This article first appeared in The Edge Financial Daily on May 4, 2017

KUALA LUMPUR: Effective yesterday, banks and investment banks are no longer required to maintain a reserve fund. Instead, they must maintain a set minimum amount of capital funds at all times.

“Minimum capital funds requirements are introduced as an important entry and ongoing requirements to ensure a banking institution maintains a minimum size of capital to operate and perform its intermediation function effectively,” said Bank Negara Malaysia (BNM) in its policy document on capital funds.

Under the new requirements, a licensed locally incorporated foreign bank is required to have a minimum of RM300 million in capital funds, which is the sum of paid-up ordinary shares, preference shares, irredeemable convertible unsecured loan stock, retained earnings and other disclosed reserves.

Meanwhile, a licensed foreign bank which is not locally incorporated must have at least RM2 billion in capital funds, either by the bank itself or in aggregation with the capital funds of its related corporation that is a licensed investment bank.

For licensed investment banks that are not related to any licensed bank, a minimum of RM500 million is required in capital funds.

“In addition to the minimum capital funds requirement, a banking institution must also comply with the minimum regulatory capital requirement as set out in the Capital Adequacy Framework (Capital Components) and Capital Adequacy Framework (Basel II — Risk-Weighted Assets),” said the central bank.

BNM said it expects banking institutions to exercise prudence before submitting an application to distribute the reserves as dividends, adding that it will consider the institutions ability to comply with the fully phased-in capital conservation buffer requirement and any other buffers that it may specify.

CIMB Investment Bank analyst Winson Ng said in a note that the research house does not expect this move to translate into higher dividend payments, as the banking institutions would still have to comply with the requirements under Basel III.

“Overall, we are neutral on the above announcement. Although banks will no longer need to maintain a reserve fund, we do not expect an increase in their dividend payment as they still have to comply with the stringent capital requirements under the Basel III accord.

Ng said the minimum regulatory requirement for common equity tier-1 capital ratio is 4.5% under Basel III, and that banks are also required to maintain a capital conservation buffer of up to 2.5%. Banks are also subject to countercyclical capital buffer above the minimum regulatory capital adequacy ratio.