KUALA LUMPUR: Malaysia’s banking system is expected to remain resilient even under severe macroeconomic stress scenarios, said Bank Negara Malaysia (BNM).
In its Financial Stability Review for the second half of 2025 (2H 2025), released today, the central bank stated that over the three-year stress test horizon, the banking system is projected to incur sizeable losses arising mainly from higher credit risk and valuation adjustments on securities classified as fair value through other comprehensive income (FVOCI).
BNM said the cumulative credit costs were estimated to be RM78.9 billion and RM90.6 billion, under the temporary shock scenario (AS1) and moderate but more persistent downturn scenario (AS2), respectively, or equivalent to 59 per cent and 63 per cent of total losses, respectively.
"This estimated rise in credit losses results from an increase in defaults among household borrowers, particularly from impaired loans in the residential property loans segment,” said BNM.
The central bank said that the stress test scenarios are not forecasts of Malaysia’s economic outlook, but rather plausible tail-risk events intended to test the resilience of financial institutions under extreme but credible shocks.
BNM said several large corporates with existing financial vulnerabilities are also projected to default, while prolonged economic weakness continues to affect the debt servicing capacity of small and medium enterprises (SMEs).
Credit losses from the overseas operations of domestic banking groups (DBGs) are expected to account for 24.5 per cent of total credit costs, driven mainly by defaults involving several large non-SME borrowers.
By the end of the stress horizon in 2028, overall impairments are projected to increase to 7.7 per cent and 8.7 per cent of total banking system loans under AS1 and AS2, respectively, driven mainly by household impairments.
"Overall, the banking system capital ratios are projected to remain above the regulatory minima under both scenarios,” it said.
BNM said that banks facing persistent financial weaknesses are assumed to experience an additional liquidity shock in the form of deposit outflows.
Under this scenario, most banks maintain sufficient stock of unencumbered high-quality liquid assets (HQLA) to meet the heightened cashflow demands.
This reflects that the banking system’s strong starting liquidity position, with the system-wide Liquidity Coverage Ratio (LCR) at a robust 154.8 per cent as of December 2025.
"Taken together, the solvency and liquidity stress test exercises continue to affirm that banks remain resilient in the face of severe macroeconomic, financial and liquidity shocks.
"Banks are expected to retain sufficient capacity to support lending to the economy even during periods of downturn,” said BNM.
In the insurance segment, the stress test exercise also incorporated potential spillovers from geopolitical developments that could contribute to a hardening of global reinsurance conditions.
Under the stress scenarios, it said six general insurers, accounting for six per cent of total insurance assets, are projected to breach the regulatory minimum following the shock, with the capital shortfall accounting for four per cent of total insurance capital. - Bernama
