NRB Introduces Comprehensive Framework to Regulate Nepal’s 10 Systemically Important Banks

Nepal Rastra Bank (NRB) has unveiled a detailed regulatory framework aimed at identifying and supervising the country’s ten Domestic Systemically Important Banks (D-SIBs). The central bank stated that the framework is grounded in lessons learned from the 2008 Global Financial Crisis and is closely aligned with global standards set by the Basel Committee on Banking Supervision (BCBS). According to NRB, the primary goal is to safeguard the stability of Nepal’s financial system by ensuring that large and interconnected banks operate under stricter oversight.

Purpose and Importance of the Framework

NRB emphasized that larger banks naturally carry a higher level of systemic risk. When a major bank faces distress or failure, the impact can spread widely across the entire financial sector — a phenomenon known as the “too big to fail” problem. To prevent such situations, the new framework seeks to minimize systemic vulnerabilities. It is designed to classify banks based on their size, reach, and complexity, and to impose additional regulatory measures where necessary. The central bank believes this will help ensure a stable, resilient, and risk-aware financial environment in Nepal.

Four Key Indicators Used to Measure Systemic Risk

To identify systemically important banks, NRB has introduced four weighted indicators. These indicators provide a comprehensive picture of each bank’s influence and interconnectedness within the broader financial ecosystem. The first indicator, financial size, has been given the highest weight at 40 percent, reflecting the importance of a bank’s balance sheet and total exposure. The second indicator, interconnectedness, accounts for 30 percent and measures how deeply a bank is tied to other financial institutions through loans, deposits, and financial transactions.

The remaining indicators — substitutability and complexity — each carry a weight of 15 percent. Substitutability assesses the bank’s role in essential services such as payment systems, where failure could disrupt the entire financial landscape. Complexity captures the extent of a bank’s involvement in activities such as trading, cross-border transactions, and use of advanced financial instruments. According to NRB, these four indicators together portray a bank’s operational footprint, systemic importance, and potential for transmitting risk.

Additional Capital Requirement for High-Risk Banks

Based on the scores obtained through these indicators, systemically important banks will be required to maintain an additional capital buffer ranging from 0.20 to 1 percent. This buffer acts as a financial shock absorber, ensuring that large banks have sufficient protection against unexpected losses. NRB clarified that this requirement will not be implemented immediately; instead, it will gradually come into effect starting in 2027. The delay provides banks with adequate time to adjust their internal capital planning, improve governance structures, and enhance risk-management frameworks.

NRB has also built flexibility into the system by retaining the right to exercise supervisory discretion. This allows the central bank to raise or reduce capital requirements based on emerging risks or unusual market conditions. Such discretion, NRB stated, ensures that regulation remains dynamic and responsive rather than rigid.

Reducing Interbank Transmission Risk

One of the major objectives of the framework is to reduce interbank transmission risk — the phenomenon where one bank’s inability to repay interbank loans triggers liquidity stress or failure in another institution. NRB believes that by identifying and closely supervising highly interconnected banks, the overall stability of the financial system can be significantly strengthened. This measure is especially crucial in Nepal’s banking sector, where interbank transactions play a vital role in managing liquidity and maintaining daily operations.

The framework is also expected to raise Nepal’s regulatory credibility internationally. By aligning with global norms and prioritizing systemic resilience, NRB aims to ensure that Nepal’s banking system remains robust even during periods of financial stress.

Independent Audit of the 10 Largest Banks

In parallel with the introduction of the framework, NRB has already appointed an independent audit firm to examine the country’s ten largest banks. Bangladesh-based firm Howlader Yunus & Co. was selected through an open competitive process. According to NRB, the firm has already begun its audit work. The independent audit is expected to uncover potential weaknesses in governance, credit quality, operational processes, and compliance practices. This step represents a deeper push toward transparency and accountability within the banking industry.

NRB stated that the independent audit will help validate the indicators used in the framework and provide more accurate insights into banks' risk positions. Such audits, combined with stronger capital requirements, are expected to foster long-term stability and protect the financial system from structural vulnerabilities.

The introduction of the D-SIB framework marks a significant shift in Nepal’s banking regulation. It indicates that NRB is moving from traditional supervision toward a more analytical, data-driven, and risk-sensitive approach. By identifying systemic importance and imposing capital buffers, the central bank is attempting to ensure that financial institutions internalize the risks they pose to the system.

Furthermore, the framework aligns Nepal with international best practices, making the financial sector more credible to foreign investors and multilateral agencies. Banks will now be compelled to prioritize risk management, improve transparency, and adopt proactive strategies to maintain capital adequacy. The move may also encourage consolidation in the long run, as smaller banks strive to remain competitive in a more regulated environment.

Overall, this reform represents a forward-looking strategy aimed at strengthening Nepal’s financial architecture, minimizing systemic shocks, and ensuring the safety of depositors and the economy at large.