Assignment I

Financial stability report of NRB assesses the stability of global financial

markets and emerging market financing. The Global Financial Stability Report
focuses on current conditions, especially financial and structural imbalances
that could risk an upset in global financial stability and access to financing by
emerging market countries. Financial stability can be defined as a condition
in which the financial system intermediaries, markets and market
infrastructures can withstand shocks without major disruption in financial
intermediation and in the effective allocation of savings to productive
investment.
The financial system can be said to be stable if it displays the following three
key characteristics:
1. The financial system should be able to efficiently and smoothly transfer
resources from savers to investors.
2. Financial risks should be assessed and priced reasonably accurately
and should also be relatively well managed.
3. The financial system should be in such a condition that it can
comfortably absorb financial and real economic surprises and shocks.
If any one or a combination of these characteristics is not being maintained,
then it is likely that the financial system is moving in a direction of becoming
less stable, and at some point might exhibit instability
Nepalese financial stability has been turning in the direction of stability by
focusing on 3 major factors which are asset quality, capital and liquidity.
Despite of concern on such factors there are still some issues to be
addressed which NRB has been looking close and making policies to
eliminate them.
NRB is also availing merger policy to remove unwanted competition and
solving capital problem. So, based on the report there are 23 BFIs which has
been upgraded or renamed after successful merger. It is the need of people
to have proper access of financial services due to which NRB has guided BFIs
to provide services in very remote areas as well. NRB has fixed the spread
rate of interest to 5% to remove randomness in interest rate spread.

By all the means above, safeguarding of financial stability requires

identifying the main sources of risk and vulnerability such as inefficiencies in
the allocation of financial resources from savers to investors and the mispricing or mismanagement of financial risks. This identification of risks and
vulnerabilities is necessary because the monitoring of financial stability must
be forward looking: inefficiencies in the allocation of capital or shortcomings
in the pricing and management of risk can, if they lay the foundations for
vulnerabilities, compromise future financial system stability and therefore
economic stability.

Furthermore, there are certain roles of state owned banks. In Nepal RBB &
NBL hold a major portion of share in total banking sector. The ups and downs
in these banks can alter the banking system as whole. So it is duty of central
bank to maintain soundness in these banks so that others may not loose the
confidence in banking system.
Looking on the structures of balance sheets of BFIs in Nepal, there is no
uniformity for maintain soundness of banking system. So NRB has provided
major indicators to measure Financial soundness and based on such NRB list
out ranking of commercial banks. Capital
adequacy, asset quality,
profitability, Liquidity are some important indicators to measure such. NRB
play a watchdog role to check whether the optimum level in each indicators
is maintained or not and if any BFIs is performing below expected level , such
institutions are supervised and regulated by NRB.

Stress testing is another important aspects to analyze shocks of different

level in BFIs. Credit shock , liquidity shock, market shock and combination of
these three is posing threats in BFIs. Some BFIs have been already declared
under pressure from those shocks whereas others are vulnerable from such.
Therefore stress testing is important analytical tools to identify problems in
deposit lending institutions and protect them through necessary measures.

Besides commercial banks, there are also different other micro level financial
institutions. Such institutions also have important role in economy of country
by adding GDP and serving deprived sectors. Insurance, CIT are also
important financial institutions in country that accept money of people. The

regulation in these sectors is also of prime importance as they can downturn

the economy from unhealthy competition.
It is well known that for a competitive, healthy, stable and prudentially sound
financial system the role of central bank is very important. The policy,
strategy guidelines, directives from central bank helps to maintain
soundness in the system. Monetary policy regulate the circulation of money
and control inflation, liquidity, exchange rates and interest rate competition.
So to address the complex issues and dilemma to improve the overall
strength of financial sector, the preparation of financial sector development
strategy is underway.