1

TOPIC 3:

THE FUNCTION OF
CENTRAL BANK AND
MONETARY POLICY

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 2 INTRODUCTION
• Was established on Jan 26, 1959
• governed by Central Bank of Malaysia Act 2009

• Was set up due to the need for the management of the country’s money and
credit situation.

• BNM also as the controller and supervisor of the institutions under the
banking system
• Main role : to promote monetary and financial stability:-aimed to provide a
conducive environment for the sustainable growth of the Malaysian economy.

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 IMPORTANT
3 FUNCTIONS OF CENTRAL
BANK OF MALAYSIA
FUNCTIONS OF Banker for Currency issue
BNM
Keeper of international Reserves

Responsibility for monetary

policy
Government banker and advisor

Banker to the banks

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 4 F1: BANKER FOR CURRENCY
ISSUE
• Part III of CBA 1958 provides for the Central Bank as sole currency issuing
authority in the country.

• The Central Banks commenced to issue its own currency on June, 1967;
replacing the Currency Board.

• Unit of currency: “Ringgit Malaysia” (RM) & “sen”

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 F2: KEEPER OF INTERNATIONAL RESERVES &
5 SAFEGUARDING VALUE OF RINGGIT

• Holdings of the country official external reserved centralized at the CB.

• International reserves: gold, foreign exchange, reserve with IMF & Special
Drawing Rights.

• Reserves has increased progressively due to the Influence by economic

situation.

• To safeguard the external value of Ringgit, the maintenance of min

external reserves backing of 80% against the currency issues.

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 6 F3: AGENCY RESPONSIBLE
FOR MONETARY POLICY
a) Promoting monetary stability and sound financial structure.
• Influence credit situation thru supply of money & volume of credit
• The CB is obliged to ensure that the supply of money and the volume
credit are sufficiently elastic to the demands without pressure on the
resources.
• Using quantitative & qualitative controls.
b) Management of banking system
• Responsible to manage the banking system such maintaining public
confidence in the banking system thru its legislative power.

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 F3: AGENCY RESPONSIBLE FOR
7 MONETARY POLICY

• Central Bank of Malaysia ordinance (CBO) 1958: BNM is empowered to regulate the
supply of money & credit creation through:
• Qualitative measures (use to ask at exam)
• Interest rate Ceiling
• Selected Credit Control
• Moral Suasion
• Quantitative measures
• Statutory reserved requirement (SRR)
• Minimum Liquidity Requirement (MLR)
• Money Market Operation (MMO)

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 F3: AGENCY RESPONSIBLE FOR
8 MONETARY POLICY

Selected Credit
Control
Interest Rate Ceiling
These measure are Moral Suasion
Eg. Involved in setting used in regulating the
the minimum lending volume and direction Inducing a voluntary
rates for bank loans. of credit response from the
financial system to its
policy initiatives

Qualitative
Measures

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 F3: AGENCY RESPONSIBLE FOR
9 MONETARY POLICY

Monetary Market
Liquidity Operations
Requirement Influence the liquidity
The banking situation in a system Discount Operation
institutions required to through selling and
observed min liquidity buying government
ratio. papers

Statutory Reserve
Centralization of Gov
Requirement (SSR)
& EPF Deposit with
SSR = Eligible liabilities
Quanitative
The Central Banks
which comprise REPO’s Measures
+ NCD’s + Interbank
borrowing

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 F4: GOVERNMENT BANKER &
10 FINANCIAL ADVISOR
• Central Bank also act as a banker, fiscal agent and financial advisor to the
Gov.
• Central Bank responsible as fiscal agent of the Government include acting
on behalf of the Government in public loan program including internal and
external loans.

Management of government accounts

• Same functions as commercial banks perform for their customers.

Source of funds to government

• Provide temporary advances to Gov to cover any deficit in budget revenue.

Management of national debt

• Manages & advises on public debt such as advices Gov on its loan programmes.

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 11 F5: BANKER TO THE BANKS
Promote
sound
financial
structure
Licensing
Lender of
banks &
last resort
non-banks

Banker to
the Banks
Banks
inspection Banking
and relationship
investigation

Currency
distribution

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 IMPORTANT
12 SOURCES & USES OF FUND
• SOURCES of BNM are:
• Major source come from deposits
• Amount borrowed from other institutions
• Capital and reserve
• Debentures and notes
• Banker acceptance
 USES of BNM are::
• Loan activities
• Amount due from Financial Institutions
• Cash and reserve
• Placement with discount houses
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 POWERS OF CENTRAL BANKS
13
CENTRAL BANK OF • Provides for the administration & specify objectives of BNM
MALAYSIA ACT 2009 • Enumerates the powers & duties of the BNM

• Provides for licensing & regulation of Islamic banking business

ISLAMIC FINANCIAL • Has provisions on financial requirements & duties of an Islamic
SERVICES ACT 2013
Bank

FINANCIAL SERVICES ACT • Provide for licensing & regulation of financial institutions that
2013 conduct the banking & financial business

MONEY SERVICES BUSINESS • provides for the licensing, regulation & supervision of the
ACT 2011 money services business

• Deal with the licensing of insurers, ins brokers, adjusters .

