Basel Committee: Top local banks still crucial in economy

PETALING JAYA: The top local banks are deemed systemically important
in the country, although they are deemed not so by global standards,
according to the Basel Committee on Banking Supervision. The
Basel Committee recently agreed that the world's top banks must hold
another 1% to 2.5% more of equity by 2019 as part of efforts to make
them more resilient in the face of another financial crisis. These
banks, known as systemically important financial institutions (SIFIs),
were the banks deemed “too big to fail” during the global financial
crisis of 2008. Besides the surcharge, they would be required to
hold another 3% of equity in reserve on top of a minimum core capital
ratio of 7% that all banks must hold by 2019 as part of the new global
regulatory standard on bank capital adequacy and liquidity known as
Basel III. Bank Nagara said in a statement to StarBiz that
the higher capital requirements for SIFIs were intended for 20 to 30 of
the largest and most internationally-active financial institutions
globally. “It is therefore unlikely that Malaysian banking
institutions will be immediately impacted by these measures given the
current size of their cross-border operations,” the central bank said. Malaysian Rating Corp Bhd vice-president-cum-financial institution ratings head Anandakumar Jegarasasingam
said in an email reply that considering the structure of the local
financial sector, the “failure of any bank linked to the domestic
payments and settlements system could create stress” within the domestic
financial system. He pointed out that in the local context,
asset size would likely be used as an important criterion to identify
financial institutions of systemic importance to the domestic financial
system. “Normally, the top four or five banks are expected to be
identified as systemically important banks. Therefore, apart from asset
size, the regulator is also likely to define systemic importance more
broadly in the domestic context to include linkages to the payment
systems and perhaps even market share of deposits,” Anandakumar said. He
said the additional capital requirements would to some extent offset
any funding advantage derived by the SIFIs from their status as
institutions that are too big to fail. Meanwhile, Bank Negara
said local banks were well-positioned to comply with higher capital
requirements, given their current strong capital positions and
profitability. “Banking institutions in Malaysia have always
maintained capital levels well above the prevailing minimum regulatory
requirements, with a majority also already operating at levels well
above the new Basel III minimums,” it said. It said local banks
were therefore unlikely to face significant challenges in maintaining
high capital levels moving forward since they have employed prudent
earnings retention practices.