Introduction: The world cannot function without banking, but can banking become a risk to the world?
THE GLOBAL BANKING SYSTEM: The Engine of World Trade, Innovation and Economic Growth – But Are We Building a New Financial Crisis?
Imagine a world without banks.
A businessman in Nepal wants to purchase machinery from Germany. A manufacturer in China wants to sell electronic products to customers in Africa. A farmer wants to expand agricultural production but does not have sufficient capital. A young entrepreneur wants to establish a technology company but cannot finance the initial investment.
How would these transactions happen?
How would money move between countries? How would businesses receive payments from international customers? How would governments finance infrastructure? How would ordinary people safely save their earnings and access credit?
The answer is simple: modern economic life would become significantly more difficult, expensive and uncertain without an effective financial system.
Banking has become one of the most important foundations of modern civilisation. It has connected countries, businesses, industries, governments and individuals through a financial network that operates across borders and time zones.
A business no longer needs to physically carry large amounts of money across continents. A company can obtain financing, purchase raw materials, pay international suppliers, receive payments from customers and expand operations using a combination of banking services.
Banks have helped transform international trade from a complicated activity dependent on physical money and personal relationships into a sophisticated system supported by financial institutions, payment networks, credit facilities and digital technology.
But there is another side to this success.
The same banking system that makes the world economically connected can also transmit financial shocks from one country to another.
The same credit system that finances innovation can create dangerous levels of debt.
The same financial technology that makes payments easier can increase cybercrime and operational vulnerabilities.
And the same interconnected banking network that supports global trade can become a channel through which one institution's failure affects millions of people.
This creates an important question for the modern world:
Has banking become so interconnected, leveraged and technologically dependent that the risks it creates are becoming as significant as the economic benefits it provides?
To answer this question, we must first understand how banking transformed the world.
1. How banking made the world closer and economic life easier
Banking is not simply about depositing money and borrowing it.
It is about connecting people who have surplus financial resources with people, businesses and governments that need capital.
This function has helped societies move beyond the limitations of individual savings and physical exchange.
A. Banking transformed international trade
International trade is one of the greatest beneficiaries of modern banking.
Consider a simple example.
A Nepali company wants to import industrial machinery from Germany.
The Nepali importer needs to pay the German exporter, but the two businesses may not know each other. They operate under different currencies, legal systems and commercial practices.
The German exporter wants assurance that payment will be received. The Nepali importer wants assurance that the machinery will be delivered according to the agreement.
Banks help solve this problem through several services.
Letters of credit: A bank provides a payment undertaking subject to agreed documentary conditions.
International transfers: Banks move money between countries through correspondent banking relationships and payment networks.
Foreign exchange: Banks facilitate the conversion of currencies.
Trade finance: Banks provide financing against trade transactions and associated documents.
Bank guarantees: Banks provide financial assurances under specified contractual conditions.
Documentary collections: Banks facilitate the exchange of shipping and commercial documents for payment or acceptance.
These services have made international trade more reliable and accessible.
Without such financial arrangements, businesses would face greater risks of non-payment, delayed delivery, fraud and currency uncertainty.
Banking has therefore become an essential part of the infrastructure supporting global commerce.
B. Banking made international payments possible at enormous scale
Before modern payment systems, international financial transactions were slow, complicated and expensive.
Today, businesses can make payments across borders using correspondent banks, international payment networks, card systems and newer digital payment infrastructure.
The SWIFT network, for example, allows financial institutions to exchange standardised financial messages securely.
It is important to understand that SWIFT is primarily a financial messaging network, not itself a bank or a system that directly holds and transfers all the money.
Settlement occurs through the relevant financial institutions and payment arrangements.
This distinction matters because the modern financial system is made up of several interconnected layers:
Banks that hold deposits and provide credit.
Payment networks that communicate transaction instructions.
Central banks that provide settlement infrastructure and monetary liquidity.
Clearing houses that calculate obligations between financial institutions.
Foreign exchange markets that facilitate currency conversion.
Financial regulators that oversee institutional safety and market conduct.
Together, these systems allow businesses and individuals to participate in the global economy.
C. Banking financed industrialisation and infrastructure development
Economic development requires capital.
Building a factory, purchasing machinery, constructing a highway, establishing a hospital or expanding an energy project often requires more money than an individual or business can generate from immediate income.
Banks help convert savings into productive investment.
A person deposits money in a bank. The bank manages its liquidity and risks, then provides loans to eligible borrowers.
Those loans can finance:
Manufacturing industries.
Agricultural modernisation.
Hydropower projects.
Transportation infrastructure.
Housing development.
Tourism businesses.
Small and medium-sized enterprises.
Technology and innovation.
This is one of the fundamental contributions of banking to economic development.
It enables productive activities to begin before their future revenues are fully realised.
However, lending must be based on credible repayment capacity. Capital allocation to unproductive or speculative activities can create financial problems rather than economic growth.
D. Banking brought financial services closer to ordinary people
Modern banking has changed the daily lives of ordinary citizens.
People can now:
Receive salaries directly into bank accounts.
Transfer money without visiting a branch.
Pay utility bills online.
Receive international remittances.
Save money securely.
Obtain business loans.
Make digital purchases.
Access account information instantly.
Use mobile wallets and electronic payment systems.
Mobile banking has been particularly important in countries where traditional banking infrastructure is limited.
A person living in a remote area can access financial services through a mobile device without travelling long distances to a bank branch.
For countries with large migrant populations, digital financial services also make it easier for overseas workers to send money home.
