CENTRAL

BANK
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STRUCTURE OF CENTRAL BANKS:
MALAYSIA
2
BANK NEGARA MALAYSIA
Established on 26 January 1959, under the Central
Bank of Malaya Ordinance, 1958
The CBA 1958 has been repealed by the Central
Bank of Malaysia Act 2009 which became effective
on 25 November 2009.
It is a statutory body wholly owned by the
Government of Malaysia with the paid-up capital
progressively increased, currently at RM100 million.
The Bank reports to the Minister of Finance,
Malaysia and keeps the Minister informed of matters
pertaining to monetary and financial sector policies.
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The Need for Central Bank
Maintaining generally low and stable inflation for decades
Thereby, preserving the purchasing power of the ringgit.
Prudent conduct of
monetary policy
Fostering a sound and progressive financial sector. Financial system stability
Developing financial system infrastructure with major emphasis
placed on building the nation's efficient and secured payment
systems
Developing the necessary institutions (including Securities
Commission, Bursa Malaysia and Credit Guarantee
Corporation)
Developmental role
Improving access to financial services for all economic sectors
and segments of society,
Promotes financial
inclusion
Advising on macroeconomic policies and managing the public debt.
Issuing currency
Managing the country's international reserves.
Banker and adviser to the
Government
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OBJECTIVES
Stable economic
growth
High level of
employment
Stability in the
Ringgits purchasing
power
Eradication of
poverty
Restructuring of
society
Rising living
standard
Reasonable position
in the countrys
balance of
payments
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FUNCTIONAL AREAS
Economics &
Monetary
Policy
Investment and
operations
Regulation
Payment
System
Supervision
Organizational
Development
Communication
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FUNCTIONAL AREAS
Economics & Monetary Policy
Primarily provides good technical and research support on growth-related issues to enhance
formulation of monetary and credit policies in promoting monetary stability and ensuring the
availability of adequate credit to finance economic growth.
Investment and operations
Manage domestic liquidity and exchange rates to ensure that monetary policy targets are
achieved as well as managing external reserves to safeguard its value and optimise its returns. It
also has the responsibility of providing advice and assistance to the Government in the area of
debt and fund management and contributing to domestic financial market development.
Regulation
Promote financial sector stability through the progressive development of sustainable, robust and
sound financial institutions and financial infrastructure, thus enabling a competitive local financial
industry to be resilient against the changing future environment as well as leads initiatives to
enhance access to financing. It also formulates and implements policies and strategies towards
building and positioning Malaysia as a premier integrated Islamic Financial Centre and enhance
the financial capability of consumers.
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FUNCTIONAL AREAS
Payment systems
Develop policies and strategies to promote reliable, secure and efficient clearing, settlement and
payment systems in the country.
Supervision
Develop, enhance and implement an effective surveillance framework to ensure safety and
soundness of financial institutions and to enforce sound practices in them.
Organisational development
Spearhead the Bank's strategic management, organisational-performance management and
programme management functions to drive its performance-improvement processes and
strengthening the capacity building of the Bank. It also leads and drives human resources
initiatives and other strategic activities to ensure that the overall Human Capital Management
framework is implemented effectively.
Communications
The communications function has assumed increasing importance in response to the heightened
demands of the various stakeholders, seeking greater transparency and disclosure.
