Banking Sector - Final guidelines issued for BASEL III capital framework

-  Final guidelines almost unchanged from Concept Paper in May 2012. Bank Negara Malaysia (Bank Negara) has released the final guidelines on BASEL III’s capital components. The final guidelines essentially include all the key proposals from Bank Negara’s concept paper in May 2012 in relation to BASEL III’s capital requirements.   

-  The unrealised gains on financial instruments classified as available-for-sale (AFS) are still subject to the following prudential filters per the Concept Paper:- (a) AFS reserves for equity and debt instruments – recognised in Common Equity Tier 1 Capital (CET1), subject to a 55% haircut; (b) Fair value gains for loans – not recognised in any tier of capital.  

-  Significant investments in the capital instruments of unconsolidated financial instruments, insurance companies and takaful operations to be fully deducted in the calculation of CET1. This is more conservative than BASEL III, which allows for threshold deductions treatment whereby investments in excess of 10% of the banking group’s CET1 capital need to be deducted. 

-  Counter-cyclical buffer expected to be finalised before 2016. The counter-cyclical buffer, which BASEL III recommends to range between 0% and 2.5%, has not yet been finalised. The central bank said it expects to detail out capital buffer requirements before 2016, providing further guidance on how the counter-cyclical buffer requirements will be operationalised.

-  Bank Negara’s final guidelines require banking institution to comply with the capital adequacy framework at the following levels: (a) Entity level and (b) Consolidated level.  This means that the final guidelines would also be applicable to bank entity level. 

-  Maintain overweight.  The minimum requirement for CET1 is still 3.5% for the calendar year 2013, and 4.0% for 2014. The minimum level is still 7.0% by 2019.  The final guidelines are broadly in line with expectations, although this means there may be a slight disappointment in the market if there had been earlier hopes that the Concept Paper may be revised to be more in line with the BASEL III’s.    

Source: AmeSecurities