NRB tells banks to assess risk
KATHMANDU, AUG 21:
Nepal Rastra Bank (NRB) has asked commercial banks to prepare their Internal Capital Adequacy Assessment Process (ICAAP) policy and submit it to the regulator by the end of the second quarter of the fiscal year.
In a bid to provide banks with a broad framework to develop such a policy, the central bank recently introduced an ICAAP guideline. ICAAP is the bank’s internal assessment of capital that it considers adequate to cover all material risks to which it is exposed.
According to a senior NRB official, no one knows the risk a bank is exposed to better than the bank itself. “So we have asked them to prepare an ICAAP policy and identify the various risks they are exposed to.”
When preparing the ICAAP policy, banks have to determine the different risks and degrees of vulnerability besides formulating a methodology to mitigate them. Commercial banks in Nepal are required to comply with the BASEL II accord which considers the credit risk, market risk and operation risk and asks banks to maintain a minimum capital adequacy ratio of 10 percent to cushion those risks.
The first pillar of the accord asks the banks to do so. “It, however, doesn’t include various other risks to which banks are vulnerable,” said a senior NRB official.
Credit concentration risk, reputation risk and strategic risk, among others, are some of the key risks banks are exposed to. “Nevertheless, as per the second pillar of BASEL II, banks are required to determine their capital adequacy ratio in relation to all material and inherent business risks and other risks related to external economic environment,” said Maha Prasad Adhikari, deputy governor at NRB. “As such, the necessity of ICAAP policy arises for the bank.”
“The vulnerability of banks with respect to such risks is different for different banks,” said the NRB official. “The ICAAP policy allows the bank itself to determine the magnitude of those risks and assess its capital adequacy in relation to them.”
The policy also asks banks to develop a strategy to maintain their capital levels. The ICAAP guideline issued by the central bank also urges banks to operate above the minimum regulatory capital ratios so that their shock absorbing capacity remains undiminished. The guideline has clearly authorised the central bank to require banks to hold capital in excess of the minimum requirement.
Apart from commercial banks, the guideline has laid down responsibilities for the regulator too. It is the responsibility of NRB to review and evaluate the ICAAP of banks and take appropriate action if it is not satisfied with the results of the process. “After banks submit their ICAAP policy in mid-January, we will study the policy of each bank thoroughly,” said the NRB official. “If any bank fails to draft a convincing policy, we will put it in the buffer zone and launch prompt remedial action against it.”
Furthermore, the guideline encourages banks to make a larger disclosure of information which is not proprietary or confidential in the policy.
Source: The Kathmandu Post