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FUNCTIONS OF BNM
Banker for
Currency Issues
Keeper of
International
Reserves
Government
Banker and
Financial Advisor
Monetary Policy Banker to Banks
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FUNCTIONS OF THE BNM
Bank for Currency Issue
Authority under Part III of Central Bank of Malaysia Ordinance
(CBO)1958
Under the Malaysian Currency (Ringgit) Act 1978, the Malaysian
currency is renamed as Ringgit and Sen respectively
The par value of Malaysian Ringgit was defined as equivalent to
0.290299 grams of fine gold
Under Part IV of the CBO, the currency is required to have a
minimum cover of 80.59% in gold and foreign exchange
In practice, BNM maintains an external asset cover well above
100% of its current liabilities
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Functions of the BNM
Keeper of International Reserves
BNMs international reserves comprise of gold, foreign exchange, reserve
position with the International Monetary Fund (IMF) and holdings of
Special Drawing Rights (SDR)
As at May 2005, the net international resources stood at RM284.5 billion,
sufficient to finance 8.2 months of retained imports of the country
Since 21 June 1973, government adopt currency arrangement to allow
Ringgit to float upwards to ensure the basic strength of Malaysian Ringgit
to be reflected in the international exchanges, and the gold regime was
abolished
From 27 September 1975, the external value of RM has been determined
in terms of a composite basket comprising of the currencies of major
trading partner of Malaysia, and the principal currencies used in external
settlements
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FUNCTIONS OF THE BNM
Government Banker and Financial Advisor
Act as banker, fiscal agent and financial advisor
Manage liquidity at source and ensure governments
expenditure patterns is in line with BNMs action to manage
liquidity in the banking system
Additional measure to ensure that government does not opt
for deficit financing
As fiscal agent, BNM acts on behalf of government for its
public loan program, including raising the internal and
external loans and debt management
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FUNCTIONS OF THE BNM
Responsibility for Monetary Policy
Promoting monetary stability and sound
financial structure and influencing the credit
situation to help achieving the nations overall
economic objectives
Management of banking system to avoid
systemic failure
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FUNCTIONS OF THE BNM
Banker to the Banks
Promote sound financial structure
Licensing of banks and non banks
Banking relationship
Currency distribution
Inspection and investigation of banks and non
banks
Lender of last resort
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Financial Services Act 2013 (FSA) and
Islamic Financial Services Act 2013 (IFSA)
Gazette March 2013 and to be in-force in mid-
2013
When?
To replace IBA 1983, BAFIA 1989, Exchange
Control Act 1953, Takaful Act 1984, Insurance
Act 1996 and Payment Systems Act 2003
Why?
Facilitate and catalyze Malaysias transition
towards becoming a high value-added, high
income economy
How?
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Purposes:
Firstly, the legislation better supports effective regulation and supervision in
anticipation of a more sophisticated and expanding financial system.
Secondly, it maintains a clear focus on risk and fair conduct towards consumers,
while allowing for differentiation between financial institutions. This in turn
supports healthy competition and productive innovation in the financial sector.
Thirdly, as the financial sector becomes more open and inter-connected with the
regional and global financial systems, it ensures that the financial sector activities
continues to support and positively contribute to the Malaysian economy
16
Financial Services Act 2013 (FSA) and
Islamic Financial Services Act 2013 (IFSA)
Source: http://www.themalaysianinsider.com/litee/business/article/bank-negara-forges-ahead-with-initiative-to-strengthen-financial-sector/
ADMINISTERED LEGISLATIONS
Central Bank of
Malaysia Act 2009
BAFIA 1989
Islamic Banking
Act 1983
Insurance Act 1996
Exchange Control
Act 1953
Takaful Act 1984
Development
Financial
Institution Act
2002
AMLA 2001
Payment System
Act 2003
Money Changing
Act 1998
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ADMINISTERED LEGISLATION
Central Bank of Malaysia Act 2009
An Act to provide for the continued existence of the Central Bank of
Malaysia and for the administration, objects, functions and powers of
the Bank, for consequential or incidental matters.
Banking and Financial Institutions Act 1989 (BAFIA)
An Act to provide new laws for the licensing and regulation of
institutions carrying on banking, finance company, merchant banking,
discount house and money-broking businesses, for the regulation of
institutions carrying on certain other financial businesses, and for
matters incidental thereto or connected therewith. Incorporating Latest
Amendments up to Act A1256/2005 - cif : 1 Apr. 2006
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ADMINISTERED LEGISLATION
Exchange Control Act 1953
An Act to confer powers, and impose duties and restrictions in relation to gold,
currency, payments, securities, debts, and the import, export, transfer and settlement
of property, and for purposes connected with the matters aforesaid. Incorporating
Latest Amendments up to Act A1241/2005 - cif : 1 Jan. 2007
Islamic Banking Act 1983
An Act to provide for the licensing and regulation of Islamic banking business.
