“It is not true that some banks have written to get dispensation from complying with accounting standards (on MTM), and even if they do, their accounts will be qualified by auditors, and would be detectable in their annual reports,” she said when queried by the press after the release of BNM’s 2022 Annual Report.
MTM losses can occur when financial instruments held, such as bonds or government securities, are valued at the current market value. If the current market price of a security falls below the purchase price, the holder would have an unrealised or paper loss, and marking the security down to the new market price would result in the MTM loss.
Bond prices and bond yields move inversely, which means that when yields or interest rates are heading higher, banks face MTM losses on their bond portfolio, which may sometimes be valued at billions of ringgit or US dollars.
The ultra-loose monetary policy during the pandemic gave banks around the world, including in Malaysia, the opportunity to make gains from their bond investments as yields fell. Now with the rates cycle turning as central banks hike interest rates to tame surging inflation, many banks are facing large MTM losses on their bond holdings.
This was the catalyst that sparked the banking crisis in the US with the collapse of Silicon Valley Bank (SVB) and Signature Bank following the US Federal Reserve’s aggressive rate hikes, as well as the downfall of Switzerland’s Credit Suisse.
MTM losses arising from BNM’s overnight policy rate (OPR) hikes in 2022 may be the reason why there was talk that some Malaysian banks tried to seek exemption from complying with MTM-related accounting standards. An exemption would essentially allow banks to avoid reflecting MTM losses in their financial statements.
MTM impact limited
Nevertheless, BNM believes the issue of MTM losses does not pose a significant threat to the Malaysian banking system.
Nor Shamsiah said Malaysian banks have yet to MTM 6%-7% of their total assets, a small percentage compared to the likes of SVB which has over 40%.
She said even if the value of such assets held by the banks were revised as MTM based on accounting practices, the impact on the banks’ capital ratio would only be a fall of one percentage point.
“When it comes to MTM losses, bonds that are held in the banking books, which are not MTM, are very small. It only accounts to about 6%-7% of their total assets, unlike Silicon Valley Bank, which was about 40%.
“And even if you were to MTM the 7%, the capital ratio of the banks would just decline by one percentage point. The 18.4% (total capital ratio) that you see is net of MTM, it is already at fair value,” she explained.
The capital ratio is defined as the percentage of banks’ capital to its risk-weighted assets.
Nor Shamsiah also stressed she does not foresee any similar banking crisis brewing in Malaysia, as local banks “remain well capitalised”.
She pointed out BNM had been conducting stress tests on Malaysian banks. “The starting point is already very high, so you have a situation where the capital ratio is already at 18%,” said Nor Shamsiah.
“For the stress tests that we carry out, we are talking about an environment much worse than the pandemic, a GDP contraction much worse than what we saw in 2020, and bond yields at levels much higher than what you have seen in the past, and even exchange rates with the US dollar at levels that we have not seen in the past.
“So, when you take all that together, the banks’ capital ratio is still higher than the minimum requirement. So, our banks are still resilient, and we do not expect what we see in the other countries to happen here in Malaysia,” she added, referring to the banking crisis in the US and Europe.
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