## _cr1497

## Source details

**Canonical URL:** [_cr1497](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1497.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1497.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1497.pdf.json)

---

### Stress test design and coverage
- Multi-year macroeconomic stress tests over 2012–2016 with three scenarios: baseline, adverse S1 (V-shaped recession), and adverse S2 (L-shaped slow growth).
- Comparative static (single-year) sensitivity tests covering credit, market and liquidity risks.
- Separate Top-Down (TD) and Bottom-Up (BU) approaches:
  - TD STs run by FSAP team based on annual end-2011 and granular supervisory data.
  - BU STs implemented by participating banks using prescribed macroeconomic scenarios and shock parameters with BNM guidance; banks modeled credit and market risk shock parameters and balance sheet projections internally.
- Solo-entity basis tests to separate Islamic and conventional banks and avoid masking subsidiary-level vulnerabilities.
- TD liquidity STs simulated sudden withdrawal of funding, maturity mismatch and rollover risk; TD contagion testing used an internal interbank exposure model with iterative joint credit and funding shock simulations.
- Single-year BU sensitivity tests reported impacts on Tier 1 (CCR) capital ratio as comparative static changes without offsetting capital actions.

### Key solvency findings
- The on-shore Malaysian banking system has substantial capital buffers to absorb credit losses.
- Conventional banks benefit from significant income as a first line of defense; larger domestic banks benefit from domestic and potential overseas revenues.
- Baseline projections: buffers increase with projected growth in risk-weighted assets; without additional capital, solvency ratios are unlikely to increase and may decrease for some banks.
- TD ST shows larger buffer declines under adverse scenarios than BU ST due to higher tail-risk loss parameters and different income assumptions.
- Banking system solvency remains above the 8 percent CAR (RWCR) and 4 percent Tier 1 (CCR) minimum regulatory capital levels for both TD and BU STs.
- Islamic banks exhibit weaker buffers and greater solvency deterioration driven mostly by lower starting capital.
- Sensitivity tests rank credit risk shocks well above market risk shocks; housing loan credit risk parameters and higher risk weights for sovereign bonds produced the largest credit risk shocks.
- Recent trends: increases in household leverage and rising house prices raise the risk of housing-market problems migrating to bank balance sheets and the wider economy.
- Recommendation: banks should assume more conservative loss rates and credit risk parameters (e.g., LGDs, PDs) in BU STs for adverse tail-risk scenarios.

### Key liquidity findings
- TD liquidity tests find robustness to medium liquidity stress events at the short-end (less than 1-month maturity).
- Rolling over longer-term funding and addressing longer maturity mismatches remains very challenging.
- Severe liquidity distress would be more damaging to many Malaysian banks.
- TD liquidity ST assumed a medium stress scenario characterized as "half Lehman event" with higher deposit withdrawal rates; deposits in Malaysia are de facto at call in severe stress scenarios.
- Malaysian banks would find it difficult to roll over short and longer term capital market funding, especially U.S. dollar funding where many banks have a cumulative net short liquidity position.
- Linking solvency and liquidity risks better captures deterioration in solvency and reveals wider vulnerabilities.
- Migration to Basel III liquidity metrics is incomplete; QIS data indicate:
  - Banks likely better positioned for the shorter-term Liquidity Coverage Ratio (LCR).
  - The longer-term Net Stable Funding Ratio (NSFR) may be more challenging.
- Liquidity recommendations:
  - Lengthen funding maturity, tackle on-call nature of deposits, and add liquefiable assets.
  - Increase granularity of cash flow and behavioral data for liquidity stress testing.
  - Finalize and publish transition to Basel III liquidity metrics based on QIS and supervisory review.
  - Assess whether emergency liquidity and deposit guarantee measures may inhibit banks’ own liquidity resilience.

### Key contagion findings
- Contagion risk from single or simultaneous defaults of too-big-to-fail or too-interconnected banks is limited but non-negligible.
- Larger domestic banks have significant interbank lending and borrowing exposures spread across subsidiaries, foreign banks, Islamic and investment subsidiaries.
- Individual defaults by large domestic banks can induce up to a maximum of 3 induced failures (2 contained within own banking group).
- Simultaneous default of 2 large banks can lead to up to a maximum of 5 induced bank failures.
- Islamic and investment bank subsidiaries appear more vulnerable to parent-bank failures.
- Failure of U.K. and locally incorporated European banks has little or no interbank contagion impact on the Malaysian banking system.
- Recommendation: further integrate solvency and liquidity ST inputs within contagion models and continue model development and sensitivity testing.

### Comparative TD vs BU outcomes and interpretation
- Under adverse scenarios, TD ST results show greater and more rapid solvency deterioration at individual bank level than BU ST.
- TD ST used higher constant through-the-cycle loss rates for most loan items than BU ST; income projections more conservative in TD for certain items.
- Trading income projections were more conservative in the BU ST.
- Adverse scenarios are hypothetical but plausible tail-risk scenarios; BU STs should adopt more conservative loss rates beyond historical worst-case values.

### Single-factor and sensitivity test findings
- Single-year BU sensitivity tests: credit risk shocks produce the largest impacts on Tier 1 (CCR); market risk shocks have smaller effects comparatively.
- For some individual banks, impacts from key loan concentration (e.g., housing loans) can be far greater than system average.
- Key single-factor parameters (selected):
  - CRS4: PD=7 percent, LGD=20percent (housing loans).
  - CRS5: PD=10 percent, LGD=30 percent (housing loans).
  - CRS3: increase risk-weights on MGS and GII from 0 percent to 20 percent.
  - MRS1: Interest Rate Risk Shock: +300 bps.
  - MRS2: Interest Rate Risk Shock: -250 bps.
  - MRS6: FBM KLCI decline (-67.3 percent) to 500 pts.
- Selected sensitivity outcomes:
  - Banking system (36 banks) median CET1 Ratio (Basel III): CRS1 (11.0 (0.2)); CRS4 (10.7 (0.3)); CRS5 (10.2 (0.6)).
  - Investment banks median impact from CRS1/CRS2: CET1 Ratio (Basel III) 22.8 (1.4) and 23.6 (0.4) respectively.
  - Some individual banks experienced declines of 200–560 bps for single-year housing loan shocks; top-end impacts for investment banks on PDS/sukuk shocks up to 680–836 bps.

### Quantitative liquidity and solvency thresholds and scope
- Multi-year test horizon: 2012–2016.
- Regulatory minimum capital levels referenced: 8 percent CAR (RWCR) and 4 percent Tier 1 (CCR).
- TD liquidity medium stress scenario characterized as "half Lehman event."
- Maximum induced failures from contagion:
  - Single large-bank default: maximum 3 induced failures (2 within own group).
  - Simultaneous default of 2 large banks: maximum 5 induced failures.
- TD liquidity test outputs (selected):
  - RM-denominated system net surplus: RM 23.8 billion.
  - Domestic commercial banks cumulative net shortfall (RM): around RM 6 billion (U.S. $1.8 billion).
  - USD-denominated system cumulative net shortfall: U.S. $6.4 billion.
  - Five-day implied cash-flow test (medium stress): Day 5 — 6 bank failures; Survival Rate of Banks 83.3 percent; Survival of Assets 70.4 percent.
  - Thirty-day implied cash-flow test: 14 banks (38.9 percent of banks; 50.3 percent of assets) did not survive; 22 banks (61.1 percent of banks; 49.7 percent of assets) survived.
- Linking solvency to liquidity (Table 9 selected):
  - Total Capital (percent) / Tier 1 Capital (percent): Capitalization before Test: 15.2 / 13.3; Capitalization (Stress), without Funding Costs: 10.3 / 5.9; Capitalization (Stress), including Funding Costs: 10.1 / 5.7.

### Selected system and macro-financial context metrics
- Malaysia experienced a peak-to-trough decline in real GDP growth of 6.2 percent for Q1 2009.
- Post-GFC economic growth approximately 5 percent year-on-year (baseline projection: real GDP growth hovers around 5 percent; unemployment remains low at 3 percent).
- Key historical balance-sheet metrics (percent):
  - RWCR: 2007 13.2, 2008 12.6, 2009 15.4, 2010 14.8, 2011 15.1.
  - CCR: 2007 10.2, 2008 10.6, 2009 13.8, 2010 13.0, 2011 13.2.
  - ROA: 2007 1.5, 2008 1.5, 2009 1.2, 2010 1.5, 2011 1.6.
  - ROE: 2007 19.8, 2008 18.6, 2009 14.0, 2010 16.6, 2011 17.4.
  - Liquid Assets to Total Assets: 2007 14.3, 2008 14.6, 2009 14.2, 2010 15.6, 2011 16.
  - Liquid Assets to Short-term Liabilities: 2007 38.5, 2008 41.9, 2009 42.9, 2010 48.1, 2011 45.5.
  - Net Impaired Loans Ratio (Net NPL): 2007 3.2, 2008 2.2, 2009 1.8, 2010 2.3, 2011 1.8.
- System composition:
  - Islamic banks form around 20 percent of the banking system.
  - Labuan contributes 6 percent to the overall banking system; Labuan-based entities account for 3 percent of total assets of the parent bank.