E. Banking supported innovation and entrepreneurship
Innovation requires more than ideas.
It requires investment, infrastructure, research, skilled workers and time.
Banks contribute by financing businesses at different stages of development.
A small business can obtain working capital to purchase raw materials. A manufacturing company can finance machinery. A technology company can fund expansion. A renewable energy developer can obtain long-term project financing.
Banking also supports innovation through:
Venture debt.
Equipment financing.
Project financing.
Payment infrastructure.
Working-capital facilities.
Financial guarantees.
Export financing.
Although venture capital and equity markets also play important roles, the banking system provides a critical financial foundation for business activity.
F. Banking helped reduce the economic distance between countries
A company in Nepal can receive payments from a customer in Australia.
A German manufacturer can finance exports to Africa.
A farmer in a developing country can receive a loan to improve agricultural production.
A migrant worker can send money to family members thousands of kilometres away.
These are not merely financial transactions.
They represent economic relationships connecting people and countries.
Banking has helped make the global economy more integrated, more accessible and more productive.
But this growing integration also means that financial problems can travel faster and farther than ever before.
That brings us to the risks.
2. Understanding how the modern banking system actually works
Before discussing the risks, we need to understand an important feature of banking: banks do not simply keep all customer deposits in vaults.
Modern commercial banking operates through a system of deposits, lending, capital, liquidity management and settlement.
A. How banks create credit
Suppose a customer deposits Rs. 10 million in a commercial bank.
The bank records a deposit liability to that customer. It holds liquid assets and regulatory reserves, manages its funding requirements and can use part of its funding capacity to support lending.
When the bank approves a loan of Rs. 5 million, it generally creates a corresponding deposit in the borrower's account.
The borrower can then use that deposit to purchase machinery, pay employees or invest in a business.
This is one way commercial banks create money in the form of bank deposits.
However, this does not mean banks can create unlimited money.
They face several constraints:
Capital adequacy requirements.
Liquidity requirements.
Regulatory restrictions.
Creditworthiness of borrowers.
Funding availability.
Interest-rate and market risks.
Demand for loans.
Central bank monetary policy.
When a borrower repays the principal of a bank loan, the corresponding bank deposit money is generally extinguished through the banking system.
Therefore, lending is not simply the transfer of existing cash from one customer to another. It is also a process through which commercial bank money is created and subsequently destroyed.
B. The difference between liquidity and solvency
These two concepts are fundamental to understanding banking crises.
Liquidity means having sufficient cash or assets that can be converted into cash quickly to meet financial obligations.
Solvency means having sufficient asset value and capital to cover liabilities and absorb losses.
Consider two examples.
A bank may own valuable long-term loans and government securities but may not have enough immediately available cash to meet sudden withdrawals.
That bank may face a liquidity crisis.
Another bank may have sufficient cash today but hold so many bad loans that the real value of its assets is insufficient to cover its liabilities.
That bank may face a solvency crisis.
A liquidity crisis can sometimes be resolved through emergency funding.
A solvency crisis requires the recognition and absorption of losses, potentially through new capital, restructuring or resolution.
Confusing these two problems can make financial crises worse.
C. Why banks are particularly vulnerable to public confidence
Banking depends heavily on confidence.
Most customers do not withdraw all their money simultaneously because they believe their deposits are safe and accessible.
Banks therefore operate with a structure in which many deposits are withdrawable relatively quickly, while loans and other assets may take years to mature.
This process is known as maturity transformation.
It is economically useful, but it creates a structural vulnerability.
If a large number of depositors suddenly demand their money at the same time, even a bank with valuable long-term assets can experience serious liquidity pressure.
This is why bank runs can spread quickly.
Digital banking has made withdrawals easier and faster. A crisis of confidence can now develop through social media and electronic transfers in a matter of hours.
3. The current global banking system: Is it strong or becoming fragile?
The global banking system is not currently in a uniform state of collapse.
In fact, many banks have stronger capital, liquidity and risk-management frameworks than they had before the global financial crisis of 2008.
Regulatory reforms, stress testing, deposit protection arrangements and stronger supervisory frameworks have improved resilience in many jurisdictions.
However, the system is facing a complicated combination of risks.
The October 2026 Global Financial Stability Report published by the International Monetary Fund provides an important assessment.
Its central message is that global financial markets have remained resilient, but financial stability risks remain elevated.
The IMF identifies three particularly important potential triggers of market stress:
A correction in AI-related asset valuations.
A sharp increase in sovereign bond yields.
Increasingly sophisticated cyber threats.
The IMF also identifies vulnerabilities among weaker banks, private-credit institutions, pension funds, insurers and leveraged hedge funds.
This is an important distinction.
A financial system can appear healthy during favourable economic conditions while simultaneously accumulating vulnerabilities that become visible only when a major shock occurs.
The Bank for International Settlements also warned in its 2026 Annual Economic Report that persistent inflation risks, growing financial vulnerabilities and weaker fiscal positions require greater policy discipline.
In other words, the global banking system has become more sophisticated, but sophistication does not automatically eliminate risk.
4. The major risks threatening the modern banking system
The risks facing modern banking are interconnected.
Some originate within banks, while others develop outside the traditional banking sector and eventually affect banks through loans, investments, deposits and financial markets.
Let's examine the most important vulnerabilities in detail.
Risk 1. Excessive lending and the accumulation of bad loans
Lending is one of the most important functions of banking.
But lending without proper assessment is one of the most dangerous activities a bank can undertake.
