Stress Testing and Capital Adequacy
Domain focus
Stress testing and capital adequacy tests scenario design, ICAAP, capital buffers, reverse stress testing and the use of stress results in capital planning.
Core rules
- BNM's stress testing expectations require a board-approved framework, severe-but-plausible scenarios, sensitivity analysis, reverse stress testing, and capital and liquidity stress tests.
- ICAAP is the bank's own assessment of capital adequacy over a multi-year horizon under base and stress scenarios; BNM reviews it under Pillar 2.
- Basel III capital minima in Malaysia: CET1 4.5%, Tier 1 6%, total capital 8%, plus a 2.5% capital conservation buffer, a countercyclical buffer of 0–2.5%, and D-SIB buffers for systemic banks.
- The leverage ratio minimum is 3%.
- Stress results must feed capital planning, dividend policy and the contingency capital plan.
Worked example
CET1 capital = RM5.25bn; RWA = RM50bn; CET1 ratio = 10.5%. Stress losses are RM1.8bn and RWA rise to RM55bn. Post-stress CET1 = RM3.45bn; ratio = 3.45 / 55 = 6.27%. This is above the 4.5% minimum but below 7.0% (minimum plus conservation buffer), so the bank faces distribution restrictions and must plan capital actions.
Traps
Do not use a single scenario. Do not ignore RWA increases. Do not stress only credit risk. Do not treat the stress test as a compliance exercise. Do not forget reverse stress testing.