Basel III rules in Malaysia to affect major banks

Ratings agency Fitch announced in a statement that major banking groups will soon have to comply with the requirements that are outlined in Malaysia’s extension of Basel III to financial holding companies (FHCs).

These requirements were formerly only applicable to licensed bank entities but the measures will strengthen capital framework for FHCs and is expected to manage the buying and selling of assets between the parent and subsidiary.

The new regulations that were finalised by the Bank Negara Malaysia last week and Fitch predicts that the focus on core equity capital by FHCs and banks with be retained. These requirements will apply from 1 January 2019 and groups such as CIMB Group, RHB Capital, Hong Leong Financial Group and AmBank Group are among those that will have to comply.

Recently, FHCs have become more popular because of their capital efficient structure and have strictly enforced capital adequacy rules, but this is changing as there is more awareness of risk between FHCs and their entities.

Alongside this, Malaysian FHCs have improved their capital positions and reduced leverage and new instruments will ensure that capital that is issued by a subsidiary will be used to recapitalise the group if it fails.

Basel III has primarily been a regulatory issuance for banks so far and so that FHCs can be in compliance of this regulation, securities may incur a higher risk premium compared with instruments issued by banks.

“Cross-entity triggers are not common in Asia, so there are uncertainties as to how banking groups in Malaysia will address the new regulations and how the market will receive instruments which contain such triggers,” the statement said.

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