Banks earn income through interest on loans and other financial activities.
When credit expands rapidly, banks may compete aggressively to increase their loan portfolios.
This can encourage:
Weak credit assessments.
Excessive lending against property.
Loans based on unrealistic business projections.
Overvaluation of collateral.
Loans to politically connected borrowers.
Repeated refinancing of financially distressed borrowers.
Concentration of lending in a few economic sectors.
The problem may remain hidden during periods of economic growth.
Businesses continue paying interest, property prices rise and collateral values appear strong.
But when economic activity slows, borrowers may struggle to repay.
Bad loans increase, banks must make additional provisions and profitability declines.
If losses become sufficiently large, bank capital can also come under pressure.
The dangerous cycle:
Rapid and weakly assessed lending
Asset prices and borrowing increase
Economic slowdown and repayment difficulties
Non-performing loans and financial losses increase
Reduced lending, capital pressure and possible banking instability
This is why the quality of loans matters more than the headline growth of a bank's lending portfolio.
Risk 2. The real estate and property market bubble
Property has historically been one of the largest sources of bank lending.
Housing loans, commercial property financing, construction loans and land-backed business credit can generate substantial revenue for financial institutions.
However, excessive property speculation can create a dangerous relationship between banks and the real estate market.
Imagine a situation in which property prices increase continuously.
Banks accept higher property valuations as collateral. Borrowers use that collateral to obtain additional loans. Some borrowers purchase more property, increasing demand and pushing prices higher.
This creates an apparent cycle of prosperity.
But what happens when property prices stop rising?
If the market falls sharply:
The value of collateral declines.
Borrowers may owe more than their properties are worth.
Property developers struggle to sell.
Construction projects are delayed.
Banks face difficulties recovering loans.
New lending becomes more restricted.
A particularly dangerous situation develops when banks are heavily exposed to the same property market.
Even institutions with different owners may face similar losses at the same time.
The property market does not have to collapse completely to create a banking problem. A prolonged decline in transactions, weak rental income and falling collateral values can be enough to damage loan quality.
Risk 3. Rising government debt and the sovereign-bank connection
This is one of the most important and sometimes overlooked risks.
Governments borrow money by issuing bonds and other debt instruments.
Banks, pension funds, insurance companies and other investors purchase these securities.
Government bonds are often considered relatively safe compared with private-sector investments, particularly when issued in a country's own currency.
However, government debt is not risk-free.
If inflation increases, investors may demand higher interest rates.
If investors become concerned about government finances, bond yields may rise sharply.
When bond yields rise, the market value of existing fixed-rate bonds generally falls.
This creates potential losses for financial institutions holding large portfolios of those bonds.
Banks can also face pressure if government finances weaken because their deposits, sovereign investments and broader economic environment may be affected simultaneously.
This creates what is commonly called the sovereign-bank nexus: the financial health of banks and governments can become closely connected.
The IMF's October 2026 report warns that renewed inflation or fiscal concerns could cause a sharp rise in sovereign bond yields, with broad effects across financial markets.
A government financial crisis can therefore become a banking crisis, and a banking crisis can in turn create additional government liabilities through emergency support.
Risk 4. Liquidity crises and sudden bank runs
A bank can be profitable on paper and still face a liquidity crisis.
This is because deposits can be withdrawn quickly, while loans and other investments cannot necessarily be converted into cash immediately.
Suppose a bank has:
Long-term housing loans.
Commercial property loans.
Government bonds.
Corporate lending.
Short-term customer deposits.
If depositors suddenly become concerned about the bank's safety, they may transfer their money to other institutions.
A small initial withdrawal can turn into a much larger problem if confidence deteriorates.
Social media can intensify this process.
A rumour, misleading financial statement or negative report may circulate rapidly. Customers can transfer their deposits electronically without physically visiting a bank.
This makes digital-era bank runs potentially faster than traditional bank runs.
The failure of Silicon Valley Bank in March 2023 remains an important example of how concentrated deposits, interest-rate exposure and a rapid loss of confidence can interact.
The lesson is that liquidity management and public confidence are fundamental to banking stability.
Risk 5. The growing influence of non-bank financial institutions
One of the biggest changes in the global financial system is that banking-related financial activity increasingly takes place outside traditional banks.
This sector is commonly called non-bank financial intermediation, or NBFI.
It includes:
Hedge funds.
Private-credit funds.
Insurance companies.
Pension funds.
Investment funds.
Certain money market funds.
Other financial intermediaries.
These institutions provide valuable financing and investment services.
They can increase competition, provide alternative sources of credit and support financial innovation.
However, they can also create risks when they operate with substantial leverage, limited liquidity or insufficient transparency.
Consider a private-credit fund that lends money to companies using borrowed money of its own.
If financial conditions tighten, its funding costs may increase while the borrowers it finances experience repayment difficulties.
At the same time, investors may want to withdraw their capital.
The fund may then struggle to meet obligations or continue providing committed financing.
Banks can be affected through their loans to these funds, credit lines, derivatives, collateral arrangements and other exposures.
The IMF's October 2026 analysis specifically highlights increasing leverage and liquidity pressures in private credit, as well as liquidity mismatches among insurers and pension funds. It also reports that global hedge fund assets have reached approximately $13 trillion.
This is important because financial stability cannot be protected by supervising commercial banks alone.
Risk 6. Cyberattacks, digital fraud and technological dependence
Banking is becoming increasingly digital.
This makes financial services faster and more convenient, but it also creates a larger technological attack surface.