### Prioritized stress testing recommendations (selected)
- High priority
  - Page 16: Adopt multi-year macroeconomic stress testing for TD and BU; banks should utilize higher than historical credit risk parameters for adverse tail-risk scenarios as part of all BU STs and internal stress testing.
- Medium priority
  - Page 19: Stress testing of financial conglomerates including nonbank and significant unregulated entities; address contagion risk within conglomerates.
  - Page 19: Labuan stress test improvements—improve data, LFSA capability, align stress test standards with onshore banks; LFSA to conduct stress testing for Labuan banks with BNM and investigate contagion to mainland parents and within Labuan.
  - Page 28: Encourage smaller Islamic banks with lower starting capital to hold larger buffers above regulatory minimums via improved provisioning, conservative credit risk modeling, prudent valuation, and greater earnings retention.
  - Page 39: Increase liquidity resilience by lengthening funding maturity, tackling on-call deposits, adding liquefiable assets; enhance liquidity stress testing data and finalize Basel III liquidity metric transition.
- Low priority
  - Page 46: Enhance BNM network-model sensitivity testing and more fully integrate solvency and liquidity ST inputs within contagion models.
  - Page 47: Increase transparency, publication and communication of stress test results; present more TD and BU data subject to confidentiality; enhance feedback to banks and training on developing tail-risk scenarios and improving modeling for credit, market, liquidity and contagion risk.

*Prepared by Mohamed Norat (IMF) in the context of the 2013 Malaysia FSAP; stress tests covered onshore Malaysian banks and in a limited way Labuan IBFC.*

### Executive Summary ......................................................................................................

### _cr1497 - Executive Summary ......................................................................................................

### Stress test design and coverage
- Multi-year (2012–2016) macroeconomic stress tests over three scenarios: baseline, adverse S1 (V-shaped recession), and adverse S2 (L-shaped slow growth).
- Comparative static (single-year) sensitivity tests covering credit, market and liquidity risks.
- Separate top-down (TD) and bottom-up (BU) approaches:
  - TD STs run by FSAP team based on annual end-2011 and granular supervisory data.
  - BU STs implemented by participating banks using prescribed macroeconomic scenarios and shock parameters with broad guidance by BNM; actual credit and market risk shock parameters and balance sheet projections modeled internally by banks.
- Tests undertaken on a solo-entity basis to ensure Islamic banks and conventional banks could be stress tested separately and to avoid masking vulnerabilities at subsidiary or branch level.
- TD liquidity STs simulated sudden withdrawal of funding, maturity mismatch and rollover risk. TD contagion risk testing used an internal interbank exposure model with iterative simulations of joint credit and funding shocks.
- Single-year BU sensitivity tests determined impacts on Tier 1 (CCR) capital ratio as comparative static changes without offsetting capital actions.

### Key solvency findings
- The on-shore banking system in Malaysia has substantial capital buffers to absorb credit losses on its credit risk exposures.
- Conventional banks benefit from buffers provided by significant income as a first line of defense; larger domestic banks benefit from domestic and potential overseas revenues.
- In baseline projections, buffers increase in line with projected growth in risk-weighted assets; however, without additional capital, solvency ratios are unlikely to increase and may decrease for some banks.
- TD ST shows larger buffer declines under adverse scenarios than BU ST due to:
  - Higher assumed tail-risk loss parameters across the cycle in the TD ST.
  - Differences in income and earnings assumptions between TD and BU.
- Banking system solvency remains above the 8 percent CAR (RWCR) and 4 percent Tier 1 (CCR) minimum regulatory capital levels for both TD and BU STs.
- Islamic banks have somewhat weaker buffers and greater solvency deterioration relative to other domestic and foreign commercial banks, driven mostly by lower starting capital.
- Sensitivity tests ranked credit risk shocks well above market risk shocks; housing loan credit risk parameters and higher risk weights for sovereign bonds produced the largest credit risk shocks.
- Recent trends of increases in household leverage and rising house prices raise the risk that housing market problems could migrate to banks’ balance sheets and the wider economy.
- Recommendation: banks should assume more conservative loss rates and credit risk parameters (e.g., LGDs, PDs) in BU STs for adverse tail-risk scenarios.

### Key liquidity findings
- TD liquidity tests found robustness to medium liquidity stress events at the short-end (less than 1-month maturity).
- Rolling over longer-term funding and addressing longer maturity mismatches remains very challenging.
- Severe liquidity distress would be more damaging to many Malaysian banks.
- TD liquidity ST assumed a medium stress scenario (half Lehman event) with higher withdrawal rates of deposits; deposits in Malaysia are de facto at call in severe stress scenarios.
- Malaysian banks would find it difficult to roll over short and longer term capital market funding, especially dollar funding where many banks have a cumulative net short liquidity position.
- Linking solvency and liquidity risks provides better capture of deterioration in solvency and reveals wider vulnerabilities.
- Migration to Basel III liquidity metrics is incomplete; preliminary QIS data provides uncertainty on bank positions:
  - Banks likely better positioned for the shorter-term Liquidity Coverage Ratio (LCR).
  - The longer-term Net Stable Funding Ratio (NSFR) may be more challenging.
- Recommendation highlights:
  - Increase resilience by lengthening funding maturity, tackle on-call nature of deposits, and add liquefiable assets.
  - Increase granularity of cash flow and behavioral data for liquidity stress testing.
  - Finalize and publish transition to Basel III liquidity metrics based on QIS and supervisory review.
  - Assess whether emergency liquidity and deposit guarantee measures may inhibit banks’ own liquidity resilience.

### Key contagion findings
- Contagion risk from single or simultaneous defaults of too-big-to-fail or too-interconnected banks is limited but non-negligible.
- Larger domestic banks have significant interbank lending and borrowing exposures distributed across subsidiaries, foreign banks, Islamic and investment subsidiaries.
- Individual defaults by large domestic banks can induce up to a maximum of 3 induced failures (2 contained within own banking group).
- Simultaneous default of 2 large banks can lead to up to a maximum of 5 induced bank failures.
- Islamic and investment bank subsidiaries appear more vulnerable to parent-bank failures.
- Failure of U.K. and locally incorporated European banks has little or no interbank contagion impact on the Malaysian banking system.
- Continued model development and sensitivity testing against changes in assumptions, exposures, contagion triggers and channels is important.
- Recommendation: further integrate solvency and liquidity ST inputs within contagion models.

### Comparative TD vs BU outcomes and interpretation
- Under adverse scenarios, TD ST results show far greater and more rapid solvency deterioration at individual bank level than BU ST.
- The TD ST utilized higher constant through-the-cycle loss rates for most loan items than BU ST; income projections were more conservative in the TD ST for certain items.
- Trading income projections were more conservative in the BU ST than in the TD ST.
- The adverse scenarios are hypothetical but plausible tail-risk scenarios; BU STs should adopt more conservative loss rates beyond historical worst-case values.

### Single-factor and sensitivity test findings
- Single-year BU sensitivity tests show credit risk shocks produce the largest impacts on Tier 1 (CCR); market risk shocks have smaller effects comparatively.
- For some individual banks, impacts from key loan concentration (e.g., housing loans) can be far greater than system average.

### Summary quantitative thresholds and scope
- Multi-year test horizon: 2012–2016.
- Baseline and two adverse scenarios: adverse S1 (V-shaped recession), adverse S2 (L-shaped slow growth).
- Regulatory minimum capital levels referenced: 8 percent CAR (RWCR) and 4 percent Tier 1 (CCR).
- TD liquidity medium stress scenario characterized as "half Lehman event."
- Maximum induced failures from contagion:
  - Single large-bank default: maximum 3 induced failures (2 within own group).
  - Simultaneous default of 2 large banks: maximum 5 induced failures.

### Stress testing recommendations (prioritized)
- High priority
  - Page 16: Adopt multi-year macroeconomic stress testing for TD and BU. Aim to capture prolonged stress periods; banks should utilize higher than historical credit risk parameters for adverse tail-risk scenarios as part of all BU STs and internal stress testing.
- Medium priority
  - Page 19: Stress testing of financial conglomerates including nonbank and significant unregulated entities; address contagion risk within conglomerates.
  - Page 19: Labuan stress test improvements—improve data, LFSA capability, align stress test standards with onshore banks; LFSA to conduct stress testing for Labuan banks in conjunction with BNM and investigate contagion to mainland parents and within Labuan.
  - Page 28: Encourage smaller Islamic banks with lower starting capital to hold larger buffers above regulatory minimums via improved provisioning, conservative credit risk modeling, prudent valuation, and greater earnings retention.
  - Page 39: Increase liquidity resilience by lengthening funding maturity, tackling on-call deposits, adding liquefiable assets; enhance liquidity stress testing data and finalize Basel III liquidity metric transition.
- Low priority
  - Page 46: Enhance BNM network-model sensitivity testing and more fully integrate solvency and liquidity ST inputs within contagion models.
  - Page 47: Increase transparency, publication and communication of stress test results; present more TD and BU data subject to confidentiality; enhance feedback to banks and training on developing tail-risk scenarios and improving modeling for credit, market, liquidity and contagion risk.

*Prepared by Mohamed Norat (IMF) in the context of the 2013 Malaysia FSAP; stress tests covered onshore Malaysian banks and in a limited way Labuan IBFC.*

### 1.      Malaysian banks have so far managed to navigate the worst effects of Global

### _cr1497 - 1.      Malaysian banks have so far managed to navigate the worst effects of Global

### System-wide resilience and macro-financial context
- Malaysian banks navigated the worst effects of the Global Financial Crisis (GFC) helped in part by substantial capital and liquidity buffers and lack of exposure to the subprime crisis and affected counterparties.
- Malaysia suffered a substantial 6.2 percent peak-to-trough decline in real GDP growth for the first quarter of 2009.
- Authorities' response:
  - Early adoption of fiscal stimulus measures.
  - BNM eased monetary policy and implemented comprehensive measures to sustain SME financing and arrest heightened risk aversion by banks, helping push the economy out of recession into recovery.
- Economic performance post-GFC:
  - The economy has grown at around 5 percent year-on-year.

