KUALA LUMPUR: Malaysia's proposed additional capital requirement for systemically important banks is credit positive, Moody's Investor Service find.
In its sector report, Moody's said the proposed additional capital requirement for domestic systemically important banks (D-SIB) would increase Malaysia’s largest banks' ability to absorb potential shocks and enhance banking system stability amid challenging operating conditions, a credit positive.
On April 3, 2019, Bank Negara Malaysia (BNM), the central bank, held a public consultation on the proposed designation of D-SIBs and the implementation of higher loss absorbency requirements for them.
Under BNM’s proposed framework, banks designated as D-SIBs will be required to maintain an additional capital buffer of 0.5 per cent to 1.0 per cent of Common Equity Tier 1 (CET1) capital relative to risk-weighted assets (RWAs) on a consolidated group basis.
The proposed D-SIB buffer would complement other CET1 capital requirements implemented this year, such as the countercyclical capital buffer and capital conservation buffer, Moody's noted.
Moody's identified six banks banks namely AmBank Bhd, CIMB Group Holdings Bhd, Hong Leong Bank Bhd, Public Bank Bhd, Maybank Bhd and RHB Bank Bhd.
"Assuming all six of the Moody's-rated Malaysian banks are designated as D-SIBs, we expect all of them would comfortably meet the higher capital requirement without having to raise additional capital because they maintain buffers well above the new minimum regulatory capital levels," Moody's report said.
The CET1 capital ratios of all six banks were more than 300 basis points above the 8 per cent minimum CET1 ratio (including a 1 per cent D-SIB capital buffer) at year-end 2018.
"In addition, we expect the banks’ internal capital generation to remain sound and outpace capital consumption over the next 12-18 months because of sluggish loan growth and weak market sentiment," Moody's noted.
To identify D-SIBs, BNM will use the criteria of size, interconnectedness and substitutability to determine the degree of a bank’s systemic importance and the effect that its failure would have on the domestic financial system and economy.
Moody's also noted that BNM has not determined the implementation date of the proposal.
BNM proposes an annual review of designated D-SIBs to divide the banks into three groups and calibrate D-SIB buffers of 0.5 per cent to 2.0 per cent depending on the banks’ relative systemic importance.
As proposed, a 1.0 per cent capital buffer would apply to D-SIBs of greater systemic importance, and a 0.5 per cent capital buffer would apply to the other D-SIBs.
The 2.0 per cent capital buffer would not apply to any of the D-SIBs at the start of the policy implementation, but allows for higher capital requirements at the discretion of BNM.