Kathmandu, Nov 26: The Nepal Rastra Bank (NRB), central bank of Nepal, has announced a comprehensive framework to identify and regulate Domestic Systemically Important Banks (D-SIBs) to strengthen the resilience of Nepal’s financial system. The framework, aligned with the Basel Committee on Banking Supervision (BCBS) principles, targets banks whose failure could significantly disrupt the domestic economy.
The framework is applicable to all “A” class 20 commercial banks of Nepal. It adopts an indicator-based methodology to assess systemic importance, focusing on four key criteria: size, interconnectedness, substitutability, and complexity. Size is measured by total exposure, while interconnectedness examines intra-financial system assets, liabilities, and outstanding securities. Substitutability considers payment volume and trading activity, and complexity includes Level 2 assets, cross-jurisdictional activities, and trading securities. Each bank’s overall systemic score is calculated as a weighted average of these indicators.
Banks exceeding the threshold score will be designated as D-SIBs and categorized into different buckets, each with a corresponding Higher Loss Absorbency (HLA) requirement. The HLA is applied through additional Common Equity Tier 1 (CET1) capital, ranging from 0.20% to 1.00% of risk-weighted assets depending on the bank’s systemic importance. Newly identified D-SIBs or those moving to a higher bucket must meet the HLA requirement by the end of the fiscal year.
NRB will conduct annual assessments, with the timeline spanning from August (data collection) to October (publication of D-SIB list and HLA requirements). Banks undergoing mergers or acquisitions are required to submit relevant data within three months. D-SIBs must also submit comprehensive reports, including their Internal Capital Adequacy Assessment Process (ICAAP), to the supervision department.
The framework aims to minimize systemic risk, enhance financial stability, and ensure that critical banks maintain sufficient capital buffers to withstand economic shocks. The HLA requirements for D-SIBs will be enforced starting mid-July 2027, and the framework will be reviewed at least once every three years to incorporate updates from global Basel Committee guidelines. #nepal #NRB
