KATHMANDU, Sept. 15: Nepal Rastra Bank (NRB) has revised the range of risks emerging in the financial sector while enforcing a separate guideline for banks and financial institutions (BFIs) to adopt necessary measures to mitigate related risks in their core system.
Issuing the ‘Risk Management Guidelines’ on Monday, the NRB has incorporated newly emerging risks in the country’s financial sector. These include the range of risks triggered by climate change to those generated by increasing uses of artificial intelligence (AI) and machine learning.
According to the NRB, the emergence of new risks to the financial sector continues to threaten global financial stability. Escalating climate change has prompted central banks, financial regulators and international supervisory bodies all over the globe to set out principles, guidelines and regulations for combating climate and environment-related risks. The rapid adoption of digitalization, increasing reliance on data-driven technologies, and advancement of cutting-edge innovations such as AI has significantly enhanced the efficiency, accessibility, and innovation of the financial system.
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At the same time, these developments have introduced new and evolving risks related to data confidentiality, cyber security, operational resilience, and the safety and integrity of payment systems and financial markets. As financial institutions become more interconnected and technology-dependent, NRB says strengthening risk management frameworks is essential to harness the benefits of technological innovation while effectively managing the associated risks.
The NRB’s guidelines state that following the global financial crisis, risk management in financial institutions has evolved from a compliance-driven function to a top-level comprehensive activity relevant at the highest levels of decision-making and strategy setting.
The central bank officials insist that the scope and structure of risk management vary according to the size and complexity of each financial institution, but its effectiveness depends on consistently applying fundamental principles across the organization.
While identifying the nature of risks broadly, the NRB has also suggested the BFIs bring in necessary measures to mitigate possible hazards. “Each financial institution should implement additionally a comprehensive risk management program tailored to its needs and the circumstances under which it operates,” read the NRB guidelines.
As the NRB expresses its concerns for new types of risks, the apex monetary institution has also kept the conventional risks such as credit risk, liquidity and fund management risk, market risk and interest rate risk under the broader framework. The central bank has clarified the roles of board of directors, high-level management, risk management committee and internal audit system for management of various sorts of risks separately.