A cyberattack targeting a major bank or payment infrastructure could potentially disrupt:
Customer access to accounts.
International transfers.
ATM networks.
Online payments.
Financial market transactions.
Bank-to-bank communications.
Business payroll systems.
Cyber threats include ransomware, phishing, identity theft, malware, account takeover and attacks on third-party technology providers.
Artificial intelligence adds another dimension.
AI can help banks detect fraudulent transactions, assess credit risks, automate compliance and improve customer services.
But criminals can also use AI to create convincing impersonations, automate scams, produce fraudulent documents and exploit weaknesses in digital identity systems.
A particularly serious concern is the dependence of multiple financial institutions on a small number of cloud providers and technology companies.
If one major service provider experiences a widespread outage, several banks may be affected simultaneously.
The European Banking Authority's June 2026 Risk Assessment Report identifies cyber threats, IT failures, fraud and third-party technology dependencies as important banking operational risks. It reports approximately €730 million in materialised losses from newly reported ICT events in 2025 among the institutions covered by its reporting.
Cybersecurity is no longer merely an IT department responsibility.
It is a core financial stability issue.
Risk 7. Artificial intelligence and the possibility of a financial market bubble
Artificial intelligence is creating significant opportunities for banking, investment management and financial services.
However, rapid technological investment can also produce unrealistic expectations.
Companies may be valued on the assumption that future AI earnings will be extremely high.
Banks and investment funds may provide financing to companies based on expectations that have not yet been demonstrated through sustainable profits.
If expected returns fail to materialise, valuations can fall sharply.
The consequences may include:
Losses for investors.
Reduced collateral values.
Lower confidence in technology-sector financing.
Increased loan defaults among exposed companies.
Market volatility.
Pressure on banks with concentrated exposures.
The IMF's October 2026 report identifies an AI-related asset-price correction as one of the three principal potential triggers of global market stress.
It specifically warns that concentrated exposures and rising leverage could amplify the impact.
This does not mean AI is a financial bubble.
It means that the difference between genuine technological productivity and speculative investment expectations must be carefully evaluated.
Risk 8. Geopolitical conflicts, sanctions and disruptions to global trade
Modern banking is closely connected to international trade and geopolitical developments.
Wars, sanctions, tariffs, shipping disruptions and energy-market shocks can affect the financial system through several channels.
For example:
Conflict disrupts international shipping.
Shipping and insurance costs increase.
Importers face higher operating expenses.
Businesses experience reduced profitability.
Borrowers struggle to repay loans.
Banks face rising credit losses.
At the same time, geopolitical tensions can create cyber threats and complicate international payments.
Financial sanctions can also restrict access to international banking networks and correspondent relationships.
The Bank of England's July 2026 Financial Stability Report identifies geopolitical developments and the Middle East conflict as important sources of market and financial uncertainty. The Bank of Canada has also highlighted trade policy, geopolitical risks and AI as significant financial stability concerns.
The banking system cannot be separated from the political and economic stability of the countries in which it operates.
Risk 9. Interest-rate fluctuations and currency instability
Interest rates influence nearly every major banking activity.
When central banks increase interest rates, borrowing becomes more expensive.
Existing borrowers may struggle to repay loans, particularly when they have floating-rate debt.
Banks can also experience losses on securities purchased when interest rates were lower.
When rates fall, banks may face pressure on lending margins, particularly if deposit costs do not adjust at the same speed.
Currency instability creates another challenge.
Banks involved in international transactions may face foreign-exchange losses if currencies move sharply.
Borrowers who earn in one currency but borrow in another can be particularly vulnerable.
For example, a company that earns revenue in Nepali rupees but has significant foreign-currency debt could face repayment pressure if the rupee weakens against the currency in which it borrowed.
Foreign-exchange management is therefore essential for financial stability.
Risk 10. Money laundering, financial crime and loss of institutional trust
Banks play a central role in protecting the integrity of the financial system.
If financial institutions fail to identify suspicious transactions, the system may be exploited for:
Money laundering.
Terrorist financing.
Fraud.
Tax evasion.
Corruption.
Illicit cross-border transfers.
Sanctions evasion.
These activities can expose banks to fines, legal action, reputational damage and restrictions on international financial relationships.
Strong anti-money-laundering systems and customer due diligence are therefore essential.
However, compliance requirements must also be proportionate and designed to avoid unnecessarily excluding legitimate customers from financial services.
5. The hidden danger: Banking risks are becoming interconnected
The biggest threat to modern banking may not be any single problem.
It may be the possibility that several problems occur simultaneously.
Consider this hypothetical situation:
Geopolitical conflict disrupts energy supplies.
Energy prices increase.
Inflation rises.
Central banks maintain or increase interest rates.
Government bond yields rise.
Property prices weaken.
Businesses experience lower profits.
Borrowers struggle to repay bank loans.
Banks face increasing bad loans.
Investors withdraw money from risky financial institutions.
Cyberattacks disrupt payment services during the crisis.
Each event may be manageable independently.
But when they happen together, the effects can reinforce one another.
This is known as systemic risk.
A systemic crisis occurs when financial difficulties spread beyond an individual institution and threaten the functioning of the wider financial system.
How a financial shock can spread across the world
Initial shock
War, inflation, cyberattack, market crash or debt crisis
Financial market disruption
Bond prices fall, funding becomes expensive, investors lose confidence
Banking sector pressure
Deposits move, loan defaults rise, liquidity and capital weaken
Credit contraction
Banks reduce lending and businesses struggle to finance operations
Economic slowdown
Investment, employment, production and consumption decline
Wider financial instability
Government finances, international trade and public confidence come under pressure
This is why financial regulators increasingly focus on the entire financial system rather than looking at individual banks in isolation.
