Capital Adequacy Challenges in Facing Economic Conflicts in Banking Institutions

Abstract

The banking sector is one of the sectors that is affected by the economic instability. The function played by the institution in assisting the economic volatility of a country is through capital adequacy and liquidity requirements. Capital adequacy has a direct effect towards income generation. However, as a result of the volatile global and Malaysian economic conditions, particularly because of the outbreak of Covid-19 pandemic, Bank Negara Malaysia (BNM) has given leeway to the banking institutions for the Liquidity Coverage Ratio (LCR) to be below 100 percent. Meanwhile, in recent years, the banking sector's LCR was more than the targeted 100 percent. The question arises whether the decline in LCR parameters to below 100 percent is suitable to be implemented by all banking institutions? It is certain that with the reduction of LCR, liquidity risk caused by lack of funding at a reasonable cost to finance the operations of the bank and provide liabilities at the required time will definitely be faced by the bank. The ability to comply with the expected and unexpected cash flow requirements will be affected, thereby creating liquidity risk and increase in credit risk.