A structural model of capital buffer usability | Jan Hannes Lang, Dominik Menno

KUALA LUMPUR, 15 AUGUST 2026 —

Malaysian Banks Face Capital Buffer Constraints in Crisis Scenarios, Study Finds

The research, published in August 2026, examines the usability of CBRs—capital reserves held above minimum regulatory requirements that banks can draw down during losses. Introduced under Basel III reforms following the 2008 global financial crisis, CBRs are designed to absorb shocks without triggering resolution. However, the study finds that even minimal costs—such as supervisory scrutiny or market stigma—can deter banks from utilizing these buffers, leading to significant deleveraging instead.

Historically, Basel III mandated higher capital requirements to reduce bank failure risks. Unlike minimum capital ratios, which trigger resolution if breached, CBRs allow banks to operate below the buffer threshold under certain conditions, albeit with restrictions on payouts and increased oversight. While empirical studies have debated whether banks actually avoid using CBRs due to perceived costs, this paper is the first to model the issue structurally, incorporating non-linear banking sector dynamics.

The study reveals that stigma costs as low as 0.5 to 3 basis points (bps) are enough to prevent banks from dipping into their CBRs, even when losses occur. For Malaysian banks, where credit risk averages around 50 bps and default costs are estimated at 1% of total assets, this translates to a net cost of just 1.9 bps for maintaining the buffer.

However, during crises, this reluctance forces banks to cut lending by up to 10% to preserve their capital ratios, undermining the CBR’s macroeconomic stabilisation role.

For Malaysia’s banking sector, which holds total assets exceeding RM2.5 trillion as of 2025, the implications are significant. While the study suggests that CBRs marginally reduce lending by only 1–13 bps in normal times—boosting capital ratios by 0.5–1.3 percentage points and lowering default probabilities by 1.25–2 percentage points—the impact diverges sharply during downturns. If banks deleverage aggressively to avoid breaching CBRs, loan supply could contract precisely when stimulus is needed most.

The findings raise questions about Malaysia’s adherence to Basel III standards, particularly the composition of its capital buffers. The study suggests that a higher share of releasable buffers—capital that can be drawn down without stigma—may better support loan supply during crises. Malaysia’s central bank, Bank Negara Malaysia, has yet to comment on potential adjustments to its macroprudential framework in light of these findings.

Looking ahead, the authors call for further analysis on optimising CBR design to balance resilience with lending stability. With global financial conditions remaining uncertain, the study underscores a critical trade-off: while capital buffers enhance safety, their usability constraints may inadvertently amplify economic downturns.

Related: Bank Negara Malaysia