Incorporating Latest Amendments up to Act A1307/2007 - cif : 31 July 2007
Insurance Act 1996
An Act to provide new laws for the licensing and regulation of insurance business,
insurance broking business, adjusting business and financial advisory business and for
other related purposes. Incorporating Latest Amendments up to Act A1247/2005 - cif :
1 Jan. 1997
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ADMINISTERED LEGISLATION
Takaful Act 1984
An Act to provide for the regulation of takaful business in Malaysia and for other
purposes relating to or connected with takaful. Incorporating Latest Amendments
up to Act A1306/2007 - cif : 31 July 2007
Development Financial Institutions Act 2002 (Act 618)
The DFIA which came into force on 15 February 2002 focuses on promoting the
development of effective and efficient development financial institutions (DFIs) to
ensure that the roles, objectives and activities of the DFIs are consistent with the
Government policies and that the mandated roles are effectively and efficiently
implemented. DFIA also emphasises on efficient management and effective
corporate governance, provides a comprehensive supervision mechanism and
mechanism to strengthen the financial position of DFIs through the specification
of prudential requirements. Incorporating Latest Amendments up to
PU(A)285/2007 - cif : 31 August 2007
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ADMINISTERED LEGISLATION
Anti-Money Laundering and Anti-Terrorism Financing Act 2001 (Act 613)
This renamed and revised Act which came into force on 15 January 2002, is to provide for the
offence of money laundering, the measures to be taken for the prevention of money laundering
and terrorism financing offences and to provide for the forfeiture of terrorist property and property
involved in, or derived from, money laundering and terrorism financing offences, and for matters
incidental thereto and connected therewith. Incorporating Latest Amendments up to
PU(A) 400/2009 cif : 13 November 2009
Payment Systems Act 2003 (Act 627)
An Act to make provisions for the regulation and supervision of payment systems and payment
instruments and for matters connected therewith. Came into force on 1 Nov 2003.
Money-Changing Act 1998 (Act 577)
An Act to provide for the licensing and regulation of money-changing business and for other
matters related thereto. Incorporating Latest Amendments up to PU(A) 237/2006 - cif : 21 Jul
2006
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to regulate the operation and conducts of financial institutions,
including discount houses, and money and FOREX brokers
The Need for BAFIA
to monitor and control financial institutions more effectively with the aim
of ensuring a stronger and more stable financial system
Powers of Supervision
Non-adherence to the law could result in serious criminal violation of
law where prosecutors will seek criminal sanctions against the bank.
BAFIA provides for Scheduled Offences and Penalties as set out in the
Fourth Schedule. This includes jail term and fines
Consequences of
Breaches
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Banking and Financial Institutions Act 1989
(Amendment 2010)
Salient Features
The licensing of banks and other
financial institutions [Part III];
Restrictions in respect to deposits
[Part IV];
Requirements for maintaining
reserve fund, capital funds, liquid
assets, and the furnishing of
financial information [Part VII];
Restrictions on business of
licensed institutions, such as the
prohibition of credit facilities to
directors or officers of the licensed
institutions as contained in Section
62 of BAFIA [Part IX];
Powers of supervision and control
over licensed institutions [Part X];
Licensed institutions duty of
secrecy as laid down in Section 97
of BAFIA and the circumstances in
which disclosure of confidential
information are required or
permitted under Section 99 of
BAFIA [Part XIII].
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Institutions Under BAFIA
Licensed Institutions
Commercial banks, merchant banks, finance companies, discount houses, money
brokers and foreign exchange brokers
Scheduled Institutions
Major non bank sources of credit and finance, including issuers of charge/ credit cards
and travelers checks, operators of cash dispensing machines, development financial
institutions, building societies and housing credit institutions, factoring companies and
leasing companies
Others are representative offices of foreign banks or foreign institutions, with similar
activities of scheduled institutions
Non Scheduled Institutions
Other statutory bodies and institutions involved in the provisions of finance and credit
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Major Provisions in BAFIA
Deposit taking
Powers and Duties
of Auditors
Shareholding
Powers of
Investigation,
Search and Seizure
Secrecy
Electronic Fund
Transfer
Penalties Local Incorporation
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BASEL III
"Basel III" is a comprehensive set of reform measures, developed by the Basel
Committee on Banking Supervision, to strengthen the regulation, supervision and risk
management of the banking sector.
These measures aim to:
improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source
improve risk management and governance
strengthen banks' transparency and disclosures.
The reforms target:
bank-level, or microprudential, regulation, which will help raise the resilience of individual banking
institutions to periods of stress.
macroprudential, system wide risks that can build up across the banking sector as well as the
procyclical amplification of these risks over time.
