus, to detect the problems before it gets out of hand, monetary policy had recognised stress testing as one of the measures that the central bank will undertake.
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.
Source: THT