### Key balance-sheet metrics (Table 1)
- Risk Weighted Capital Ratio (RWCR): 2007 13.2, 2008 12.6, 2009 15.4, 2010 14.8, 2011 15.1 (percent).
- Core Capital Ratio (CCR): 2007 10.2, 2008 10.6, 2009 13.8, 2010 13.0, 2011 13.2 (percent).
- Return on Assets (ROA): 2007 1.5, 2008 1.5, 2009 1.2, 2010 1.5, 2011 1.6 (percent).
- Return on Equity (ROE): 2007 19.8, 2008 18.6, 2009 14.0, 2010 16.6, 2011 17.4 (percent).
- Liquid Assets to Total Assets: 2007 14.3, 2008 14.6, 2009 14.2, 2010 15.6, 2011 16 (percent).
- Liquid Assets to Short-term Liabilities: 2007 38.5, 2008 41.9, 2009 42.9, 2010 48.1, 2011 45.5 (percent).
- Net Impaired Loans Ratio (Net NPL): 2007 3.2, 2008 2.2, 2009 1.8, 2010 2.3, 2011 1.8 (percent).
- Source: BNM, FSR 2011, Table A.1.

### Asset quality, profitability, and funding
- Profitability (ROA, ROE) remained robust despite a dip in 2009 during the contraction.
- Asset and credit quality did not suffer significant deterioration; net NPLs around the 2 percent mark.
- Banks used stringent provisioning policies and write-offs of irrecoverable loans—avoiding ever-greening and general forbearance.
- Funding profile:
  - Banks are predominantly funded through deposits rather than wholesale (securities) funding.
  - Deposits are concentrated in large domestic commercial banks; the vast majority originate from households and domestic business enterprises.
  - A proportion (50 percent) of deposits is non-retail.

### Capital, liquidity standards and supervisory practices
- Capital and liquidity buffers were at historical high levels at the height of the GFC and improved thereafter.
- Regulatory and supervisory regime:
  - BNM employs a risk-focused, intensive on-site supervision program integrated with comprehensive off-site macro- and micro-surveillance.
  - Supervisors specify higher-than-minimum capital requirements and a liquidity framework; deposit on-call status implies resilience to severe liquidity stress could be a concern.
  - Effective coordination and information sharing with foreign supervisory authorities.
- Capital adequacy relative to Basel/BNM requirements:
  - RWCR in 2011: 15.1 percent (above BNM 8 percent minimum and Basel III minimum total capital requirement of 8 percent or 10.5 percent including the 2.5 percent capital conservation buffer).
  - Tier 1 (CCR) in 2011: 13.2 percent (above Basel III Tier 1 ratio requirement of 6.0 percent from 2015).
- Liquidity Coverage Ratio (LCR) context:
  - Current LCRs around the 60-80 percent for the majority of banks against the required 60 percent from 2015 (noting the BCBS phase-in referenced).
  - Observation: increased demand for stable retail deposits is unlikely to be met quickly given households’ compulsory contribution to pension funds such as the Employees Provident Fund (EPF) and alternative investment opportunities in entities such as Permodalan Nasional Berhad (PNB).

### Stress testing and loss-absorbency
- BNM’s stress-testing arrangements:
  - Developed over time, conservative and risk-based in principle.
  - Single-year sensitivity and scenario-based stress tests applied; stress testing guidelines require banks to build capital buffers through earnings retention well in advance of adverse market conditions.
  - Dividend and earnings retention practices enforced by BNM increase loss-absorbency.
  - Banks’ capital and/or dividend disbursements are vetted by BNM; identified capital deficiencies or weak loss absorbency are addressed by enforcement action to retain earnings and raise capital organically.
- Suggested enhancements:
  - Development of multi-year macroeconomic stress tests and tail-risk credit risk calibration to further enhance BNM stress-testing capabilities.
- Caveat:
  - An extreme shock together with a simultaneous downward turn in the credit cycle could result in extreme losses that could overwhelm Malaysian banks’ balance sheets despite prudent underwriting and conservative provisioning.

### Banking system structure and business models
- Dual banking system: conventional and Islamic banks both play important roles.
  - Islamic banks form around 20 percent of the banking system.
  - Most Islamic banks are subsidiaries of conventional parent groups; there are two domestic standalone Islamic banks and three foreign standalone Islamic banks (Middle Eastern).
  - Islamic banking in principle is based on risk-sharing, but risk- or loss-sharing is not deeply embedded in Malaysia.
- Bank classification and sample codes (select sample listed):
  - DB4, DB6, DB7, DB8 (Domestic Commercial Banks).
  - FB6, FB8, FB10, FB11 (Foreign Commercial Banks).
  - IB1, IB3 (Standalone Islamic Banks); IB8, IB11, IB13, IB16 (Bank-backed Islamic Banks).
  - InvB4, InvB5, InvB6, InvB11, InvB13 (Investment Banks; some bank-backed, some standalone).
- Balance-sheet composition (select sample):
  - Assets dominated by loans, sovereign and private debt securities (PDS); loans, securities held and amounts due from other financial institutions form the vast majority of assets.
  - Liabilities: mostly deposit-funded with little wholesale funding for most domestic and foreign commercial banks and many Islamic banks; two Islamic banks (IB8 and IB13) have sizeable wholesale funding as a proportion of liabilities.
- Deposits and government role:
  - Government deposits play an important, possibly developmental role for some Islamic banks, potentially reflecting a move by government agencies to adopt shariah-based transactions.

### Concentrations and sector exposures
- Corporate loans:
  - Domestic banks dominate the corporate loans sector.
  - Manufacturing, FIRE (Finance Insurance Real Estate and business activities) and WRRH (Wholesale, Retail Trade, Restaurants and Hotels) are the largest components.
  - One Islamic bank (IB1) has a sizeable construction exposure.
- Household loans:
  - Most Islamic banks have higher balance-sheet exposures towards the household sector (about 61 percent).
  - Islamic banks’ credit concentration in real estate and construction raises vulnerability to systemic real estate cycles.
- Investment banks:
  - Tend to have larger exposure to finance, insurance and real estate; one investment bank (InvB5) has no exposure to the corporate loan sector.
- Agricultural exposure:
  - Islamic banks (IB8 and IB16) have relatively larger shares of exposure to agricultural loans.

*Source: BNM; Financial Sector Assessment excerpts as provided in the supplied content.*

### 11.      Household loans form one of the largest loan components of Malaysian banks with

### 11.      Household loans form one of the largest loan components of Malaysian banks with

### Household loan composition and bank types
- Household loans are a major loan component of Malaysian banks, with domestic and foreign banks active in:
  - mortgage (residential and nonresidential)
  - credit cards
  - auto loans
- Islamic banks:
  - large exposures to residential, auto loans and significantly personal loans
  - credit card loans are much less significant
- Investment banks:
  - one investment bank (InvB5) has significant exposure to residential and auto loans extended to staff
  - most investment banks have exposure to loans for the purchase of securities

### Capital structure across bank types
- Large balance sheet size of Malaysian commercial domestic banks correlates with:
  - significant capital holdings
  - most diversified capital structure with both debt and equity instruments
- Islamic banks:
  - hold predominantly common equity Tier 1 capital
  - possible reasons: tendency to hold more equity than debt; paucity of available Islamic debt instruments; potential contribution from parent entities for non-standalone banks
- Foreign commercial banks:
  - tend to hold more retained earnings and debt as capital than other types of banks
  - greater proportion of debt suggests higher vulnerability to losses due to debt capital’s low loss absorbency capacity
- Across all banks, especially foreign commercial banks:
  - retained earnings and profits are important contributors to overall capital structure and enable organic capital growth
- Recent domestic economic performance:
  - helped Malaysian banks be resilient to the GFC
  - provided a boost to capital levels
  - enabled progress to Basel III capital requirements ahead of time

### BNM stress testing regime — background and practice
- BNM stress testing procedures:
  - shocks applied at the macro (TD) and micro (BU) level
  - TD shocks applied system-wide covering revenue, credit, market, liquidity and contagion risks
  - BU shocks applied at bank level with supervisors recalibrating TD shocks to reflect bank-specific risk profiles (default history, loss rates, asset quality and risk-absorbing capacity of capital) and portfolios
  - supervisors consider bank-specific risk management and governance controls; recalibration mainly for risk profiles; limited recalibration for internal controls
- Main drivers of revenue and risk shocks:
  - various macroeconomic and financial shocks impact profitability, capital and liquidity after provisioning and valuation changes
  - credit risk exposure losses expected to have the most significant impact on bank profitability and capital
- BNM uses a risk-sensitive approach to single-year sensitivity and scenario stress testing:
  - macroeconomic adverse scenarios considered (e.g., intensification of the European debt crisis conflagrating the GFC, weaker domestic macroeconomic environment)
  - scenarios include increased financial volatility, increased risk aversion, credit and liquidity crunches, deleveraging
  - adverse scenarios used to signal banks to boost loss-absorbing capital through earnings retention and to rein in capital and dividend disbursements

### Recent BNM scenario assumptions and shock parameters (Table 3 summary)
- Malaysia GDP Shock: More severe than 2009 economic contraction
- Revenue Shock: More than 40 percent decline in different revenue segments
- Credit Risk Shock (PD = Probability of Default; LGD = Loss Given Default):
  - Doubling of current PD
  - Higher downturn LGD than historical experience
  - More severe rating migration and default rates for private debt securities/sukuk than historical worst experience in 1998 and 2001
  - LGD up to 100 percent
  - Acceleration in the utilization of committed and contingent facilities of up to 100 percent
- Market Risk Shock:
  - Extreme decline in FBM KLCI
  - Sharp depreciation in 8 major currencies against the ringgit
  - Interest rate rise shocks (up to 250bp) across different tenures, taking into account:
    - Steepening of the MGS yield curve
    - Widening of credit spreads between MGS and PDS
    - Basis risk

