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Bank Resolution Capacity Building in Nepal

Project Development Objective (PDO)

This project assisted the government of Nepal in building institutional capacity to adequately respond to distress in the banking sector and in implementing the medium-term reform program, specifically in the area of bank resolution and deposit insurance. 

Background

Since 2011, the World Bank, FIRST (Financial Sector Reform and Strengthening) Initiative, U.K. Department for International Development, and International Monetary Fund have been providing technical assistance to the Nepal Rastra Bank (NRB) and the government of Nepal to support institutional capacity building and regulatory changes that would contribute over time to a more robust banking system. This project addressed the resolution challenges the Nepalese authorities have faced. 

Activities

The project included the following activities:

1.    Capacity building of the recently created Problem Bank Resolution Division 
The team created a manual and provided training to help the department hire and manage the liquidators and to increase its ability to manage the liquidation.

2.    Capacity building for Deposit and Credit Guarantee Corporation
By developing a payout manual that covers the payout process and includes a template for a simulation exercise, the team provided capacity building to enable staff members to carry out their deposit insurance functions.

3.    Revisions to the new Bank and Financial Institution Act
The team assisted in drafting the language for additional revisions to the new Bank and Financial Institution Act and fully aligned the law with the revised NRB Act and the new Deposit and Credit Guarantee Fund Act 

Expected Outcomes

This project aims to achieve the following outcomes:

1.    Adoption of methodology to identify domestic systemically important banks
2.    Use of a manual and efficient management of bank liquidation process by staff at Problem Bank Resolution Division
3.    Provision of process and skills to staff at the Deposit and Credit Guarantee Corporation for execution of the payout and insured deposit transfer
4.    Improved capacity for authorities to quickly respond to financial distress and implement bank resolution mechanisms and the deposit insurance scheme
5.    Enactment of the Bank and Financial Institution Act
6.    Improved harmonization of the Banking and Financial Institution Act with the NRB and Deposit Guarantee Acts to avoid conflicts between these laws that could undermine the new resolution powers of the NRB and Deposit and Credit Guarantee Fund
7.    Reduction of the disruptive effect of the emerging resolution challenges on the financial system and the wider real economy