These two approaches to supervision are complementary as greater resilience at the
individual bank level reduces the risk of system wide shocks.
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http://www.bis.org/bcbs/basel3/b3summarytable.pdf
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IMPACT OF BASEL III REQUIREMENT
TO BANKS IN MALAYSIA
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CAMEL Framework
CAMEL
C = Capital
Adequacy
Framework
A = Asset
Quality
M =
Management
E = Earning
Capacity
L = Liquidity
Framework
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CAMEL Rating Frameworks
C
Capital
Adequacy
Support ups and
downs of
business to
finance the fixed
assets
Cushion on
unexpected
losses
Continuing
commitment of
shareholders
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The Importance of Capital Adequacy
Framework
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BNM: Capital Adequacy Framework
The Capital Adequacy Framework sets out the approach
for computing regulatory capital adequacy ratios, as well
as the levels of those ratios at which banking institutions
are required to operate.
The framework has been developed based on
internationally-agreed standards on capital adequacy
promulgated by the Basel Committee on Banking
Supervision (BCBS).
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Source: Bank Negara Malaysia
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CET1
Fully paid up and
permanently viable
Freely available
and not earmarked
a particular asset
of banking
activities
Ability to absorb
losses occurring in
the course of
ongoing business
Represents no
fixed charge on
the earnings of an
institutions
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BNM: Capital Adequacy Framework
Risk Weighted Capital Adequacy Framework (RWCR)
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CAMEL Rating Frameworks
A
Asset
Quality
Poor credit
evaluation
Connected
lending to
directors or
staff
Criminal
breach of trust
Risk
diversification
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CAMEL Rating Frameworks
M
Management
Integrity
Professional
competence
Qualities of Service
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Earning Capacity
Interest
Income
Interest
Expenses
Non Interest
Income/ Off
Balance
Sheet
Activities
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CAMEL Rating Frameworks
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CAMEL Rating Frameworks
L: LIQUIDITY FRAMEWORK
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CAMEL Rating Frameworks
L: LIQUIDITY FRAMEWORK
Two-Tier Regulatory System
Shareholders funds (Net investment in subsidiaries) of
RM500 million by end-1995
Shareholders funds (Net investment in subsidiaries) of
RM500 million by end-1998
Paid up capital of RM1 billion by end 2000
Tier-I Status:
Commercial
Banks
Minimum capital requirement for Tier-I merchant bank is
RM250 million, and finance companies of RM300 million
By end of 1998, Tier-I merchant banks and finance
companies are required to have shareholders funds of
RM500 millions and RM600 millions respectively
Tier-I Status:
Merchant Banks
and Finance
Companies
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THE BNM BALANCE SHEET
Referred to as monetary liability, are currency in circulation
and reserves.
Important part in money supply as increases in both or either
will lead to increase in the money supply (everything else
being constant).
Monetary Base is the sum of BNMs Monetary Liabilities
(currency in circulation, reserves, coins).
Liabilities
Comprised of government securities and discount loans.
Important component because of:
Changes in asset items leads to changes in reserves and
consequently changes in the money supply.
The assets earn interest while the liabilities do not.
Assets
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MONETARY POLICY AND THE
ECONOMY
Principle objectives of monetary policy is to promote monetary
stability and sound financial system
The BNM plays a key role of overall macroeconomic policy and
the final objectives, primarily to regulate money supply in
circulation and the credit supply in the economy
Monetary policy tools are categorized into two:
general instruments
selective instruments
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Monetary Instruments
General Instruments: Influence the level of bank reserves or
high powered money
Variations in the statutory reserve requirements (SRR)
Adjustment in the liquidity ratio
Money Market Operations
Selective Instruments: Influence credit to a particular sub-sector
or type of lending
Priority sector lending guidelines, e.g. SME
Hire purchase guidelines on motor vehicles
Credit cards operations guidelines
Credit limit for financing specific types of property
44
MONETARY POLICYS TOOLS
Interbank
Rate
Reserve
Requirement:
SRR and Liquidity
Open
Market
Operations
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STATUTORY RESERVE REQUIREMENTS
(SRR)
Defined in terms of a banks eligible liabilities (EL), comprises of deposits
(including NCDs and REPOs) and net interbank borrowings.