### Stress test outcomes and limitations
- Under BNM’s adverse macroeconomic scenario (published stress tests):
  - capital ratios in terms of RWCR and CCR of the banking system remained above 13 percent and 11 percent respectively
- Under more extreme assumptions (domestic contraction and global financial crisis):
  - RWCR and CCR would fall to 8 percent and 6 percent respectively
  - capital ratio levels for the Malaysian banking system would remain above current regulatory minimum levels even under worst-case macroeconomic scenario
- Limitations noted:
  - BNM stress testing is currently single-year (sensitivity) stress tests
  - unclear resilience of banks and banking system under prolonged multi-year adverse or extreme scenarios
  - multi-year shocks not currently captured; remainder of Technical Note aims to address this

### Recommendation (single-year to multi-year)
- Adopt multiple-year TD and BU macroeconomic stress testing to:
  - better identify weakness in capital loss absorbency under prolonged stress
  - account for scenarios where bank revenues do not recover immediately, loan loss provisioning weakens, and NPLs grow rapidly
  - use more conservative loss rates and higher credit risk parameters (PDs, LGDs) beyond historical highs in BU and internal stress tests
  - project paths for monetary and fiscal policies while recalibrating counter-cyclical macroprudential and microprudential policies
  - determine bank or banking system life-time losses and recapitalization needs, and appropriate banking system consolidation in recovery and resolution planning

### Consolidated group and solo entity stress testing
- BNM practices:
  - TD and BU stress testing at solo entity level to ensure dedicated capital is sufficient for subsidiaries and branches
  - BU stress testing at solo entity level with supervisors calibrating bank-specific credit risk parameters (PDs, LGDs, CCFs) aligned to solo entity risk profile
  - calibration considers portfolio quality, bad debt recovery profile, internal stress testing regimes, historical trends and robustness of PDs and LGDs, utilization rates of off-balance sheet exposures through the economic cycle
  - calibration challenges optimistic bank parameter values; supervisors scale parameters to reflect forward-looking and tail-risk scenarios
- Labuan entities:
  - credit risk parameters for Labuan solo entities calibrated by BNM to reflect specific Labuan risks
  - LFSA currently does not play a role in calibration and does not conduct off-site or on-site work related to Labuan subsidiaries
  - Labuan-based entities are not separately stress tested distinct from parent bank; foreign Labuan-based entities whose parents are outside Malaysia and not part of locally-incorporated foreign banks are not stress tested separately
  - BNM rationale: Labuan contributes 6 percent to the overall banking system; Labuan-based entities account for 3 percent of total assets of the parent bank; Labuan data not granular enough for a TD exercise
  - BNM aims to enhance data capture and stress testing capabilities of Labuan entities in line with materiality to onshore banks

### Parent bank and consolidated group stress testing
- Solo entity stress testing at parent bank level:
  - BNM aggregates losses from parent bank domestic activities and overseas branches (excluding subsidiaries but including Labuan entity exposure)
  - losses combined impact parent bank capital; branches assumed not ring-fenced
- Consolidated Banking Group Supervision:
  - BNM undertakes consolidated supervision but has not yet stress tested complex financial conglomerates headed by a nonbank parent (FHC)
  - Six of the largest 8 domestic financial conglomerates where banking is important are headed by an FHC, not a parent bank
  - BNM lacks explicit supervisory reach to fully group stress test these FHCs, posing risk that intra-group risk transfers (e.g., from banks to less-regulated insurers) may build systemic risk without early warning
- Recommendation:
  - BNM should undertake stress testing for financial conglomerates, especially where nonbanks are the parent under FSA and IFSA legislation (effective 30 June 2013)
  - BNM needs to monitor and identify risk transfers between banks and nonbanks and developments from financial innovation
  - BNM and LFSA should improve Labuan-based data reporting to onshore bank standards and implement improvements for TD and BU stress testing of Labuan-based Malaysian and non-Malaysian solo entities without consolidating with the parent bank
  - LFSA should be able, at minimum, to carry out a TD stress test of such entities

### Stress tests coverage, approach and scenarios
- Coverage:
  - FSAP team conducted TD solvency, liquidity, sensitivity and contagion tests using an IMF balance-sheet based toolkit and supervisory data for 36 banks as of end 2011
  - BU stress tests carried out by banks under BNM guidance using prescribed macroeconomic assumptions and sensitivity parameters
  - BNM undertook contagion tests
- TD ST toolkit:
  - links balance sheet based tests with portfolio model elements; geared toward Basel II/III
  - allows stress of RWAs for both IRB and Standardized Approach banks via a quasi-Internal Rating Based (QIRB) approach
  - addresses increased tail thickness of loss distributions under adverse scenarios
- Macroeconomic scenarios (TD and BU):
  - tests carried out over three macroeconomic scenarios: baseline and two adverse scenarios
  - FSAP projections for 2012-2016 provided for real GDP, unemployment, inflation, stock prices, volatility, house price index, conventional and Islamic interest rates (short-term and long-term), commodity prices (rubber, palm oil, oil), bilateral exchange rates and real GDP growth rates for neighboring countries
- Baseline scenario:
  - real GDP growth hovers around 5 percent
  - unemployment remains low at 3 percent
  - house and asset prices continue to rise

*Source: _cr1497 - 11.      Household loans form one of the largest loan components of Malaysian banks with*

### 26.      The Adverse scenario 1 (S1)

### 26.      The Adverse scenario 1 (S1)

### Scenario descriptions
- Adverse scenario 1 (S1) involves a Malaysian recession followed by a slow recovery back to the current 5 percent growth benchmark—‘V-shaped’ real GDP growth path.
- Under S1 the initial peak-to-trough decline in real GDP growth in 2013 adversely impacts banks’ balance sheets through credit losses, lower income and revenue generation, but banks are expected to recover slowly and bolster solvency through capital buildup on the upswing.
- At the end of 2016 real GDP growth recovers at 5.2 percent.
- Adverse scenario 2 (S2) involves a mild recession followed by no robust recovery—an ‘L-shaped’ real GDP growth path with prolonged low growth. In S2:
  - Credit losses continue to mount and income and revenue generation fall away over the forecast horizon.
  - Unemployment continues to rise through the forecast horizon and house and asset prices continue to fall.
  - Banks’ ability to bolster solvency in the upswing is heavily compromised.

### Macroeconomic and external drivers / transmission
- Adverse scenarios S1 and S2 arise on the back of a further conflagration of the global financial crisis (GFC).
- Negative trade impacts and capital outflows, increased global uncertainty and risk aversion reduce consumption and investment.
- Lower oil and commodity prices impact Malaysia’s fiscal and debt position given their importance to state revenue generation.
- Reduced fiscal space to tackle unemployment beyond one year leads to rising unemployment and a collapse in property and asset prices.
- Global economic and financial shocks together with domestic shocks transmit to financial stability through various transmission mechanisms.

### Satellite models and projection approach
- Bank solvency evolution through the horizon 2012–2016 follows the three macroeconomic scenarios using satellite (regression) models.
- For Malaysia the satellite models relate to changes in impaired loans (credit losses), credit growth, and profit growth (impacting pre-impairment revenue and income).
- The satellite models were provided by BNM and were simple in form; satellite models can be less robust and model incoherence, lack of fit can occur.

### Top-Down (TD) solvency stress test findings
- Top-down results indicate major banks are well capitalized and resilient to distress; system-wide CAR and Tier 1 capital remain above minimum thresholds even under adverse scenarios.
- Credit loss is the largest driver of capital deterioration, followed by lower bank income in adverse scenarios and negative credit growth.
- Under adverse scenarios credit losses dominate; trading and bank income are sluggish in adverse S1 and decline more markedly in adverse S2.
- In the baseline at end-2016 one Islamic bank is below the 4 percent Tier 1 ratio; in adverse S1 and adverse S2 scenarios two Islamic banks and three Islamic banks, respectively, are below 4 percent Tier 1 ratios.
- Under adverse scenario S2, capitalization needs (using Basel III simulations) for the Malaysian banking system may increase by 3 times vis-à-vis adverse scenario S1, or 0.4 percent relative to banking system total assets (only in 2016, driven mainly by smaller banks).
- Recapitalization needs in 2016 are around RM 7 billion to bring banks above the minimum regulatory total capital adequacy ratio under prolonged low growth.
- Smaller Islamic banks are more vulnerable to credit loss in the adverse scenarios due to lower starting capital and less diversified business models, with greater credit concentration in residential mortgages, personal and auto loans.
- Loss rates and credit risk parameters (PDs, LGDs and loss rates) are an important determinant of credit losses—the higher they are, the larger credit losses and the more significant the deterioration in bank capital.
- BNM’s TD approach uses historical highs from actual bank loss experience for sensitivity and scenario tests; this may understate possible tail-risk outcomes where credit deterioration can exceed past highs.

