The central bank has hiked the capital charge of banks and financial institutions to mitigate growing operational risks.
As most banks and financial institutions have been exposed to operational risks lately, the additional capital charge will help mitigate the risk, Nepal Rastra Bank (NRB) said today.
Updating the supervisory adjustments in risk weighted assets and capital of Capital Adequacy Framework, 2007, under the unified directives of banks and financial institutions, NRB said that if banks do not adopt sound practices to manage operational risks, they shall be levied an additional capital charge of two per cent to five per cent of gross income of the immediate previous financial year for operational risks.
Operational risk losses have often led to the downfall of financial institutions globally also. According to Basel II, operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.
Likewise, the central bank has asked class 'B' and 'C' financial institutions to also increase their risk weighted assets to mitigate operational risks in a phasewise manner.
Development banks and finance companies have to add two per cent by the end of the current fiscal year 2012-13, four per cent by the end of next fiscal year 2013-14, and five per cent by the end of fiscal year 2014-15, additional capital charge in their risk weighted assets.
Lately, banks and financial institutions have been undergoing a sea change and facing an environment marked by growing consolidation, rising customer expectations, increasing regulatory requirements, proliferating financial engineering, enhanced technological innovation and mounting competition, which has also increased the probability of failures or mistakes from the operations point of view, resulting in increased focus on managing operational risks.
A key component of risk management is measuring the size and scope of the firm's risk exposures, though there is no clearly established, single way to measure operational risk on a firm-wide basis. But the central bank's move could help banks and financial institutions adopt sound practices to manage operational risks.