The Financial Stability Board warned in June 2026 that the simultaneous materialisation of several vulnerabilities could threaten financial stability. It highlighted high asset valuations, compressed risk premiums, government debt and leveraged trading in sovereign bond markets.
6. Lessons from previous financial crises: What history has taught us
To understand future banking risks, we should examine previous crises.
A. The 2008 global financial crisis
The global financial crisis of 2008 remains one of the most important examples of how financial innovation, excessive lending and weak risk management can destabilise the world economy.
In the years preceding the crisis, the US housing market experienced rapid growth.
Financial institutions provided large volumes of mortgage loans, including loans to borrowers with weak repayment capacity.
Many of these mortgages were packaged into complex financial securities and sold to investors around the world.
The risks became difficult to understand and assess.
When US housing prices declined and mortgage defaults increased, the value of mortgage-related securities collapsed.
Financial institutions suffered substantial losses.
The failure of Lehman Brothers in September 2008 intensified the crisis and contributed to a severe global financial shock.
The consequences included:
Bank failures and emergency rescues.
A severe international credit contraction.
Falling business investment.
Rising unemployment.
Housing market collapses.
Government debt increases.
Global recession.
The most important lesson was that risks cannot be eliminated simply by transferring financial assets from one institution to another.
If the underlying borrowers cannot repay their debts, the risk remains somewhere in the financial system.
B. The European sovereign debt crisis
Following the global financial crisis, several European countries faced serious public debt and banking problems.
Greece became the most prominent example.
Concerns about government debt, fiscal deficits and the ability to repay obligations increased borrowing costs.
Banks holding government debt faced additional risks.
At the same time, weaker economies placed pressure on domestic banks.
The crisis demonstrated the danger of a close relationship between government finances and banking-sector stability.
It also showed how financial problems within one currency union can affect other countries.
C. Silicon Valley Bank – 2023
The collapse of Silicon Valley Bank in March 2023 demonstrated that even a bank with apparently substantial assets can experience a rapid liquidity crisis.
The bank had significant exposure to long-duration securities.
When interest rates increased, the market value of those securities declined.
At the same time, its depositor base was concentrated in technology and venture-capital-related businesses.
Concerns about the bank's financial position triggered rapid withdrawals.
Digital communication and electronic transfers accelerated the loss of confidence.
The US authorities intervened to contain wider financial disruption.
The lesson was particularly important for modern banking:
A bank's balance sheet, funding structure and depositor confidence must be managed together.
D. Credit Suisse – 2023
Credit Suisse's collapse into a state-supported emergency takeover by UBS in March 2023 demonstrated the damage that prolonged governance problems, financial losses and reputational difficulties can create.
The bank had faced years of scandals, losses and declining confidence.
The situation became increasingly difficult when depositors and investors questioned its future.
The Swiss authorities facilitated the takeover to reduce the danger of wider financial instability.
This case showed that a banking crisis does not always begin with a conventional bad-loan problem.
Weak governance, operational failures and reputational damage can also become existential threats.
The common lessons
Historical crisis | Important lesson |
|---|---|
2008 global financial crisis | Excessive lending and hidden financial risks |
European debt crisis | Government debt and bank exposure are interconnected |
Silicon Valley Bank | Interest-rate risk and concentrated deposits |
Credit Suisse | Governance, reputation and confidence matter |
The history of banking shows that financial crises rarely emerge from one cause alone.
They usually develop when weaknesses accumulate and several risks interact.
7. Nepal's banking system: A closer look at the risks facing our economy
The global banking discussion is especially relevant to Nepal.
Nepal's economy depends heavily on remittances, imports, tourism, agriculture, services and financial intermediation.
Banks play an important role in collecting domestic savings, financing businesses, facilitating imports, supporting housing and providing payment services.
However, Nepal also faces structural challenges that deserve serious attention.
The important question is not whether Nepal's banking system is about to collapse. Available indicators do not justify such a conclusion.
The question is whether the current banking model is sufficiently prepared to support sustainable economic growth while managing deteriorating loan quality and structural vulnerabilities.
A. Rising non-performing loans: An important warning
One of the most significant indicators is the non-performing loan ratio.
According to the World Bank's latest Nepal Development Update, the gross NPL ratio of Nepal's financial sector reached a record 5.7% by mid-July 2026, with deterioration across major categories of financial institutions.
The report also noted:
Financial-sector loan-loss provisions increased to 1.2% of GDP.
Net profits declined modestly.
Private-sector credit growth remained weak.
The aggregate capital adequacy ratio was 12.8% at the end of FY2026, above the 11% regulatory minimum.
Regulatory forbearance measures helped cushion the impact of deteriorating asset quality.
worldbank.org
These figures require careful interpretation.
The 5.7% figure refers to the gross NPL ratio of the financial sector, not necessarily the ratio of commercial banks alone.
Nevertheless, it indicates that loan-repayment difficulties have become an important challenge.
An increasing NPL ratio deserves attention because it can reduce profitability, weaken lending capacity and eventually create capital pressure if losses are not adequately recognised and absorbed.
B. The problem of weak credit demand
An interesting feature of Nepal's banking sector is that lower interest rates do not automatically produce higher productive investment.