### Bottom-Up (BU) solvency stress test findings
- BU stress test results are similar to TD results: the banking system and major banks are resilient to distress across scenarios; system-wide CAR (RWCR) and Tier 1 (CCR) ratios remain above hurdle rates of 8 percent and 4 percent.
- Differences between TD and BU arise from credit risk parameters and bank income assumptions in adverse scenarios; TD shows greater solvency deterioration variance across scenarios than BU.
- In the baseline solvency declines (RWCR and CCR) are mostly due to growth in risk-weighted assets as credit and market losses increase gradually over five years amid balance sheet expansion.
- In adverse S1 the lowest CCR and RWCR occurs in 2013 when the recession is at its height; marginal improvements occur over 2014–2016 despite a rapid GDP pick-up, indicating asymmetric solvency impact with muted capital recovery.
- In adverse S2 a continuous and steady decline in solvency occurs through 2012–2016 with no capital recovery in the smaller upswing due to insufficient retained earnings or deleveraging.
- Bank-type specific impacts:
  - Domestic commercial and investment banks follow system trends across scenarios.
  - Foreign commercial banks saw capitalisation ratios rise from 2012–2014 in the baseline and stabilise thereafter; they buffer losses via income growth and agile deleveraging and raised capital ratios after the 2013 downturn in both adverse scenarios.
  - Islamic banks manage RWA growth but suffer continuous declines in capital ratios over 2012–2016 under adverse scenarios, reflecting concentrated portfolios in sectors hit hard (auto, personal loans, housing, agriculture, manufacturing) and lower solvency starting positions.
- Some Islamic banks fall below 8 percent CCR thresholds in adverse scenarios in both BU and TD tests by end of the forecast horizon; in TD scenario S2 around fifteen banks were below the 8 percent CCR at end-forecast, of which eight were Islamic banks and the rest smaller domestic and foreign commercial banks.
- No supervisory early prudential action to boost Islamic banks’ capital ratios is assumed in the scenarios.

### Policy recommendation (from the source)
- It would be prudent for BNM to ensure Islamic subsidiaries in particular have higher capital ratios in line with conventional, commercial banks in Malaysia to buffer against adverse macroeconomic scenarios. Reputational risk to the overall banking group is real even though Islamic subsidiaries or standalone Islamic banks are not systemic with regard to the overall Malaysian banking system.

### Sensitivity analysis — single-factor stress tests
- Five single-factor credit shocks and seven single-factor market risks were applied to all 36 banks in the sample as comparative static changes with no offsetting capital impact allowed and no earnings buffer; all shocks directly impact Tier-1 capital.
- Capitalization impact across each credit and market risk shock decreased Basel II and Basel III capital ratios by less than 1 percentage point (ppt) at the banking system level.
- Capital impact was broadly greater for commercial banks than for Islamic and investment banks over most shocks; at the individual bank level decreases were much wider and substantial for specific banks.
- Credit risk shocks, especially increased loss rates translated into higher PDs and LGDs for housing loans, have the greatest impact on system and individual CAR (RWCR) and Tier 1 (CCR) ratios.
- Credit risk shocks CRS4 and CRS5 (PD and LGD shocks on current stock of performing housing loans irrespective of credit grade) recorded the most significant capital impact on commercial and Islamic banks and affected the most number of banks.
- Some foreign commercial, Islamic and domestic commercial banks saw capital decreases in their Basel II and Basel III ratios ranging from 200–560 bps for single-year housing loan shocks, reflecting large credit concentration to housing loans and heterogeneity in banks’ credit risk management and IRB approaches.

*Source: IMF Staff (extracted from the provided content unit).*

### 42.      Credit risks shocks arising from holdings of PDS and sukuk due to either

### _cr1497 - 42.      Credit risks shocks arising from holdings of PDS and sukuk due to either

### Credit-risk shocks from PDS/sukuk holdings (CRS1, CRS2) and housing loan shocks (CRS4, CRS5)
- Investment banks are most affected by credit risk shocks arising from defaults of PDS/sukuks and other corporate debt securities (CRS1) or migration to weaker ratings (CRS2) because of large holdings of private corporate debt securities including sukuk.
- Median impact for Investment banks: decline in capital ratios by around 40–140 bps (Table 4).
- Top-end impact for individual Investment banks:
  - CRS1: decline in capital ratios up to 680 bps (Figure 11).
  - CRS2: decline in capital ratios up to 836 bps (Figure 11).
- Domestic, foreign commercial and Islamic banks: median impact around 20 bps (Table 4 and Figure 11).
- Housing loan credit risk shocks applied as:
  - CRS4: PD=7 percent, LGD=20percent.
  - CRS5: PD=10 percent, LGD=30 percent.
- Default rates and rating migration rates were applied to all corporate debt securities held in AFS, HFT and HTM portfolios, including those rated by international rating agencies. Provisioning rate assumed at 100%.

### Single-factor sovereign risk shock on government securities (CRS3)
- Increasing risk-weights on sovereign securities (MGS and GII) from 0 to 20 percent:
  - Median effect across banks: 20–40 bps decline in capital ratios (Table 4).
  - For some Investment banks with significant holdings: capital decline of 700–1070 bps (Figure 11).
- Discussion:
  - Sovereign-bank link is important; sovereign risk could damage bank solvency and feed back to sovereign if recapitalizations are required.
  - The test examines sovereign risk via risk-weights; actual solvency deterioration from sovereign exposures is difficult to fully address through sovereign exposure adjustments.
  - Greater disclosure of inter-linkages and exposures between banks and the sovereign is suggested, as exemplified by EBA ST exercises.

### Key Bottom-Up Single-Factor Sensitivity Stress Tests (selected Table 4 figures)
- Banking system (36 banks) median indicators and median impacts (selected):
  - CRS1: CET1 Ratio (Basel III) 11.0 (0.2)
  - CRS2: CET1 Ratio (Basel III) 11.2 (0.0)
  - CRS4: CET1 Ratio (Basel III) 10.7 (0.3)
  - CRS5: CET1 Ratio (Basel III) 10.2 (0.6)
- Commercial banks (selected):
  - CRS4: CET1 Ratio (Basel III) 8.7 (0.5)
  - CRS5: CET1 Ratio (Basel III) 8.1 (1.0)
- Islamic banks (selected):
  - CRS4: CET1 Ratio (Basel III) 10.5 (0.3)
  - CRS5: CET1 Ratio (Basel III) 10.1 (0.7)
- Investment banks (selected):
  - CRS1: CET1 Ratio (Basel III) 22.8 (1.4)
  - CRS2: CET1 Ratio (Basel III) 23.6 (0.4)
  - CRS4/CRS5: CET1 Ratio (Basel III) 24.7 (0.0)

### Market-risk shocks: FX (MRS5), interest rate (MRS1–MRS4), equity (MRS6–MRS7)
- Foreign exchange shock (MRS5):
  - Least impact on banking system: no more than a 30 bps decline in capital ratios at system level.
  - Individual bank outcomes range from +70 bps (gainers with sizeable net long USD/SGD) to -36 bps (losers).
- Interest rate shocks (MRS1–MRS4):
  - Investment banks lose the most from an upward shift or steepening: CAR (RWCR) declines by 10–90 bps.
  - Banking system decline from these shocks: 11 bps (Figure 11).
  - Parallel downward shift yields MTM gains: banking system gains 7 bps versus pre-shock capital ratios.
- Equity risk shocks (MRS6/MRS7):
  - Declines in FBM KLCI have greatest MTM impact on Investment banks.
  - Typical decline of capital ratios for most banks (except four): around 10–90 bps.
  - Banking system impact: around 30 bps decline.
  - One investment bank recorded a decline of 360–500 bps.
- Definitions of market risk scenarios:
  - MRS1: Interest Rate Risk Shock: Parallel upward shift in yield curve [+300 bps]
  - MRS2: Interest Rate Risk Shock: Parallel downward shift in yield curve [-250 bps]
  - MRS3: Interest Rate Risk Shock: Steepening of yield curve
  - MRS4: Interest Rate Risk Shock: Widening of credit spreads
  - MRS5: Foreign Exchange Risk Shock
  - MRS6: Equity Risk Shock (Decline in FBM KLCI index (-67.3percent) to 500 pts)
  - MRS7: Equity Risk Shock [Decline in FBM KLCI index (-47.7percent) to 800 pts]

### Multi-factor liquidity stress tests (RM and USD) — net cumulative mismatch
- Test setup: simultaneous deposit withdrawals, crystallization of undrawn commitments and guarantees, no rollovers of interbank funding and FX swaps, and haircuts on liquefiable assets.
- RM-denominated results:
  - Banking system overall net surplus: RM 23.8 billion.
  - Domestic commercial banks cumulative net shortfall: around RM 6 billion (US$1.8 billion U.S. Dollars).
  - Around 64 percent of all banks recorded an RM denominated surplus; 36 percent of the banking system would be short of RM liquidity under the shock.
- USD-denominated results:
  - Banking system cumulative net shortfall: U.S. $6.4 billion.
  - Shortfalls predominantly from domestic and foreign commercial banks: Commercial Banks (USD) (6.0) bil; Domestic (3.3) bil; Foreign (2.7) bil.
  - Around 76 percent of the banking system recorded a U.S. dollar liquidity shortfall.
- Observations:
  - Pre-shock starting positions are strong predictors: banks starting with net shortfalls are more likely to be short post-shock.
  - In a severe international funding stress (e.g., worsening Eurozone/GFC), Malaysian banks’ access to U.S. dollar liquidity could be severely impacted.
  - Bank Negara Malaysia (BNM) could fill RM and USD liquidity shortfalls through domestic liquidity operations and FX swap operations.
  - Improved liquidity risk management by banks is recommended to avoid financial fragility.

### Labuan entities and short sample caveat
- Two Labuan-based solo entities assessed:
  - One recorded an RM denominated cumulative net shortfall; the other recorded a net surplus.
  - One entity recorded a very sizeable cumulative U.S. dollar surplus, larger than many on-shore solo entities except one.
- Small sample size: cannot determine whether this indicates general Labuan U.S. dollar fragility.

