KUCHING: Stress tests serve as valuable tools for banks to evaluate their financial health and resilience in the face of adverse economic conditions, acting as early warning indicators.
Universiti Malaysia Sarawak (UNIMAS) economist Jerome Kueh said it may enhance investors’ and customers’ confidence in the banking sector. He identified three factors contributing to this outcome.
First, Kueh explained that Bank Negara Malaysia (BNM)’s long-standing practice of closely monitoring and supervising financial institutions has fostered stability, soundness and robustness in the financial system.
“The integration of the financial supervisory and regulatory function under the central bank has improved the ability to track banks’ financial stability and adaptability,” he told New Sarawak Tribune yesterday.
Second, Kueh highlighted the importance of asset diversification in the banking industry, which involves relying on a variety of sectors rather than just one.
“This strategy allows for the reduction of overall risk associated with domestic and foreign banking activity. In the face of poor economic conditions, diversification enables banks to spread the risks,” he said.
Thirdly, Kueh emphasised the critical role of strict risk management methods employed by banks.
“For instance, thorough loan processing analysis enables the banks to mitigate the effects of asymmetric information, where borrowers may withhold unfavourable information about their financial status. By reducing the risk of default payments, the rigorous examination process indirectly benefits banks’ financial stability,” he added.
However, he acknowledged that stress tests, being scenario-based, may not fully capture potential risks faced by banks.
He cited climate change as an example, saying, “There is a risk associated with climate change where the expected scenario resulting from the impact may not be easily forecast.”
In the BNM’s Financial Stability Review report recently, over 80 per cent of Malaysian banks are expected to maintain capital ratios above their internal targets. However, 24 out of 54 banks, representing 25 per cent of total banking system assets, may report losses in at least one year during the three-year stress period.
The central bank also mentioned that two banks, accounting for less than one per cent of total banking system assets, might fail to meet the minimum regulatory capital requirements under adverse scenarios.
The report also revealed that over three years, overall impairments for financial institutions are expected to rise by 2025. Under two different scenarios, first adverse scenario (AS1) and second adverse scenario (AS2), impairments will increase to 6.9 per cent and 7.7 per cent of total banking system loans, respectively.
The main driver of these impairments is households, with about 65 per cent of borrowers at risk of defaulting being those earning below RM5,000 a month due to their limited financial buffers.
Impairment refers to a reduction in the value of an asset, such as a loan or investment, due to a decline in its quality or performance. For loans, impairment occurs when a borrower is unable or unlikely to meet their repayment obligations, resulting in a decrease in the loan’s value on the bank’s balance sheet. Financial institutions need to recognise and account for impairments to accurately reflect the true value of their assets and to assess their overall financial health.