The World Bank reported that private-sector credit increased only marginally, from 95.7% of GDP in FY2025 to 95.9% in FY2026, despite historically low lending interest rates and measures intended to encourage credit expansion.
This suggests that the problem may not be simply the cost of borrowing.
Businesses may lack confidence in future demand. Investors may be uncertain about government policies. Some borrowers may already have excessive debt. Others may find it difficult to identify profitable investment opportunities.
This creates a fundamental economic question:
What is the benefit of having abundant banking liquidity if productive businesses are unwilling or unable to borrow and invest?
Banks cannot create sustainable economic growth simply by expanding credit.
The economy must also provide viable opportunities for that credit to generate income and employment.
C. Excessive concentration in real estate and unproductive sectors
Nepal's financial institutions need to evaluate whether their lending portfolios are sufficiently diversified.
Excessive exposure to property, land speculation, construction and other cyclical activities can increase vulnerability.
If property transactions slow or collateral values decline, several borrowers may face difficulties simultaneously.
Banks should give greater attention to financing:
Export-oriented manufacturing.
Agricultural processing.
Hydropower and renewable energy.
Tourism infrastructure.
Information technology.
Small and medium-sized enterprises.
Productive industrial development.
This does not mean property lending should stop.
Housing and infrastructure are important parts of economic development.
The issue is whether credit is creating sustainable economic value or primarily supporting asset-price speculation.
D. Remittance dependence and the domestic credit cycle
Remittances are an important source of foreign currency and household income for Nepal.
They help support consumption, savings, education, housing and foreign-exchange reserves.
However, excessive dependence on remittance-supported consumption can create structural weaknesses.
If a large portion of banking deposits originates from remittance income but domestic productive investment remains limited, the financial system may struggle to translate savings into long-term economic development.
Nepal needs stronger connections between remittance savings and productive investment.
Examples include:
Agricultural enterprises.
Export businesses.
Manufacturing.
Renewable energy.
Tourism.
Technology startups.
Infrastructure development.
The objective should be to turn remittance-supported savings into productive capital without discouraging the legitimate use of remittances for household welfare.
E. The FATF grey-list challenge
Nepal's continued presence on the Financial Action Task Force grey list is another important issue.
The World Bank's 2026 Nepal Development Update notes that this increases cross-border transaction and compliance costs.
This can affect international banking relationships, correspondent banking arrangements, due diligence and the cost of financial transactions.
Strengthening anti-money-laundering controls, beneficial ownership transparency and enforcement against financial crime is therefore important not only for compliance but also for Nepal's international financial credibility.
F. The risks facing Nepal's smaller financial institutions
The Nepal Rastra Bank's Financial Institution Supervision Department annual report contains another important warning.
Its stress tests for finance companies found substantial sensitivity to deterioration in real estate and housing loans.
Under one severe hypothetical scenario in which 25% of real estate and housing loans deteriorated into the loss category, only two finance companies would remain above the minimum capital adequacy threshold, while the other institutions would experience negative capital adequacy.
Its liquidity stress testing also showed that a hypothetical 10% daily deposit withdrawal over three consecutive days would cause all but one of the tested finance companies to experience negative liquidity ratios.
These are stress-test scenarios, not predictions that such events will happen.
But they demonstrate why smaller financial institutions may require particularly close supervision.
G. What Nepal must avoid
Nepal should avoid building a banking system that depends excessively on:
Property-backed speculative lending.
Short-term credit for long-term projects without adequate funding arrangements.
Loan refinancing that conceals genuine repayment problems.
Politically influenced lending.
Weak corporate governance.
Unproductive consumption-based credit expansion.
Insufficient cyber and operational security.
A banking system should not be evaluated only by the number of branches, the size of deposits or the total amount of loans.
Its real contribution should be measured by the productive economic activity it finances, the quality of its assets and its ability to withstand financial shocks.
8. Future risks: What could happen to banking over the next 5–10 years?
The future of banking will be shaped by artificial intelligence, digital currencies, tokenisation, automation, changing international trade patterns and evolving financial regulation.
These developments can make banking more efficient, but they can also introduce risks that traditional regulatory frameworks were not designed to manage.
Here are seven developments worth watching.
1. AI-driven financial concentration
Artificial intelligence may make financial institutions more productive.
However, if many banks depend on the same AI models, data providers or technology companies, a failure or vulnerability in one system could affect numerous institutions.
AI-driven trading could also amplify market movements if different institutions use similar models and respond to the same signals.
A future financial crisis may therefore originate partly from technological systems rather than traditional lending decisions.
2. Digital currencies and stablecoins
Digital currencies and stablecoins could change the way international payments operate.
Stablecoins aim to maintain a relatively stable value, often by referencing a national currency or another asset.
They may reduce some payment costs and provide faster settlement.
However, they also raise questions about:
Reserve quality.
Redemption rights.
Liquidity.
Regulatory oversight.
Cybersecurity.
Consumer protection.
Currency substitution.
Financial stability.
If large numbers of people move deposits from traditional banks into digital alternatives during a crisis, some banks could experience funding pressure.
The IMF also cautions that the growing tokenisation of financial assets could introduce additional liquidity, maturity and technology risks as these markets expand.
3. The decline of traditional bank branches
Digital banking will continue reducing the need for physical branches.
This may improve efficiency, but it also creates challenges for people with limited digital access, elderly customers and those living in remote communities.
Banks will need to balance technological efficiency with financial inclusion and access to human assistance.
4. Quantum computing and future encryption risks
Quantum computing is a developing technology that could eventually challenge some cryptographic systems used to protect financial information.
