Capital adequacy regulations are a cornerstone of financial stability, ensuring that banks maintain sufficient capital to absorb potential losses. While global standards are set by the Basel Committee on Banking Supervision (BCBS), Bank Negara Malaysia (BNM) introduces localized modifications to reflect the unique characteristics of the Malaysian financial system.
As banks prepare for implementation, gaining clarity on the differences in the treatment of individual exposures under the Capital Adequacy Framework (or Basel III Reforms Framework) between BCBS standards and BNM requirements can offer valuable insights for effective compliance and strategic decision-making.
Key Distinctions Between the Frameworks
Some key distinctions between the two frameworks include:
• Exposures to Sovereign and Central Banks: Country risk scores are not applicable under BNM.
• Exposures to Public Sector Entities (PSEs): Under BCBS, the risk weight is based on the external rating of either the sovereign or the PSE, whereas BNM applies a flat risk weight of 20%.
• Exposures to Banking Institutions: The External Credit Risk Assessment (ECRA) approach is used under both BCBS and BNM, but the Standardised Credit Risk Assessment (SCRA) approach is only applicable under BCBS.
• Exposures to Covered Bonds: BCBS provides specific treatment for exposures to covered bonds, but they are not covered under BNM.
• Exposures to Corporate: Under BCBS, a corporate SME is defined as a financial institution with most recent financial year reported annual sales ≤ €50 million, whereas under BNM, the threshold is ≤ RM250 million.
• Exposures to Retail: Under BNM, term loans/financing for personal use with an original maturity greater than 5 years are assigned a 100% risk weight; BCBS does not provide a specific treatment for such exposures.
• Exposures to Real Estate: When determining the risk weight for residential real estate exposures, BCBS uses six risk weight buckets based on LTV/FTV ranges, depending on whether the loan is materially dependent on property cash flows. BNM uses only five buckets.
• Exposures to Real Estate: The whole loan approach is used under both BCBS and BNM, but the loan splitting approach is only applicable under BCBS.
• Exposures with Currency Mismatch: Under BNM, a risk weight multiplier for exposures with currency mismatch applies only to exposures originated after 1 July 2026. This is not applicable under BCBS.
• Defaulted Exposures: Under BNM, a default by a corporate obligor triggers a default on all of its other credit obligations. This treatment is not specified under BCBS.
• Exposures to Shariah contracts: Only BNM provides specific treatments for exposures to Shariah-compliant contracts.
• Exposures to Other Assets: Under BNM, investments in sukuk issued by the International Islamic Liquidity Management Corporation (IILM) are risk-weighted based on short-term rating requirements. This treatment is exclusive to BNM.
Download A Framework Comparison Guide
FRG has compiled a detailed, side-by-side comparison of related paragraphs from both frameworks. This document serves as a practical reference for banks seeking to understand the impact of regulatory differences and support the implementation of capital adequacy requirements.
For the complete comparison, download the full document from the FRG Resources page.
Dao Shyan Liew, FRM, a Business Analytics Consultant with FRG, is skilled in leveraging financial risk technologies and modeling. His expertise has been leveraged on implementation projects focused on satisfying regulatory requirements such as Basel, CECL, and CCAR.