Bank Negara Malaysia (BNM) published an Exposure Draft on requirements for the calculation of capital charge for the standardized approach for credit risk under the Basel III reforms, with the consultation period ending on June 30, 2023.
In addition to providing general feedback, all financial institutions are expected to respond to the questions set out in the Exposure Draft and to complete the accompanying Quantitative Impact Study (QIS) reporting template. Post finalization, the proposed regulatory requirements are expected to come into effect from January 01, 2025. A banking institution shall comply with the finalized requirements at both the entity and the consolidated levels. The final rules will be applicable to licensed banks, licensed Islamic banks, licensed investment banks, and financial holding companies. The requirements in this Exposure Draft also apply to financial institutions applying the internal ratings-based approach for credit risk in determining the output floor requirements, which will be the subject of a separate consultation.
The Exposure Draft states that, to compute the capital requirements, a financial institution shall refer to an exposure as an asset or contingent asset under the applicable Financial Reporting Standards, net of specific provisions (including partial write-offs). Under the MFRS 9, specific provisions refer to loss allowance measured at an amount equal to lifetime expected credit losses for credit-impaired exposures; meanwhile, general provisions refer to loss allowance measured at an amount equal to 12-month and lifetime expected credit losses and regulatory reserves, to the extent that they are ascribed to non-credit-impaired exposures. For exposures emanating from Islamic banking contracts, the treatment for the computation of the risk-weighted assets is provided in Part F on Exposures to Assets under Shariah Contracts. On-balance sheet exposures shall be multiplied by the appropriate risk-weight to determine the risk-weighted asset amount, while off-balance sheet exposures shall be multiplied by the appropriate credit conversion factor before applying the respective risk-weights. Additionally, for the calculation of capital requirements, a financial institution shall only use the ratings from external credit assessment institutions (ECAIs). This Exposure Draft is to be read together with the Capital Adequacy Framework (Capital Components) and the Capital Adequacy Framework for Islamic Banks (Capital Components).
Keywords: Asia Pacific, Malaysia, Banking, Credit Risk, Basel, Regulatory Capital, Standardized Approach, BNM
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