KATHMANDU, Jan 4: Nepal Rastra Bank (NRB) has introduced new capital adequacy framework for the commercial banks to enforce 'Basel III' system.
Basel III refers to a comprehensive set of reform measures developed by the Switzerland-based Basel Committee on Banking Supervision to strengthen regulation, supervision and risk management of the banking sector.
According to the central bank, the new capital adequacy framework will come into gradual implementation from mid-July as part of the transitional arrangements to avoid any near term stress to the banks, and will be fully phased-in and implemented as on mid-July 2019.
"Realizing the significance of capital for ensuring the safety and soundness of the banks and the banking system at large, NRB has developed and enforced capital adequacy requirement based on international practices with an appropriate level of customization based on domestic state of market developments," reads the new capital adequacy framework.
Until this new framework comes into implementation, banks will have to run parallel frameworks -- implementation of the earlier capital adequacy framework while reporting the central their capital adequacy ratio as per the new framework in a monthly basis.
Bankers say that the new capital adequacy framework prioritizes enhancing the quality of capital that banks are required to maintain.
Though there will be no additional capital requirement for the banks following the implementation of the new capital adequacy framework, the new set of measures will require changes in calculation of total capital that a bank must maintain.
For example, a commercial bank is required to maintain a total of 11 percent capital by including at least six percent of core capital, four percent of supplementary capital and one percent of buffer.
If the new capital adequacy framework comes into full implementation in 2019, the commercial bank will have to maintain 11 percent of capital where it should hold 8.5 percent of core capital which should include 2.5 percent of capital conservation buffer and 2.5 percent of supplementary capital.
Bhuvan Dahal, CEO of Sanima Bank, told Republica that the new capital measures in the framework will help to make banking industry more resilient to internal and external financial shocks. "One of the reasons behind the world financial crisis of 2008 is a practice among the banks to hold more supplement capital and less core capital.
The Basel III measures aim to address such shortfalls and try to protect banks from the vulnerabilities," he added.
Similarly, as part of the micro-prudential aspects of the Basel III, the new capital adequacy framework also lays down extra capital measures based on the requirements.
Counter cyclical buffers, leverage ratio and liquidity coverage ratio, net stable funding ratio and systematically important financial institution measures, are some of the requirements that may be enforced based on the requirements.
"Many banks have run into trouble just because they lack enough liquidity to cover the risk even if they have the capital as well as their excessive exposure toward on and off-balance sheet leverage," said Dahal. "The capital adequacy framework will also help to mitigate such risks."