NRB to Impose Additional Capital Requirements on Systematically Important Banks

The Nepal Rastra Bank has started identifying systemically important banks—institutions whose failure could pose significant risks to the financial system—and decided to subject them to enhanced supervision and additional capital requirements. The central bank announced the move on Monday while unveiling the Framework for Identifying Systemically Important Banks, which outlines the criteria for selecting such banks and the provisions requiring them to maintain extra capital buffers based on risk

Under the framework, NRB will assess banks using four major indicators. The size of a bank’s financial operations carries the highest weight at 40 percent. The central bank said larger banks have greater influence on the financial market and pose a higher risk to overall confidence in the financial system, which is why size is given the highest scoring weight.

Interconnectedness with other banks and financial institutions carries a 30 percent weight. This category evaluates interbank assets, interbank liabilities, and equity investments, with each factor assigned a 10 percent weight. NRB said that when financial institutions are highly interconnected, difficulties faced by one can easily spread to others, creating a “chain effect,” and therefore such interconnectedness is a key criterion for identifying systematically important banks.

A bank’s role in providing critical financial infrastructure also plays a role in the assessment. This indicator carries a 15 percent weight, with 10 percent assigned to the volume and number of domestic currency payments processed, and 5 percent to the size of trade transactions handled. NRB said disruptions in banks that play a major role in financial infrastructure could significantly impact the broader financial system.

The remaining 15 percent weight is assigned to a bank’s complexity—its business volume, structure, and the nature of its operations. NRB spokesperson Guru Prasad Paudel said the central bank aims to identify larger and more complex banks whose distress could affect the entire financial system, and to adopt stronger safeguards for them.

Based on the sectoral weights, data reported by banks will be converted into 10,000 base points. Banks that score above a certain threshold will be designated as systematically important banks. Paudel said NRB has not yet finalized the threshold. Depending on their scores, banks may be placed into five or more categories, with up to 1 percent additional capital requirements. The framework also allows NRB to make qualitative assessments and decisions when data is insufficient.

Once designated as systematically important, banks must meet the additional capital requirement within the same fiscal year. NRB will assess data at the end of August each year, calculate scores by the end of September, publish the list of systematically important banks by the end of October, and enforce the capital requirement beginning in mid-June 2027.

Banks designated as systematically important will also have to submit a capital enhancement plan to NRB. The central bank had first announced its intention to identify such banks a decade ago in the Monetary Policy and had targeted issuing the framework by 2025 under its fourth strategic plan.