Bhutan’s Financial Regulatory Bodies Make Strides in Macroprudential Regulation and Risk Management
Introduction
The Royal Monetary Authority (RMA) and the Monetary Authority of Bhutan (MMA), Bhutan’s financial regulatory bodies, have made significant progress in implementing macroprudential regulations and enhancing risk management capabilities.
Macroprudential Regulations
The RMA has drafted and published seven out of eight macro-prudential rules and regulations on its website for adoption. These regulations cover important areas such as:
- Counter-cyclical capital buffers for banks
- Sectoral capital requirements
- Loan-to-Value (LTV) and Loan-to-Income (LTI) restrictions
- Time-varying capital provisioning
- Restrictions on distributing profits
- Minimum ceilings on leverage ratios for banks
- Disclosure requirements
- Debt-to-Equity ratios
The MMA is currently deliberating on the timing for adoption and implementation of these regulations.
Risk Management Capabilities
To further support risk management, the authorities have prepared a stress-testing template for Bhutan and Maldives, adapted to each country’s financial system structure. This includes:
- A guidance document outlining stress-testing operations procedures
- Development of a list of financial soundness and macroeconomic indicators and templates for macroprudential monitoring and surveillance
The authorities have also constructed an Aggregate Financial Stability Index (AFSI) using sub-indices that measure the health of the financial sector, external risks, and other macro-economic risks to the financial sector.
Financial Stability Reports and Monitoring Frameworks
The preparation of financial stability reports for Bhutan and Maldives is ongoing. Additionally, a framework for monitoring and forecasting the macro influences on banking system liquidity has been established, along with spreadsheets and processes for following these necessary steps.
Individual Bank Management
A framework for monitoring prudential liquidity positions and liquidity management has been set up, based on new international standards promulgated by the Basel Committee on Banking Supervision. This includes:
- Liquidity coverage ratio
- Net stable funding ratio
Training Workshops
The RMA and MMA have conducted in-country training workshops on macroprudential regulations, stress testing, financial soundness indicators, early warning signals, and liquidity management in Bhutan and Maldives.
Conclusion
These efforts demonstrate Bhutan’s commitment to promoting financial stability and improving risk management capabilities within its financial sector.