Moody's: Additional capital rule for important banks credit positive

KUALA LUMPUR:  Bank Negara Malaysia's proposed additional capital requirement for domestic systemically important banks (D-SIBs) is credit positive, Moody's Investors Service says.

The proposal would increase Malaysia’s largest banks' ability to absorb potential shocks and enhance banking system stability amid challenging operating conditions, the rating agency said in a statement on Monday.

On April 3, 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 the proposed framework, banks designated as D-SIBs would have to maintain an additional capital buffer of 0.5%-1.0% 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.

“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,” it said. 

Moody's said the CET1 capital ratios of all six banks were more than 300 basis points above the 8% minimum CET1 ratio (including a 1% 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,” it said.

To identify D-SIBs, Bank Negara would 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. 

“Bank Negara has not determined the implementation date of the proposal. Bank Negara proposes an annual review of designated D-SIBs to divide the banks into three groups and calibrate D-SIB buffers of 0.5%-2.0% depending on the banks’ relative systemic importance. 

“As proposed, a 1.0% capital buffer would apply to D-SIBs of greater systemic importance, and a 0.5% capital buffer would apply to the other D-SIBs. The 2.0% 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 Bank Negara,” Moody's said.

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