Nepal Rastra Bank (NRB) has revised its risk-management framework to address emerging risks in the financial sector and directed banks and financial institutions (BFIs) to adopt measures suited to their individual risk profiles.

The central bank issued the Risk Management Guidelines on Monday, expanding the scope of risks to include threats arising from climate change, artificial intelligence (AI) and machine learning, alongside conventional financial risks.

NRB said the changing financial environment is creating new challenges for global financial stability. Climate change has pushed central banks and financial regulators worldwide to develop frameworks for managing climate- and environment-related risks.

At the same time, rapid digitalization, growing dependence on data and the increasing use of technologies such as AI and machine learning have improved the efficiency and accessibility of financial services while creating new vulnerabilities.

These include risks related to data confidentiality, cybersecurity, operational resilience, and the security and integrity of payment systems and financial markets.

According to NRB, increasing interconnectedness and technology dependence among financial institutions make stronger risk-management systems necessary to capture the benefits of innovation while controlling the associated risks.

Risk management moves beyond compliance

The new guidelines note that risk management in financial institutions has evolved significantly since the global financial crisis. It is no longer viewed only as a compliance function but as a comprehensive responsibility that needs to be integrated into high-level decision-making and strategic planning.

NRB has emphasized that the size, complexity and operating circumstances of each financial institution can determine the structure of its risk-management framework.

However, fundamental risk-management principles should be applied consistently across the organization.

The guidelines require each financial institution to establish a comprehensive risk-management program tailored to its own needs and operating environment.

Traditional risks remain under the framework

While expanding its focus to emerging risks, NRB has retained conventional financial risks within the broader framework.

These include credit risk, liquidity and fund-management risk, market risk and interest-rate risk.

The guidelines also define separate responsibilities for the board of directors, senior management, risk-management committee and internal audit function in managing and overseeing different types of risks.

The revised framework therefore seeks to make BFIs better prepared not only for traditional financial risks but also for risks emerging from technological, environmental and increasingly interconnected financial systems.