Stress testing mandatory for B, C class financial institutions

The central bank has asked the class B and C financial institutions also to conduct stress test from this quarter end.

Earlier, a year ago, the central banks had made it mandatory for the class  A commercial banks to start stress testing that could ensure one of the risk indicators. The test can reflect the financial institutions strength in case of mass withdrawal and how they can manage the risk by evaluating the potential impact. Depending on the results, institutions are to correct their weaknesses.

“The stress test should be conducted based on the financial statement of the first quarter, and its result should be discussed with the board of directors and top level management,” the central bank said in its directives.

 The financial institutions have also to submit the results within a month to the concerned supervision division.

The central bank has also directed the financial institutions to file a precaution plan and policy to for future after acknowledging its status to the board of directors.

Likewise, the central bank has also asked national level financial institutions to report the results to the Nepal Rastra Bank’s Offsite Division Bank Supervisions Department within a month of every quarter-end. 

The stress tests determine the strength of a financial institution by mapping out whether it will be able to withstand unfavourable economic scenarios too. The same guidelines that dictate stress testing module for commercial banks will be applied for development banks and finance companies.
The central bank had prepared a standard module to carry out stress test of banks based on the framework of IMF and Basel Committee on Banking Supervision. Banks need to assess their soundness in case of key risks like credit, market and liquidity risks.

Meanwhile, the central bank has allowed Class B and C financial institutions to open interest-bearing accounts at development banks and finance companies till the end of the current fiscal year. Earlier, they were allowed to their money at the commercial banks only.