BNM published policy documents that set out requirements on the transitional arrangements for regulatory capital treatment of accounting provisions for the expected credit losses (ECLs). The policy document on transitional arrangements is applicable to development financial institutions, while the two policy documents on capital adequacy framework are applicable to conventional as well as Islamic banks. Part G of both the policy documents on capital adequacy framework sets out requirements on the transitional arrangements for banking institutions. Institutions that elect to apply the transitional arrangements are allowed to add back a portion of the Stage 1 and Stage 2 provisions for ECLs to Tier 1 capital over a four year period from financial year beginning 2020 or a three-year period from financial year beginning 2021. The policy documents came into effect on December 09, 2020.
The updated capital adequacy frameworks, in particular, are applicable to licensed banks, investment banks, Islamic banks, banks carrying on Islamic banking business, and financial holding companies. The transitional arrangements in the updated policy are consistent with the guidance issued by BCBS on the interim approach and transitional arrangement on regulatory treatment of accounting provisions (published in March 2017) and the measures to ease the impact of COVID-19 outbreak (published in April 2020). An institution (be it a banking institution or a development financial institution) shall make a one-time election on whether or not to apply the transitional arrangements. Once made, this election is irrevocable throughout the transition period. An institution is allowed to add back the amount of loss allowance measured at an amount equal to 12-month and lifetime ECLs to the extent they are ascribed to non-credit-impaired exposures to Tier 1 capital. A development financial institution shall submit periodic reports on its capital adequacy ratios using the reporting templates provided by BNM. An institution applying the transitional arrangements is required to disclose the following:
- Description of the transitional arrangements, including the financial year where the transitional arrangements is first applied and the duration of application
- Comparison of the capital ratios computed in accordance with the transitional arrangements as well as the capital ratios in case the transitional arrangements had not been applied
- Press Release
- Framework for Conventional Banks (PDF)
- Framework for Islamic Banks (PDF)
- Transitional Arrangements for Development Institutions (PDF)
Effective Date: December 09, 2020
Keywords: Asia Pacific, Malaysia, Banking, ECL, Regulatory Capital, Transitional Arrangements, Credit Risk, Islamic Banking, COVID-19, BNM
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