### TD liquidity stress testing framework and results
- Toolkit capabilities:
  - Simulate bank-run scenarios with fire sales and central bank liquidity provision (eligible collateral and haircuts).
  - Liquidity gap analysis matching assets and liabilities by maturity buckets with rollover risk assumptions.
  - Calculate simplified Basel III metrics (LCR and NSFR) where data permit (BNM and FSAP agreed not to use existing Basel III measurements in TD liquidity ST due to ongoing supervisory review).
  - Link liquidity and solvency via: (i) simulating funding-cost increases from solvency deterioration (implied rating change), (ii) simulating partial/full closure of funding markets depending on capitalization, and (iii) examining concentration and name-crisis impacts.
- Short-term daily (five-day) implied cash-flow test under medium stress:
  - Mild stress: nearly all banks pass and survive.
  - Medium stress (half Lehman): six banks would fail after day five; majority of failures are domestic, foreign commercial and Investment banks; some Islamic banks perform relatively better.
- Five-day implied cash-flow test (Table 5):
  - Day 0–3: 0 bank failures; Survival Rate of Banks 100.0 percent; Survival of Assets 100.0 percent.
  - Day 4: 2 bank failures; Survival Rate of Banks 94.4 percent; Survival of Assets 83.8 percent.
  - Day 5: 6 bank failures; Survival Rate of Banks 83.3 percent; Survival of Assets 70.4 percent.
- 30-day implied cash-flow test under medium stress (Table 6):
  - No: 14 banks, 38.9 percent of banks, 50.3 percent of assets (did not survive).
  - Yes: 22 banks, 61.1 percent of banks, 49.7 percent of assets (survived).
- Modeling notes:
  - Run-off rates for deposits and short-term funding aligned with assumptions equivalent to an event half as severe as a Lehman event.
  - Behavioral cash-flow data enhance tests; where unavailable, contractual cash-flows are used and behavioral flows are modeled based on stress assumptions.

*Source: BU Bank Data, BNM Calculations; BNM, IMF Staff Calculations (as presented in the source content).*

### 53.      Malaysian banks as expected would find survival over a longer period (30-day)

### Malaysian banks as expected would find survival over a longer period (30-day)

### 30-day survival under medium stress
- Fourteen Malaysian banks would fail to survive over a 30-day period (Table 6).
- The banks that fail are larger domestic and foreign commercial banks and represent a large part of bank assets from the ST sample of banks; Islamic banks would tend to survive.
- Main driver of failures: relatively significant inflow (loss) from the fire sale of assets.
- Open question noted: why Islamic banks tend to have relatively stable deposits (smaller proportionate outflows) and greater proportionate inflows from fire sale of assets compared to domestic commercial banks.

### Maturity mismatch and rollover tests (Test 2.2A / 2.2B / 2.2C)
- As maturities lengthen the maturity mismatch and shortfalls widen (Test 2.2A).
- With no possibility of moving free assets across buckets (Test 2.2B) or due to dynamic rollover constraints (Test 2.2C), more banks encounter liquidity shortfalls at shorter maturity buckets.
- Results indicate liquidity stress is greater in funding longer-term assets; only very short-term funding is able to be rolled over and even that with some difficulty for the majority of banks (Table 7).

Key numeric outcomes from Table 7 (as presented):
- Up to 1 week (Inv banks: 3 days): cumulative no. of banks with shortfall 15; Shortfall (Percent of total Assets) 36.7%; cumulative no. of banks with shortfall 23; Shortfall (Percent of total Assets) 65.9%; cumulative no. of banks with shortfall 23; Shortfall (Percent of total Assets) 65.9%.
- 1 week - 1 month (Inv banks: 4days - 1): cumulative no. of banks with shortfall 12; Shortfall (Percent of total Assets) 56.4%; cumulative no. of banks with shortfall 34; Shortfall (Percent of total Assets) 99.8%; cumulative no. of banks with shortfall 30; Shortfall (Percent of total Assets) 86.7%.
- 1-3 months: cumulative no. of banks with shortfall 28; Shortfall (Percent of total Assets) 66.2%; cumulative no. of banks with shortfall 36; Shortfall (Percent of total Assets) 100.0%; cumulative no. of banks with shortfall 32; Shortfall (Percent of total Assets) 93.4%.
- 3-6 months: cumulative no. of banks with shortfall 29; Shortfall (Percent of total Assets) 66.6%; cumulative no. of banks with shortfall 36; Shortfall (Percent of total Assets) 100.0%; cumulative no. of banks with shortfall 32; Shortfall (Percent of total Assets) 93.4%.
- 6-12 months: cumulative no. of banks with shortfall 29; Shortfall (Percent of total Assets) 66.6%; cumulative no. of banks with shortfall 36; Shortfall (Percent of total Assets) 100.0%; cumulative no. of banks with shortfall 32; Shortfall (Percent of total Assets) 93.4%.
- >1 year: cumulative no. of banks with shortfall 32; Shortfall (Percent of total Assets) 69.4%; cumulative no. of banks with shortfall 36; Shortfall (Percent of total Assets) 100.0%; cumulative no. of banks with shortfall 34; Shortfall (Percent of total Assets) 94.2%.
- Source: BNM, IMF Staff Calculations.

### Fully-fledged cash flow tests (Test 2.3)
- After net inflows and outflows and including counterbalancing liquid assets and haircuts, shortfalls arise in nearly all maturity buckets (Table 8).
- Actual cash flow data suggest liquidity shortages will arise for the majority of banks at nearly all maturity buckets; funding beyond a month will be difficult for most banks.

Key numeric outcomes from Table 8 (as presented):
- 1 week - 1 month (Inv banks: 4days - 1 m): Cumulative no. of banks with shortfall 10; Shortfall (Percent of total Assets) 24.6%; Cumulated CBC of Banking System (after Gap & HC) 28,788,108.
- 1-3 months: Cumulative no. of banks with shortfall 19; Shortfall (Percent of total Assets) 50.9%; Cumulated CBC of Banking System (after Gap & HC) -7,205,196.
- 3-6 months: Cumulative no. of banks with shortfall 24; Shortfall (Percent of total Assets) 62.7%; Cumulated CBC of Banking System (after Gap & HC) -33,948,894.
- 6-12 months: Cumulative no. of banks with shortfall 26; Shortfall (Percent of total Assets) 70.4%; Cumulated CBC of Banking System (after Gap & HC) -81,092,150.
- >1 year: Cumulative no. of banks with shortfall 36; Shortfall (Percent of total Assets) 100.0%; Cumulated CBC of Banking System (after Gap & HC) -528,397,017.
- Source: BNM, IMF Staff Calculations.

### Linking solvency inputs to liquidity stress (Table 9)
- Increases in credit risk will impact solvency and be further impacted by increased funding costs.
- System-level impact of additional solvency impact of funding costs is not dramatic, but for individual banks it can be significant (notably Investment banks).

Key numeric outcomes from Table 9 (as presented):
- Total Capital (percent) / Tier 1 Capital (percent)
  - Capitalization before Test: 15.2 / 13.3
  - Capitalization (Stress), without Funding Costs: 10.3 / 5.9
  - Capitalization (Stress), including Funding Costs: 10.1 / 5.7

### Recommendations on liquidity resilience
- BNM should focus on improvements in banks’ liquidity resilience by tackling maturity mismatches at different tenors and the at-call nature of all deposits in Malaysia.
- BNM should seek to improve banks’ liquidity data beyond existing BNM Liquidity Framework requirements by providing increased granularity of actual cash flow and behavioral cash-flow data.
- Implementation of Basel III requirements in Malaysia in accordance to the global timeline will address these issues moving forward.
- Note: Islamic banks globally face challenges in availability of shariah-compliant high quality liquidity assets to meet the Basel III Liquidity Coverage Ratio.
- Further analysis required on why net inflows due to fire sale of assets are relatively higher for Islamic banks.
- BNM is finalizing reconciliation of QIS data to finalize LCR and NSFR numbers to assess the scale of longer-term funding shortfall; recommendation that this reconciliation be completed at the earliest opportunity.
- Footnote: Where it is possible time-limits could be placed on deposit withdrawal.

### Contagion risk stress tests — model and assumptions
- Model: BNM’s contagion risk model based on interbank exposures (gross interbank lending and borrowing relationships denominated in ringgit and foreign currencies) captures domino effects from simulated bank failures and quantifies potential capital losses and cumulative credit and funding shocks.
- Key shock assumptions:
  - Trigger bank(s) default on outstanding interbank borrowing from all other banks (across all remaining maturities).
  - Other banks absorb 100 percent loss from default on all interbank loans to trigger bank(s).
  - Trigger bank(s) simulated to stop providing interbank funding (no-rollover of all outstanding interbank funding across all remaining maturities).
  - Other banks assumed to be unable to replace 50 percent of funding needs through interbank market; shortfall met via fire sale of assets with a haircut of 50 percent.
  - Iterative simulation until no additional bank has resultant RWCR of <8 percent.
  - RWA adjustment to interbank loans set at 20 percent.
- Model accommodates single and simultaneous failures and tracks contagion paths; data sample 56 banks for this analysis (55-bank sample referenced elsewhere).

### Contagion test part 1 — individual defaults (one-at-a-time)
- Potential contagion impact assessed to be limited: maximum induced failure of 3 banks or maximum of 2 contagion rounds (Table 10).
- Contagion impact mostly contained within trigger bank’s banking group (spillover to own subsidiaries).
- Largest domino effect from a single trigger bank expected to affect solvency of 3 other banks within only one contagion round.
- Banking system RWCR expected to remain above 13.7 percent after absorbing losses from cumulative loan defaults and fire sale of assets by all affected banks.
- Vulnerability metrics:
  - Maximum hazard rate of 3.6 percent.
  - Absolute hazard of 2.
  - A particular bank is expected to fail at most twice if all other banks are assumed to default one-at-a-time.
- Source: BNM.

### Contagion test part 2 — simultaneous defaults (scenario-based)
Scenarios and selection of trigger banks:
- Scenario 1: Four largest domestic and foreign banks (by asset size)—assess “too-big-to-fail” contagion impact.
- Scenario 2: Four most connected banks (by interbank borrowing counterparty)—assess “too-interconnected-to-fail”.
- Scenario 3: Four most connected Islamic and investment banks (by interbank borrowing counterparty)—assess contagion from Islamic and investment banks.
- Scenario 4: Seven locally-incorporated European banks (LIEBs) —assess interbank shocks from LIEBs amid a worsened European debt crisis scenario.

