New rules for financial holding companies in Malaysia

Malaysia's new Basel III capital adequacy rules will extend to the financial holding companies (FHCs) of most major banking groups such as Maybank, CIMB Group, RHB Capital, Hong Leong Financial Group and AmBank Group, among others, starting from Jan 1, 2019.

The minimum capital adequacy ratio (CAR) for FHCs will be the same as those for banks, Fitch Ratings said. These will include an 8 per cent total capital ratio; a 2.5 per cent capital conservation buffer; and when required, a counter-cyclical capital buffer, or a capital buffer to curb excessive risk taking.

The rules, finalised by Bank Negara Malaysia earlier this month, aim to strengthen the capital framework for FHCs with bank operating subsidiaries.

The rules, finalised by Bank Negara Malaysia earlier this month, aim to strengthen the capital framework for FHCs with bank operating subsidiaries.

Under the rules, additional Tier 1 and Tier 2 instruments, such as perpetual capital securities and subordinated debt, issued by a bank subsidiary can count as capital belonging to the FHC, with certain conditions.

That means if either the issuer or its parent FHC is in trouble, the central bank can require the write-down of these securities to shore up capital for the group. Therefore, capital issued by a subsidiary can be used to help recapitalise the parent when it fails.

Ms Elaine Koh, Fitch Ratings Singapore's director of financial institutions, said: "The fact that these capital securities issued by the subsidiary can be written down, depending not just on the health of the subsidiary, but also that of the parent as well, means that the risk of these securities to investors is higher."

This is a potentially significant regulatory change, as many banking groups in Malaysia are headed by FHCs with bank operating subsidiaries. "Basel III capital issuance has thus far been largely at the bank entity level," Fitch added.

The Basel Committee on Banking Supervision issued rules in 2010 to boost banks' capital adequacy ratios and give them an extra buffer against losses, following the global financial crisis in 2008. The Basel III rules will be introduced in 2019.

Groups such as Maybank are less affected for now because their parent banks are already subject to Bank Negara's regulatory requirements, and the majority of issuance still originates from the parent.

However, this issue may become more relevant for Maybank as it prepares to locally incorporate its Singapore business, and expand its Indonesian subsidiaries, particularly as these subsidiaries issue capital securities to meet regulatory requirements of their own.

Maybank is required to incorporate locally becauseit has a big enough market share. Maybank's Singdollar deposit market share is roughly about 5 per cent, while DBS Bank's share is about 25 per cent.

A version of this article appeared in the print edition of The Straits Times on October 26, 2015, with the headline 'New rules for financial holding companies in Malaysia'. Print Edition | Subscribe