The timing and practical impact remain uncertain.
However, financial institutions should begin preparing for post-quantum cryptographic standards, secure data migration and long-term protection of sensitive information.
The risk is not limited to immediate theft. Financial information stolen today could potentially become vulnerable to future technological developments.
5. Climate change and financial asset deterioration
Climate-related events can affect the value of financial assets.
Floods, droughts, extreme heat, storms and other natural disasters can damage properties, disrupt businesses and reduce agricultural income.
Banks financing climate-exposed sectors may face increased credit losses.
Financial institutions therefore need better methods for assessing physical climate risks and the financial consequences of the transition to lower-carbon economies.
6. The growing complexity of global financial networks
Financial transactions are becoming more interconnected.
Banks, investment funds, payment providers, cloud companies, insurers and technology platforms increasingly depend on one another.
This creates efficiency but can also create hidden concentrations of risk.
A failure in a major payment provider or technology company could potentially affect institutions that otherwise appear financially healthy.
7. The possibility of a new debt-driven financial crisis
Global debt, government borrowing, private credit and leveraged financial transactions deserve continued attention.
If economic growth slows while borrowing costs remain elevated, governments, companies and households may face increasing debt-servicing pressure.
A sudden repricing of financial assets could then expose weaknesses in banks and non-bank financial institutions.
This is not a prediction of another 2008 crisis.
The structure of today's financial system is different, and regulators have introduced important safeguards since then.
But the IMF and BIS assessments show that leverage, sovereign debt, asset valuations and interconnected financial vulnerabilities remain important risks.
9. What needs to be done? Solutions for a safer and stronger banking system
The objective should not be to reduce banking activity or discourage financial innovation.
Banking is essential for economic development.
The objective should be to build a financial system that can support growth without creating excessive risks for depositors, businesses, governments and the wider economy.
The solutions require action from central banks, commercial banks, governments, international institutions and customers.
A. What central banks and financial regulators must do
1. Strengthen banking supervision
Regulators should continuously monitor:
Loan quality.
Capital adequacy.
Liquidity positions.
Large borrower exposures.
Related-party lending.
Real estate concentration.
Foreign-exchange exposure.
Operational and cyber risks.
Supervision should identify problems before they become serious.
2. Conduct realistic stress tests
Banks should be tested against several simultaneous shocks, not just one isolated financial problem.
For example:
A 20% decline in property collateral values.
A substantial increase in loan defaults.
A sudden withdrawal of deposits.
A sharp rise in interest rates.
A major cyberattack.
A severe economic recession.
These are illustrative stress scenarios, not universal regulatory thresholds.
The purpose is to understand whether institutions have enough capital, liquidity and operational capacity to survive difficult conditions.
3. Strengthen capital requirements
Banks must maintain sufficient capital to absorb unexpected losses.
Capital should not merely satisfy minimum regulatory requirements under normal conditions.
It should also provide a meaningful buffer during periods of economic stress.
4. Improve deposit protection
Depositors need confidence that their savings will be protected within the limits of applicable deposit insurance arrangements.
Deposit insurance systems should be adequately funded, clearly communicated and supported by effective bank-resolution procedures.
5. Monitor non-bank financial institutions
Regulators should improve transparency around private credit, hedge funds, insurance companies, pension funds and other financial intermediaries.
Systemic risk does not respect institutional boundaries.
6. Establish stronger cyber-resilience standards
Financial institutions should maintain:
Independent security testing.
Continuous threat monitoring.
Secure backup systems.
Disaster recovery arrangements.
Strong identity verification.
Regular incident simulations.
Contingency arrangements for third-party service failures.
B. What commercial banks must do
1. Prioritise loan quality over loan volume
A bank should not celebrate credit growth if that growth creates future repayment problems.
Loan assessments must focus on borrowers' genuine income, business viability and repayment capacity.
2. Diversify lending
Banks should avoid excessive concentration in a single sector, geographic area or group of borrowers.
3. Improve corporate governance
Independent directors, effective risk committees, transparent reporting and strict conflict-of-interest policies are essential.
4. Invest in cybersecurity
Digital security should be treated as a fundamental banking expense rather than an optional technology investment.
5. Maintain adequate liquidity
Banks must be prepared for unexpected deposit withdrawals, disruptions in financial markets and temporary restrictions on funding access.
6. Adopt AI responsibly
AI-based lending, fraud detection and investment systems should be independently tested, explainable where appropriate and subject to human oversight.
C. What governments must do
Governments also have a major responsibility because banking stability depends on the wider economy.
They should:
Maintain sustainable public finances.
Avoid unnecessary political interference in bank lending.
Strengthen the independence of regulatory institutions.
Promote stable economic policies.
Encourage productive investment.
Improve legal mechanisms for recovering bad loans.
Strengthen commercial dispute resolution.
Maintain credible anti-corruption systems.
Invest in digital infrastructure and financial literacy.
A healthy banking system cannot exist independently of a healthy economy and credible public institutions.
D. What international institutions must do
The IMF, World Bank, BIS and Financial Stability Board have important roles in global financial stability.
International cooperation should focus on:
Stronger financial risk monitoring.
Greater transparency in cross-border lending.
Consistent regulation of major financial activities.
Improved cooperation on cyber threats.
Better coordination during international financial crises.
Stronger supervision of non-bank financial institutions.
Responsible development of digital financial infrastructure.
Effective resolution arrangements for internationally active banks.