Key results:
- Scenario 1 (four largest domestic and foreign banks): Contagion manageable. Maximum number of induced failures of 5 banks within 2 contagion rounds (Table 12). Potential erosion of 16 percent of total banking system capital base. Overall banking system RWCR expected to remain at 12.6 percent.
- Scenario 2 (four most connected banks): Limited impact. Maximum number of induced failures of 3 banks within 1 contagion round (Table 13). Combination of a most connected domestic and Islamic bank had the most significant solvency impact.
- Scenario 3 (four most connected Islamic and investment banks): Limited impact. Maximum number of induced failures of 1 bank within 1 contagion round (Table 14). Suggests Islamic banks on their own do not have sufficient size or scale to be systemic for the rest of the banking system.
- Scenario 4 (failure of UK subsidiaries or all European bank subsidiaries): Failure of all UK subsidiaries in Malaysia would not result in defaults of any other bank; failure of all European bank subsidiaries in Malaysia would not be systemically important with no contagion impact to any other Malaysian bank (Table 15).
- Caveat: Tail-risk macroeconomic scenarios (worsened Eurozone or GFC) could still be problematic for the banking system through macro channels (trade, profits, NPLs).

### Recommendations on contagion modeling
- BNM should continue developing contagion model sensitivity work and explore novel changes in assumptions not previously undertaken (new triggers, new types of credit and liquidity shocks, changes in contagion path, other exposures).
- Development of a separate contagion model for Islamic banks recommended to map systemic failure within the Islamic banking sector.
- Contagion risk modeling encouraged as complement to off-site supervisory and surveillance assessments and for complex financial conglomerates to map intra-group exposures that could cause simultaneous defaults of bank and nonbank entities.
- Suggestion: model defaults of Labuan entities on onshore and other Labuan banks.
- Recommendation that BNM share their model with large FHCs and groups to enable mapping of internal networks and vulnerabilities.

### Key conclusions (summary)
- Malaysian banking system has proven resilient to uncertain global conditions to date, but caution is warranted.
- Adverse scenarios could lead to structural changes and significant contagion impacts through macroeconomic and financial channels, with domestic demand at risk given limited fiscal and monetary space.
- TD solvency tests: with higher credit-risk parameters under adverse scenarios, some banks—especially some Islamic banks—may need additional capital for a prolonged economic malaise.
- BU solvency tests indicated less solvency decline in adverse scenarios.
- Banks should apply tail-risk scenarios and be cautious using historical values for loss rates and credit risk parameters (PDs, LGDs).
- Reverse stress testing recommended to calibrate credit risk parameters for tail-risk scenarios (set parameters much higher and calibrate downwards to identify solvency thresholds).

*Source: BNM, IMF Staff Calculations, and IMF FSAP report content provided.*

### 63.       BNM is active and forward-looking with regard to determining banks’ risk

### _cr1497 - 63.       BNM is active and forward-looking with regard to determining banks’ risk

### Stress-testing capability assessment and recommendations
- BNM has self-assessed its stress-testing capabilities against BCBS supervisory stress testing principles as “intermediate but with advanced features”.
- FSAP observation: “We have not undertaken an assessment on the BCBS principles but we find that BNM’s own assessment is fair and balanced at this time. We do not see any reason with sufficient resources and improvements to their ST framework as articulated in this Technical Note that BNM could not move to ‘advanced status’.”46
- Recommendations:
  - Continue to interrogate banks’ internal models for those on the Advanced IRB approach to ensure resilience to tail-risk scenarios.
  - Ensure Labuan bank stress-testing capabilities and data are in line with standards required for onshore banks.
  - Start stress-testing financial conglomerates and nonbanks that are deemed systemically important under recent legislation.
  - Integrate solvency, liquidity, and contagion risk testing more fully so that inputs from one test feed into the others.

### Liquidity stress-testing findings and actions
- Recommendation: Banks need to build increased resilience independently of the authorities’ liquidity and deposit support.
- BNM could start to report LCR and NSFR from latest QIS data to assess Malaysian banks’ readiness to meet the Basel III liquidity metrics.
- Finding: Malaysian banks are hampered in rolling over longer term funding in the liquidity area with net shortfalls arising at all maturities beyond a month in a stressed scenario.
- Time horizons and reporting referenced:
  - BU horizon: 1-month.
  - TD horizon: 5 days, 30 days, up to 1 year.
- Institutions covered in liquidity tests:
  - 36 banks (commercial, Islamic and investment banks) including exposures of Labuan branches.
  - Coverage: 83 percent of banking system assets.

### Solvency stress-testing framework and scenarios
- Type of tests:
  - Bottom-Up (BU): Macro-scenario analysis; Sensitivity analysis (5 single-factor credit shocks; 7 single-factor market risk shocks).
  - Top-Down (TD): Macro-scenario analysis; Contagion risk analysis (instantaneous contagion impact on solvency).
- Institutions involved and coverage:
  - 36 banks (commercial, Islamic and investment banks) including exposures of Labuan branches.
  - Coverage: 83 percent of banking system assets.
- Data source and reference date:
  - Supervisory data as at end-2011.
  - Unconsolidated solo basis to separate commercial, Islamic, investment, Labuan and material overseas subsidiaries.
- Horizon:
  - Macro-scenario analysis: 5-year i.e. 2012-2016.
  - Sensitivity analysis: 1-year.
- Macro-scenarios:
  - Baseline: Latest WEO forecasts; taking into account conflagration of Europe sovereign debt crisis and GFC.
  - Adverse S1: V-shaped recession and slow recovery (peak to trough decline of 2.6SD with respect to average real GDP growth over the previous 12 years).
  - Adverse S2: L-Shaped recession and prolonged low growth (peak to trough decline of 1.3SD with respect to average real GDP growth over the previous 12 years, but low growth is persistent).
- Macro variables considered: GDP, inflation, interest rates, exchange rates, unemployment, property prices, and various asset prices (CPO, crude oil, rubber), including GDP, exchange rates and inflation rates for 8 major countries.
- Risks/factors assessed and behavioral adjustments:
  - Balance sheet projections (y-o-y) based on business strategy/portfolio adjustments: loan growth (by business sectors and retail segments), growth in trading and investment securities portfolios, overall RWA growth, growth in deposits and other funding sources.
  - Revenue and profit projections: net interest income, trading and investment income, fee income and other income; tax rates and dividend payout rates; no planned capital raising activities included.
  - Credit risk shocks: PD and LGD shocks (by loan segments); increases in impaired loans and shocks on collateral value.
  - Market risk shocks: MTM losses/gains based on interest rate, FX, equity exposures.
  - Shocks on off-balance sheet exposures: higher drawdowns on credit facilities.
- Calibration:
  - Revenue shocks modeled on actual downturn experience and calibrated y-o-y shocks.
  - Credit risk shocks modeled on PD and LGD shocks or stressed impaired loans flow rates; point-in-time credit risk parameters and loss rates used in TD.
- Regulatory standards used:
  - Hurdle rate examples: Basel II CAR (RWCR) 8 percent, Tier 1 (CCR) 4 percent.
  - Capital definition based on Basel II and III (both with local regulatory finishes).
  - Treatment of banks: StA and F-IRB, A-IRB.
- Results reported:
  - Median/aggregate impact on CAR/Tier1/RWA and CET1 ratio (bank by bank, by industry and system-wide).
  - Losses as percentage of capital base, CET1 and RWA.
  - Stressed capital distribution by banks.
  - TD results: aggregate impact on CAR/Tier1 and CET1 ratio; CAR/Tier1 shortfall (system wide).

### Liquidity stress-test design and parameters
- Type of liquidity tests:
  - Multi-factor liquidity risk shocks on ringgit and US dollar denominated assets and liabilities.
  - Implied and/or fully funded cash-flow tests; maturity mismatch/rollover risk tests; liquidity-solvency link tests.
- Methodology:
  - Simultaneous liquidity shocks due to deposit withdrawals; crystallization of commitments and contingencies; higher drawdown of undrawn credit facilities; no rollovers of interbank funding and FX swaps; haircuts on liquefiable assets.
  - TD scenario-based multi-factor shocks applied to MYR and USD exposures, calibrated by BNM and agreed by IMF; use of IMF Liquidity Testing approach (Schmeider et al (2012)).
- Shock parameters for RM denominated items (BNM Liquidity Framework):
  1. Retail deposit withdrawals:
     - Instrument types: Fixed deposit; Savings deposit; Current account deposit; Call money; General investment deposit; Specific investment deposit.
     - Floor: 5 percent.
     - Capped at 30 percent.
  2. Corporate deposit and NIDs withdrawals:
     - Floor: 30 percent.
     - Capped at 75 percent for: Fixed deposit, Savings deposit, Current account deposit, General investment deposit, Specific investment deposit.
     - Capped at 100 percent for: Call money, Short term deposit, NIDs.
  3. Drawdown on commitments and guarantees:
     - Largest drawdown rates observed in the past 5 years over 30-day horizon.
     - Floor: 5 percent.
     - Capped at: 20 percent for credit facilities; 100 percent for liquidity facilities.
  - Common shocks for all banks:
     1) No rollover of interbank and FX swaps maturing within 30 days.
     2) Haircuts on Class 1 liquefiable assets: 10 percent.
     3) Haircuts on Class 2 liquefiable assets: 30 percent.
- For USD denominated items: bank-specific liquidity shocks based on largest 30-day run-off rates observed in past 5 years; no rollover of interbank and FX swaps maturing within 30 days.
- Results metrics:
  - For ringgit:
    - Net available cumulative mismatch to accommodate liquidity shocks (up to 1 month): Surplus as a percentage of remaining ringgit deposits (fixed, savings and current); Shortfall as a percentage of discounted value of Class-1 and Class 2 liquefiable assets.
  - For US dollars:
    - Net available cumulative mismatch to accommodate liquidity shocks (up to 1 month): Surplus as a percentage of remaining US dollars deposits (fixed, savings and current).
    - Time taken by banks to withstand liquidity shocks (days, weeks, months).
    - How many banks fall short; as a percentage of liquid assets.
    - Liquid assets divided by short-term liabilities due in 30 days.

