Liquidity coverage ratio and NSFR: Bank Negara Malaysia's requirements

What is the liquidity coverage ratio?

The LCR has applied in Malaysia since 1 June 2015. BNM's current policy document on the LCR was issued on 25 August 2016. The ratio is calculated as the stock of HQLA divided by total net cash outflows over the next 30 calendar days.

The outflow assumptions reflect a combined bank-specific and market-wide shock, including:

• a run-off of part of retail deposits and investment accounts;
• partial loss of unsecured wholesale funding and of short-term secured funding;
• extra outflows from a credit rating downgrade of up to three notches, including collateral calls;
• unscheduled draws on committed credit and liquidity facilities; and
• buying back debt or honouring non-contractual obligations to protect reputation.

What is BNM's minimum LCR?

The minimum was phased in from 60% on 1 June 2015, rising by 10 percentage points each year to 100% from 1 January 2019. Banks must now hold enough HQLA to keep the LCR at or above 100% at all times.

• The minimum applies separately to ringgit outflows and to all currencies combined.
• It applies at entity level, consolidated level and, where relevant, at Skim Perbankan Islam (SPI) level.
• Banks report LCR positions for US dollars and Singapore dollars separately, and for each other significant currency.
• A bank that falls below the minimum must notify BNM immediately, explaining the causes, its plan to restore the ratio and how long it expects to be below. BNM may grant temporary relief and can require additional liquidity buffers.

What counts as high-quality liquid assets?

Net cash outflows are expected outflows minus expected inflows, with inflows capped at 75% of outflows. HQLA must be under the control of the function that manages the bank's liquidity, so that it can be turned into cash at any time during the 30-day stress period.

• Level 1 (0% haircut, no limit): cash, central bank reserves that can be drawn down in stress, placements with BNM, and qualifying sovereign and central bank securities.
• Level 2A (15% haircut): for example, securities of sovereigns, central banks and public sector entities with a 20% risk weight that trade in deep, active markets.
• Level 2B: certain highly rated corporate debt securities and AAA-rated Cagamas residential mortgage-backed securities, with haircuts that vary by asset, such as 20% or 50% for corporate debt.
• Caps: Level 2A and 2B together can make up no more than 40% of total HQLA, and Level 2B no more than 15%.

What is the net stable funding ratio?

BNM issued its NSFR policy document on 31 July 2019, effective 1 July 2020. The NSFR is available stable funding (ASF) divided by required stable funding (RSF), and must be at least 100% at all times. It applies at consolidated level, though BNM can require entity-level compliance, on an aggregated basis across ringgit and all other currencies.

ASF factors reflect how stable a source of funding is, by tenor and by counterparty:

• 100%: regulatory capital and liabilities with a residual maturity of one year or more.
• 95%: stable deposits from retail and small business customers maturing within a year.
• 90%: less stable retail and small business deposits maturing within a year.
• 60%: funding from sovereigns, public sector entities and non-financial corporates maturing within a year.
• 50% or 0%: shorter-term funding from financial institutions, depending on whether it is operational and on its maturity.

How is required stable funding measured?

RSF factors reflect how liquid an asset is: the less liquid the asset, the more stable funding it needs. Cash and central bank reserves carry a 0% factor, unencumbered Level 1 HQLA 5% and Level 2A HQLA 15%, while longer-term performing loans that do not qualify for a low risk weight carry 85%, and assets not covered elsewhere carry 100%. Undrawn commitments and other off-balance sheet exposures also attract RSF factors.

LCR vs NSFR: what is the difference?

• Horizon: the LCR covers a 30-day stress; the NSFR covers funding risk over up to one year.
• Focus: the LCR tests the buffer of liquid assets; the NSFR tests the stability of the overall funding structure.
• Level of application: the LCR applies at entity, consolidated and SPI levels; the NSFR applies at consolidated level unless BNM specifies otherwise.
• Currency: the LCR minimum applies to ringgit and to all currencies combined; the NSFR applies to all currencies combined.

How does BNM's liquidity risk policy fit in?

BNM's Liquidity Risk policy document, issued on 15 October 2024 and effective from 15 October 2025, complements the LCR and NSFR. It is based on the Basel Committee's principles for sound liquidity risk management and the IFSB's guiding principles for Islamic financial institutions, and covers board and senior management responsibilities, intraday liquidity, funding strategy, liquidity costs and benefits, stress testing, liquid assets, collateral management, contingency funding plans and public disclosure.

From 1 January 2025, a bank that publicly discloses its LCR must show it as a simple average of daily or monthly observations over the reporting period, using at least 12 observation points.

Why do treasury and ALM teams care?

Both ratios shape day-to-day balance sheet decisions. The LCR affects which securities treasury holds and how they are controlled, how deposits are classified, since run-off rates depend on factors such as deposit insurance by PIDM, and how foreign currency liquidity is planned. The NSFR gives more credit to capital, longer-term funding and retail deposits than to short-term funding from financial institutions, which gets little or none, so it influences funding tenor and mix. A breach of either minimum must be reported to BNM immediately.

Treasury and liquidity training from Ogos Learning

Ogos Learning runs treasury and financial markets training for bank teams, including on liquidity risk and BNM's liquidity requirements. Ogos Learning has trained teams at more than 10 of Malaysia's licensed commercial banks.