Global financial problems require international cooperation because money, credit and financial risks do not stop at national borders.
E. What Nepal should prioritise
For Nepal, the following measures deserve particular attention.
Priority | Necessary action |
|---|---|
Loan quality | Recognise bad loans honestly and improve recovery |
Productive lending | Increase financing for industry, agriculture and exports |
Real estate | Monitor property exposure and collateral valuations |
Governance | Strengthen NRB supervision and bank accountability |
Liquidity | Improve stress testing, contingency funding and monitoring |
Digital security | Invest in cybersecurity and fraud prevention |
Financial inclusion | Improve access to reliable banking services |
International credibility | Strengthen AML/CFT compliance and financial transparency |
Investment | Encourage viable domestic business projects |
Nepal also needs a better connection between the banking sector and the real economy.
Banks should not merely collect deposits and compete to distribute loans.
They should help finance businesses that produce goods, generate employment, increase exports and reduce dependence on imports.
A stronger banking system should ultimately contribute to a stronger productive economy.
10. What should ordinary bank customers understand?
Financial stability is not solely the responsibility of bankers and regulators.
Customers also need to understand how to manage their own financial risks.
Some important practices include:
Choose regulated financial institutions.
Understand applicable deposit insurance limits.
Avoid keeping all savings in one institution when diversification is appropriate.
Maintain an emergency savings reserve.
Avoid borrowing beyond repayment capacity.
Never share banking passwords, PINs or one-time verification codes.
Verify suspicious calls, messages and payment requests.
Understand loan interest rates and repayment obligations.
Be cautious about unrealistic investment returns.
Review account statements and transaction notifications regularly.
Most importantly, customers should avoid spreading unverified rumours about a bank's financial condition.
Public confidence matters, but confidence should be supported by transparent financial information and credible supervision, not misinformation.
11. The future of banking: From traditional institutions to intelligent financial infrastructure
The future of banking will probably look very different from the banking system we know today.
Traditional bank branches will become less central to everyday financial transactions.
AI will increasingly assist with credit assessments, financial planning, fraud detection and regulatory compliance.
International payment systems may become faster and less expensive.
Tokenised financial assets may enable new forms of investment and settlement.
Digital identity systems may simplify customer verification.
But the fundamental purpose of banking will remain the same.
It must provide trustworthy ways to save, transfer, borrow, invest and manage money.
Technology should improve these services rather than undermine the public confidence on which they depend.
The next generation of banking should be built around five principles:
Trust: Customers must have confidence that their money and information are protected.
Transparency: Financial institutions must communicate risks and financial conditions honestly.
Stability: Banks must withstand economic, technological and geopolitical shocks.
Inclusion: Financial innovation must benefit ordinary people and businesses, not just wealthy investors.
Productivity: Credit should support sustainable economic activity and long-term development.
The banking system of the future should not simply be faster.
It should be safer, more accountable, more accessible and more useful to society.
Conclusion: Banking must remain a servant of the economy, not become a threat to it
Banking has helped bring the world closer than ever before.
It has connected international markets, financed industries, supported technological innovation, enabled international trade, facilitated remittances and made financial services accessible to billions of people.
Without modern banking, the global economy would be slower, less connected and significantly more difficult to operate.
But the success of banking also comes with enormous responsibility.
The global financial system has become so interconnected that weaknesses in one institution, one market or one country can potentially spread across borders.
Excessive lending, property speculation, government debt, poor governance, cyberattacks, technological concentration and non-bank financial vulnerabilities are not isolated problems.
They are connected challenges that require a comprehensive response.
The October 2026 IMF assessment is particularly important because it reminds us that financial markets can remain resilient while serious vulnerabilities continue to accumulate.
We should neither create unnecessary panic nor assume that the banking system is automatically safe.
The lesson from 2008, the European debt crisis and more recent bank failures is that financial stability requires continuous vigilance.
For Nepal, the priority should be even clearer.
We need banks that finance productive industries rather than simply expanding speculative credit. We need stronger supervision, better loan recovery, transparent governance, responsible digitalisation and greater confidence in financial institutions.
Economic development should not be measured merely by the size of bank deposits, the volume of loans or the number of financial institutions.
It should be measured by how effectively the financial system helps businesses grow, creates employment, increases production, supports innovation and improves people's living standards.
Banking should be the engine that powers economic development, not a machine that creates financial instability.
The world does not need less banking. It needs better banking.
The challenge for the next decade is to preserve everything that makes modern banking valuable while correcting the weaknesses that could threaten the global economy.
A strong banking system does not simply know how to lend money during good times. It knows how to protect depositors, manage risks, support productive investment and survive difficult times.
Because the real strength of a nation's banking system is not measured by how much money it circulates, but by how much sustainable economic prosperity it creates.
Selected references and further reading
The following institutional reports provide the factual foundation for the current-risk analysis.
IMF – Global Financial Stability Report, October 2026: Resilience, Risk, and Transformation.
Financial Stability Board – Potential New Vulnerabilities to Financial Stability (June 2026).
European Banking Authority – Risk Assessment Report, June 2026.
IMF – Nepal: 2026 Article IV Consultation and Seventh Review under the Extended Credit Facility.
Nepal Rastra Bank – Financial Institution Supervision Department Annual Report 2025.
Editorial note: This article is an economic and financial stability analysis, not a prediction that a global banking collapse is imminent or investment advice. Figures refer to the publication periods stated in the cited sources. Stress-test scenarios are hypothetical, and the actual resilience of individual banks differs by institution and jurisdiction.
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