KUALA LUMPUR (March 31): Malaysian banks remain well-capitalised, with sufficient buffers to absorb potential economic shocks, according to Bank Negara Malaysia’s (BNM) latest stress test.
BNM assessed financial institutions' resilience using two adverse scenarios more severe than the 2008 Global Financial Crisis and the 2020 pandemic: one with a sharp contraction followed by a quick recovery (AS1), and the other with a prolonged but milder downturn and slower recovery (AS2).
The central bank said the banking system is expected to remain above minimum regulatory requirements under these scenarios, which reflect heightened global risks — including geopolitical tensions, supply chain disruptions and rising commodity prices — that could fuel inflation and economic uncertainty.
In its Financial Stability Review for the Second Half of 2025 (2H2025), BNM said five banks — accounting for less than 6% of total system assets — may fall below minimum capital requirements under stress.
These banks tend to have weaker loan quality and higher exposure to bond holdings that are vulnerable to valuation losses.
However, the overall impact remains limited, with the total capital shortfall estimated at less than 1.5% of the banking system’s capital.
Meanwhile, another 11 banks may need additional capital to meet their internal targets under the more severe scenario (AS2), although they are still expected to remain above regulatory minimum levels.
BNM also assumed that weaker banks could face liquidity pressure from deposit withdrawals. Even so, most banks are expected to maintain sufficient high-quality liquid assets to meet funding needs, supported by a strong starting position, with the system-wide liquidity coverage ratio (LCR) at 154.8% as at December 2025.
While some banks’ LCR may temporarily fall below the minimum requirement during stress, BNM said this is due to the severity of the scenario and not a sign of underlying weakness.
In line with regulatory requirements, banks may draw down their liquidity buffer and allow their LCR to fall below 100% during periods of stress, with an expectation that buffers are rebuilt within a reasonable timeframe.
BNM said it continues to expect all banks to maintain prudent liquidity buffers under normal conditions.
“Taken together, the solvency and liquidity stress test exercises continue to affirm that banks remain resilient in the face of severe macroeconomic, financial and liquidity shocks. Banks are expected to retain sufficient capacity to support lending to the economy even during periods of downturn,” it added.
In the assessment, BNM said banks incur higher losses under AS2, whereas insurers experience higher losses under AS1.
Solid capital and liquidity positions
The banking system’s total capital ratio remained strong at 18.1% of risk-weighted assets, slightly lower than 18.2% as at June 2025. Excess capital buffers stood at RM139.3 billion, up from RM138.9 billion previously.
Capital conservation measures, including dividend reinvestment programmes, continued to support these buffers, enabling banks to sustain lending amid higher cost pressures faced by businesses and households.
Liquidity levels remained robust, with the liquidity coverage ratio at 154.8% and net stable funding ratio at 115.7%, both well above regulatory requirements.
Asset quality was stable, with a low gross impaired loans ratio of 1.4%. The share of Stage 2 loans — those with higher credit risk — declined to 6.1% of total loans from 6.6% in 1H2025.
The banking system’s loan loss coverage ratio remained high at 127.2%, compared with 130.4% previously, indicating adequate provisioning buffers.
Profitability remained healthy, with return on equity at 13.1% as of December 2025, slightly lower than 13.8% in June 2025.