Purpose
Instrument to control volume of deposits and loans that a bank support given a size of its reserves
Monetary management tool
Discussion:
Bank Negara Malaysia (BNM) yesterday maintained the Overnight Policy Rate (OPR) at 3.00% at its
fifth Monetary Policy Committee (MPC) meeting of the year. The Statutory Reserve Requirement (SRR)
was also left at 4%. We see no change in the OPR at the final MPC meetings of the year on 8 Nov, and
expect this level to stay for most of 2013. What is your expectation of the prevailing interest rates in
the market? Discuss.
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STATUTORY RESERVE REQUIREMENTS
(SRR)
Implications
Cost of funds to banking institutions
Inequality issues among FIs
Disruption in forward planning
Announcement effect of SRR adjustment has a very
powerful effect in influencing the psychology of economic
agents and market participants
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LIQUIDITY REQUIREMENTS
Expressed as Eligible Liability (EL) base of the banking
institutions
Reasons for imposition
Ensure that banking institutions are liquid
Selective credit policy to encourage direct credit to desired areas
Ensure continuous and ready financing of governments development
project
Monetary instrument to influence liquidity situation in the banking system
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Components of Liquid Assets
Cash
Clearing Balances with BNM
Money at Call
Cash and Cash
Equivalence
Treasury Bills
Bank Negara Bills
Bills Discounted or Purchased
Bank Negara Certificates
Government Investment Certificates
State Government Certificates
Short-term Bills
Government Securities
Cagamas Bonds
Medium Term
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Forces that Affect Flow of Money and Credit in the Economy
Central Bank Business Plans
Flow of international
trade
Distribution of
income and
allocation of income
Government
Budgetary Policies
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MONETARY POLICY STRATEGY
Monetary
targeting
Inflation
targeting
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MONETARY TARGETING
The Central Bank (CB) announces that it will achieve a certain value
(the target) of the annual growth of a monetary aggregate, such as
5% growth for M1, and CB is accountable to achieve the target
Types of targets:
Intermediate targets, such as monetary aggregates and interest rates, which will
have direct effect on the goals chosen.
Operating targets are another set of variables such as reserve aggregates, which
are more responsive to the tools chosen will then be aimed at.
By using intermediate and operating targets, CB can judge more
quickly whether its policies are on the right track, rather than waiting
until it sees final outcome.
52
INFLATION TARGETING
Countries
are
adopting
inflation
targeting
as
monetary
policy
strategy
to
achieve
price
stability
Elements:
Public
announcement
of medium
term numerical
targets for
inflation
Institutional
commitment to
price stability
as the primary,
long run goal
of monetary
policy and a
commitment to
achieve the
inflation goal
An information
inclusive
approach to
include many
variables aside
from monetary
aggregate in
deciding for
monetary
policy
Increased
transparency
of the
monetary
policy strategy
through
communication
with the public
and the
markets about
the plans and
the objectives
of monetary
policymakers
Increased
accountability
of the CB for
attaining its
inflation
objectives
53
INFLATION TARGETING
Advantages Disadvantages
Transparency and highly understood by the public
on regular communication
Delayed signaling outcomes are revealed after a
long lag
Increases accountability of the CB reduce
likelihood of CB of pushing for overly expansionary
monetary policy of expanding output and
employment in the short run
Too much rigidity imposes rigid rule on monetary
policymakers, and limit their abilities to respond to
unforeseen circumstances
Reduce political pressure on CB by pointing out that
CB can control inflation in the long run but not
increase growth and number of jobs
Potential for increased output fluctuations target
level should be 2% or higher
Low economic growth low growth in output and
employment
54
CHANGING FINANCIAL LANDSCAPE
Rapid development
of deeper and
broader securities
market
Consolidation of
financial
institutions
Broader range of
financial products
and services
Growth of Islamic
banking and
Islamic bond
market
Increasing global
integration
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Issues in Financial Markets and Institutions
BNMs Perspective
Interest Rates
and Regulation
Increase/
Decrease in
Reserves
BLR, BFR,
OPR
BAFIA
1989,
BASEL II
Securities Exchange Act 1996
Risk
Default Risk
Liquidity
Risk
Operational
Risk
Others
Transaction
Costs
Asymmetric of Information Peach vs.
Lemon
Adverse Selection
Moral Hazard
Conflict of Interest/ Agency Theory
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