Malaysia: Recovery Planning by Bank Negara Malaysia

In brief

Policy document on Recovery Planning for licensed banks

The Central Bank of Malaysia, Bank Negara Malaysia (BNM) has issued a policy document that requires, amongst others, licensed banks, including Islamic banks and investment banks, to prepare a robust recovery plan ("Plans") for itself and its group in a significant stress event, such as economic downturn or significant liquidity outflow. The intent is to enable a systematic resolution of the operations of the licensed banks without posing a systemic risk to the broader financial ecosystem. 

The policy document is effective as of 28 July 2021.    


Contents

Key takeaways

The approach and requirements imposed by BNM in relation to the Plans are similar to the frameworks introduced in Singapore and Hong Kong by the Monetary Authority of Singapore and Hong Kong Monetary Authority, respectively.

Licensed banks are required to develop their initial Plans within 18 months from being directed by BNM. A licensed bank will have to critically examine its various business lines within the bank and its group, to identify the steps that it would take to manage or resolve the various levels of stress. This includes considering the potential sale of its operations in the event of a significant stress.

The Plans are subject to refinement with BNM. These Plans are also intended to be refined over time given that the business of the bank, and its risk profile, would change with time.

Brief summary of the policy document 

Licensed banks must develop the Plans to, amongst others, manage severe stress events such as a financial crisis that could undermine its viability. The Plans must be prepared having regard to the nature and structure of the business and consist of, amongst others, a strategic analysis, recovery indicators, scenario analysis and preparatory measures.

Licensed banks are required to, amongst others:

  • identify and plan for the execution of the Plans in accordance with requirements imposed by BNM;
  • review the Plans on an on-going basis;
  • submit the first Plan within 18 months from when it receives a written direction from BNM;
  • establish sound governance arrangements to oversee and manage the Plans;
  • set out a recovery indicator framework with defined criteria, thresholds, procedures and governance arrangements to facilitate the Plans; and
  • develop appropriate communications and disclosures to ensure all stakeholders are adequately informed on the Plans.

Conclusion

With the coming into force of the Recovery Planning policy document, Malaysia is bringing itself in line with similar requirements introduced by the financial regulators in other jurisdictions such as the United Kingdom and the United States. 

The requirements of the policy document build on and extend beyond the stress testing that financial institutions are already required to undertake and a financial institution will have to plan for specific initiatives to be taken when its balance sheet is stressed and capital and liquidity buffers are running thin. Solutions could include carving out certain lines of businesses and planning for the segregation.

Financial institutions will need to undertake a holistic review of the operations of the group immediately and obtain the input of the relevant stakeholders (including advice from foreign counsel) for operations located outside Malaysia.

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