### Contagion and interbank spillover testing
- Top-down contagion risk analysis by BNM:
  - Institutions included:
    - 53 banks (commercial, Islamic, investment banks), excluding 3 newly-established banks.
    - Coverage: 99.8 percent of banking system assets.
  - Data and baseline date:
    - Supervisory data as at end-2011.
    - Unconsolidated solo basis to separate commercial, Islamic, investment banks.
  - Methodology:
    - Use BNM Interbank contagion risk model based on gross interbank lending and borrowing relationships among all banks.
    - Measures domino effects from simulated bank failure(s) in the interbank market, tracks contagion path and quantifies potential capital losses due to cumulative credit and funding shocks.
    - Identifies potential systemic super-spreaders and less systemic counterparties.
    - Model initialization: simulates particular bank failure(s) (trigger bank(s)) which default on its interbank borrowing and cuts back funding to all other interbank players (excluding BNM as an interbank counterparty).
    - Post-initialization: model simulates two forms of contagion shocks on all other banks, disregarding any policy responses by BNM.

*Source: _cr1497 - 63.       BNM is active and forward-looking with regard to determining banks’ risk*

### 1.   Credit   shocks:

### 1.   Credit   shocks:

### Credit shock definition
- Trigger bank(s) default on outstanding interbank borrowing from all other banks (across all remaining maturity); and
- Other banks are compelled to absorb 100 percent loss from default on all interbank loans to trigger bank(s).

### Funding shocks (domain assumptions)
- Trigger bank(s) stop providing interbank funding in the market (assume no-rollover of all outstanding interbank funding across all remaining maturity provided to all other banks) causing liquidity shocks on banks funded by trigger bank(s); and
- Other banks will need to replace the ‘lost’ funding (assume 50 percent of funding needs through interbank market is not replaceable) through fire sale of assets (with a haircut of 50 percent) to restore respective balance sheet.
- The high haircut applied represents an important source of systemic risk, where the forced sale of assets may trigger decline in market value of other banks’ portfolio.
- The simultaneous credit and funding contagion shocks is simulated in an iterative manner until no additional bank has a resultant RWCR of <8 percent.

### Shocks assumptions
- Solvency hurdle rate or failure threshold = RWCR < 8 percent
- Risk-weight for interbank loans = 20 percent
- Loss given default (LGD) of interbank loans = 100 percent
- Percent of funding not refinanced upon each failure = 50 percent
- Haircut on fire sale of assets = 50 percent

### Type of tests and scenario design
- Single default (simulating one-at-a-time hypothetical failures) to determine the (i) degree of contagion effects, and (ii) vulnerability to joint credit and funding shocks, of each bank via the interbank market
- Scenario-based simultaneous defaults (simulating two- or more-at-a-time failures) based on common themes of systemic linkages and impact:
  - Scenario 1: Four largest domestic and foreign banks (by asset size)—to assess interbank contagion impact from “too-big-to-fail” banks
  - Scenario 2: Four most connected banks (by interbank borrowing counterparty)—to assess interbank contagion from “too-interconnected-to-fail” banks
  - Scenario 3: Four most connected Islamic banks and investment banks (by interbank borrowing counterparty)—to assess contagion effects from Islamic and investment banks which borrows from a wide range of counterparties
  - Scenario 4: Seven locally incorporated European Banks (LIEBs)—to assess potential interbank shocks from LIEBs should deleveraging pressures intensify amid a worsened European debt crisis scenario

### Results
- Single default simulations
  - Degree of contagion effect by each bank
    - Measured by (i) contagion path, (ii) no. of contagion rounds, (iii) total banking system capital erosion and (iv) resultant system RWCR
  - Degree of vulnerability of each bank to shocks in interbank market
    - Measured by (i) hazard rate and (ii) absolute hazard
- Scenario-based simulations
  - Degree of contagion effect by a group of banks
    - Measured by (i) contagion path, (ii) no. of contagion rounds, (iii) total banking system capital erosion and (iv) resultant system RWCR

### Appendix 4 — Malaysian capital framework vs BCBS Basel II (key points)
- Malaysia utilizes two key capital ratios Risk Weighted Capital Ratio (RWCR) and core Capital Ratio (CCR) to determine solvency of its Banks; these are related to Basel II equivalents – Tier 1, and CET1.
- BNM has outlined that RWCR and CCR capital ratios are Basel II equivalent, but a degree more conservative in various ways.
- Definition of Capital (numerator of capital ratio)
  - Deductions are currently made at the total capital level (except for goodwill, which is deducted from Tier 1 capital) instead of 50 percent from Tier 1 capital and 50 percent from Tier 2 Capital.
  - For banking institutions that use the Standardized Approach for credit risk, inclusion of general provision in Tier 2 capital is currently not subjected to the limit prescribed by the BCBS as stipulated in paragraph 49(x)(a) of BCBS’s Basel II standard.
  - Tier 3 capital is not recognized in the regulatory capital base.
  - No recognition of the available-for-sale revaluation reserves in Tier 2 capital although BCBS’s Basel II standard (paragraph 49(vi)) allows for recognition of 45 percent of these reserves in Tier 2 capital.
- Credit Risk
  - Adoption of more conservative treatment: 20 percent credit conversion factor (CCF) applied on un-utilized credit card lines instead of 0 percent CCF.
  - Differentiated risk weights on performing residential mortgages range from 35 percent to 100 percent based on the loan-to-value (LTV) ratio, instead of a standard 35 percent risk weight.
  - Term loans for personal use with an original maturity of more than 5 years are 100 percent risk weighted, instead of 75 percent risk weight.
- Market Risk
  - Higher interest rate and equity risk capital charges for exposures to non-G10 countries.
- Large Exposure Risk Requirement (applies in Malaysia, not required under Basel)
  - Banking institutions to compute capital requirements for large exposure risks in relation to holdings of equities.
  - Investment banks to compute capital requirements for large exposure risks in relation to exposure to a single counterparty arising from unsettled trades and free deliveries in the normal course of trading in equities.
  - The large exposure risk requirement capital charge is equivalent to the corresponding counterparty risk requirement stipulated in paragraph 7 of Appendix IX of RWCAF.
- Addressing Islamic finance specificities (CAFIB)
  - Risk exposures of Islamic banking transactions are determined based on underlying Shariah contracts (asset-based, lease-based, equity based contracts).
  - Credit and market risks of the exposures funded by Mudharabah funds may be excluded from the RWCR computation, subject to conditions in the Guidelines on The Recognition and Measurement of Profit Sharing Investment Account as Risk Absorbent (issued on 1 January 2008).
- Other Basel II / Basel II.5 elements not yet adopted
  - Standardized approach (SA) and internal models method (IMM) for counterparty credit risk not introduced due to insignificance of derivative exposures.
  - IRB Approach for securitization not introduced due to minimal securitization exposures and evolving Basel III requirements.
  - Advanced Measurement Approach for operational risk not adopted while focus remains on developing operational risk management frameworks.
  - Basel II.5 enhancements for trading book and complex securitization exposures not implemented and not an immediate priority.

### Appendix 5 — Types and parameters for sensitivity analysis shocks (selected items)
- Credit Risk shocks
  - CRS 1. Defaults of PDS/sukuks and other corporate debt securities by rating: Different default rates applied to corporate debt securities issued in Malaysia/EMEs and advance economies
  - CRS 2. Credit rating migration shock for PDS/sukuks and other corporate debt securities by rating: Different migration rates applied to corporate debt securities issued in Malaysia/EMEs and advance economies
  - CRS 3. Shock on risk weight for MGS and GII: Increase in risk weights for MGS and GII from 0 percent to 20 percent
  - CRS 4. PD and LGD shocks on Housing Loans: PD=7 percent, LGD=20 percent
  - CRS 5. PD and LGD shocks on Housing Loans: PD=10 percent, LGD=30 percent
- Market Risk shocks
  - MRS 1. Interest Rate Risk Shock: Parallel upward shift in yield curve: +300 bps
  - MRS 2. Interest Rate Risk Shock: Parallel downward shift in yield curve: -250 bps
  - MRS 3. Interest Rate Risk Shock: Steepening of yield curve:
    - Short Term (<1 year): 46 bps
    - Medium Term (1 year to 5 years): 252 bps
    - Long Term (>5 years): 268 bps
  - MRS 4. Interest Rate Risk Shock: Widening of credit spreads:
    - Short Term (<1 year): 142 bps
    - Medium Term (1 year to 5 years): 228 bps
    - Long Term (>5 years): 256 bps
  - MRS 5. Foreign Exchange Risk Shock:
    - USD  +20 percent
    - SGD  +17 percent
    - HKD +15 percent
    - JPY   +20 percent
    - EUR  -20 percent
    - GBP  +15 percent
    - AUD +20 percent
    - IDR   +10 percent
  - MRS 6. Equity Risk Shock: FBM KLCI decline  (-67.3 percent) to 500 pts
  - MRS 7. Equity Risk Shock: FBM KLCI decline  (-47.7 percent) to 800 pts

*Source: _cr1497 - 1.   Credit   shocks:*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1497.pdf_