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IRRBB: A strategic opportunity for Malaysian banks
In the first episode of the Insights Malaysia podcast series, host Ling Kay Yeow speaks with Thor Boon Lee on IRRBB and its implementation in Malaysia, exploring why it is more than just risk and compliance but a strategic consideration for Malaysian banks.
Host Ling Kay Yeow speaks with Thor Boon Lee, Associate Partner, Risk Consulting, Ernst & Young Consulting Sdn. Bhd. on the Interest Rate Risk in the Banking Book (IRRBB) and its implementation in Malaysia.
They discuss why IRRBB is more than just a compliance exercise, its strategic implications for Malaysian banks, and practical considerations for effective implementation.
Key takeaways:
Understand what IRRBB means in simple terms and why it matters for Malaysian banks.
Explore the impact of interest rate fluctuations on depositors, retirees, and the wider banking sector.
Learn the challenges of implementing IRRBB in Malaysia, including data quality, diverse bank sizes, and Islamic finance products.
Recognize the need for robust modeling, parallel runs, and automation in IRRBB implementation.
Appreciate why IRRBB is a whole-of-bank strategy involving risk, finance, business, and governance functions.
For your convenience, full text transcript of this podcast is also available.
Welcome to our brand new podcast series. My name is Kay Yeow and with me today, I have Boon Lee, and we’ll be discussing on a very interesting topic around IRRBB and its implementation here in Malaysia. In our view, why is it something beyond risk and compliance, right? And something strategic the Malaysian banks should consider.
So Boon Lee, maybe in one or two words, how would you describe IRRBB for the layman?
Boon Lee
If you look at Bank Negara today and also around the world, there is a tendency for interest rates to be cut. We have seen Bank Negara cut interest rate back in July. And then with that, we have seen the deposit rates, typically for FD (fixed deposit) rates, have declined by almost close to 25 basis points. In this sense, it will affect the depositor’s return and certainly for retirees, it will affect their income going forward.
Kay Yeow
I guess the interest rate fluctuation has happened a lot more these last few years, right? Due to a lot of differences in the economic impact. With these fluctuations due in the economic impact, they will need to be managing all these changes a lot more now that Malaysia has implemented this.
Do we see any challenges that Malaysia has to take into account, given its local implementation, or something that global banks have been doing for some time?
Boon Lee
Yes, I think certainly in terms of the being on a level playing field, the local banks will have to up the standards in terms of managing interest rate risk. To ensure that this is up to the level of Basel III reforms. It is not just looking at trading books. It’s also looking at banking book and also looking at both the assets and liabilities. So in this sense, the limits set for EVE and also the net interest data will have to be put in place and this will bring Malaysian banks in par with the global banks.
Kay Yeow
And Malaysia is a unique challenge in this, right? Because we have banks of very diverse type and size.
Boon Lee
For the larger banks they may have a system in place. They have data collected in the past, in terms of how they look forward in terms of getting these measures done. Typically for the smaller banks, there may be challenges in terms of gathering data from the past that may be useful in terms of, to model interest rate risk going forward. So, not forgetting also in terms of for Islamic banks, there are unique areas that Islamic banks will have to consider given that their way of measuring profit rates would have taken a different path.
Kay Yeow
We’ve already engaged some of the other EY teams around the world. They have done the IRRBB implementation in their individual countries, where they have highlighted the challenges around getting clean data. But I guess here in Malaysia, when Malaysian banks want to implement this, there is this added complexity of how do you manage the Islamic products. And also will we be using this as a competitive advantage by going out into market?
Boon Lee
The level playing field will be the same for all banks. If you look at the regional implementation, this has been implemented in countries. And certainly once this is rolled out in Malaysia, by 2026 or 2027, we will see interest rates being looked at differently, as compared to what we have right now today.
Kay Yeow
So what can the Malaysian banks be prepared? What should they be doing now? What should they be thinking of now?
Boon Lee
To be honest, the modeling is not very straightforward, in terms of non-maturity deposits. For example, CASA or current account, savings account that will have a different impact to the interest rate environment. So with that, it will have to be looked at. I believe a short-term parallel run will need to be put in place, which is required by the regulator, and eventually validation will have to be put in place to make sure that the model built is robust and not just simple model that’s just built from some numbers.
Kay Yeow
Two things you highlighted, one is the need to do a parallel run. And the second one is the robustness of the model that actually points to a lot of need to do automation upfront. Right. I think the banks (should) also be prepared to think of how these processes, once they get implemented into production, are actually as automated as possible.
Boon Lee
Very important is that the governance part. They must be able to bring you up to ALCO, make sure that, you know, this is explained well there, as well as engaging the board on how this IRRBB will affect the total balance sheet, the financial statements, including how the returns to the shareholders will be like, going forward. These are all areas to be considered. The timeline, as what has shown by the requisite calendar issued by Bank Negara, that’s almost close to the end of 2025, two years to meet the requirements.
Kay Yeow
And will you say this is a whole of bank strategy and approach, where the businesses will be involved upfront so that they know the impact to the customer?
Boon Lee
It’s just not just an area where it’s all left to risk (team) to handle. Risk, finance, business, audit and everyone within the bank will have to be aware of this. We have to make sure that the IRRBB is implemented well and it’s not just a compliance requirement right at the beginning. It’s more of business impact, how businesses would be affected going forward.
Kay Yeow
Would there be a customer impact?
Boon Lee
If you factor in the cost of fund, together with the volatility in terms of the interest rates, you may make the product not viable but I think in terms of the franchise issue this product will still need to be offered, to ensure that, you know the bank continues to be market relevant. So talking about the, interest rate, how does it affect the man on the street? Clearly if the rates is being cut, going forward we expect the returns, to say for example the pensioners would rely on, the FD for their living, they will be affected as well. And you expect this to be something that it has to be managed carefully at both the bank side as well as the competitors.
Kay Yeow
Thanks (to) Boon Lee for the interesting conversation. Well, given that rates will continue to fluctuate banks in Malaysia should start early. And although it’s not part of regulation yet, because of Malaysia’s unique position and the conversation around the shariah products as well as the competitive market, the bank should take this as a key strategy, bringing in the business early, working together with risk, compliance, operations and technology to come up a holistic solution and something that can be repeatable and can be implemented in a quick manner yet meeting all the necessary requirements.
Boon Lee
If you are listening in and still have more questions on IRRBB, please reach out to us on our website or follow us on LinkedIn for the latest on the Malaysian pulse of the banking landscape.
podcastsPodcast
Insights Malaysia podcast series Season 1, Episode 1
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12m 38s
podcastsPodcast
Insights Malaysia podcast series Season 1, Episode 1