• Provides matters relating to policies, insurance guarantee
INSURANCE ACT 1996
scheme fund, enforcement powers of BNM, offences & other
general provisions
DEVELOPMENT FINANCIAL • to ensure that the roles, objectives and activities of the DFIs are
INSTITUTIONS ACT 2002 consistent with the Government policies and that the mandated
(Act 618) roles are effectively and efficiently implemented

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ANTI-MONEY LAUNDERING, ANTI-TERRORISM FINANCING AND
PROCEEDS OF UNLAWFUL ACTIVITIES ACT 2001 (AMLATFPUAA)
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• AMLATFPUAA -(Act 613) : provides for the offence of money laundering, the
measures to be taken for the prevention of money laundering and terrorism
financing offences, investigation powers and the forfeiture of property
involved in or derived from money laundering and terrorism financing
offences, as well as terrorist property, proceeds of an unlawful activity and
instrumentalities of an offence.
• Laundering - an act of a person who engages directly or indirectly in a
transaction that involves proceeds of an unlawful activity.

• Money laundering - a process whereby funds, generated by illegal means

such as drug trafficking, smuggling and corruption are funneled through
legitimate financial transactions to conceal its illicit origins, making it appear
legitimate.
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 15 CONT’ : AMLATFPUAA
• Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 contains provisions for:-

the offence of money laundering;

prevention;

detection and prosecution of money laundering & terrorism

financing offences;

the forfeiture of property derived from or involved in money

laundering & terrorism financing offences; and

the requirement of record keeping & reporting of suspicious

transaction by reporting institution.

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 16 HOW IS MONEY LAUNDERED?
• Illegal profits are introduced into the financial system
• By dividing large amounts of cash into less conspicuous

Placement smaller amounts that are deposited directly into a bank

account or by purchasing a series of monetary
instruments.

• Funds, which have entered the financial system, are

then distanced from their source

Layering • Done thru purchase and sales of investment instruments

or through multiple transfers of funds from different
accounts around the world disguised as payments for
goods or services.

Integration
• To integrate the illegal proceeds back into the economy as
legitimate funds through legitimate transactions such as
business ventures, luxury assets, lending and investing.
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 17 CONT’ : AMLATFPUAA
• Extend the scope of AMLA 2001 to include terrorism financing offence & terrorist property.

• Prevention measures

1. Develop customer acceptance policy & procedures.

2. Conduct customer due diligence (reasonable care) & obtain satisfactory evidence on
transactions.
3. Keep all records & documents of transactions for at least 6 years.
4. Examine & clarify economic background & purpose of any transaction.
5. Promptly submit suspicious transaction report to BNM when any employees involves
proceeds from unlawful activity.
6. Appoint officers at senior management level to be compliance officer.
7. Provides training & guidance to staff on the operation procedures & controls.

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 18 STATUTORY RESERVE
REQUIREMENT (SRR)

• Instrument to manage liquidity

• Bank reserve in BNM
• 3% to 2% effective 20 March 2020

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19 BNM CAPITAL ADEQUACY

FRAMEWORK

Capital Adequacy Framework

Development
Commercial
Islamic Banks Financial
Banks
Institutions
 COMPARISON BETWEEN COMMERCIAL
BANKS / ISLAMIC BANKS AND DEVELOPMENT
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FINANCIAL INSTITUTIONS
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Commercial Banks / Islamic Banks Development Financial Institutions
(i) Required to comply with Capital (i) Required to comply with Risk Weighted
Adequacy Framework at entity and Capital Ratio (RWCR) requirement at all
consolidated level. times at the entity level – Malaysian
operations of a DFI.
(ii) Minimum requirements: (ii) Minimum requirements:
(a) Minimum capital adequacy ratio: (a) Minimum capital: RM300 million
CET 1 Capital => 4.5% (b) Minimum RWCR: 8% at all times at
Tier 1 Capital => 6.0% entity level.
Total Capital => 8.0%
(iii) Common Equity Tier 1 Capital
(a) CET 1 capital after regulatory
adjustment = common equity –
proposed dividend – regulatory
adjustment
(b) Tier 1 capital ratio = CET 1 capital
after regulatory adjustment / RWA
COMPARISON BETWEEN COMMERCIAL BANKS /
ISLAMIC BANKS AND DEVELOPMENT
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FINANCIAL INSTITUTIONS (CON’T)

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Commercial Banks / Islamic Banks (Con’t) Development Financial Institutions
(Con’t)
(iv) Tier 1 Capital (iv) Core Capital Ratio
(a) Tier 1 capital after regulatory Core capital ratio = Tier 1 capital /
adjustment = Common Equity Tier 1 Total RWA
capital after regulatory adjustments +
Additional Tier 1 capital – regulatory
adjustment for Tier 1 capital
(b) Tier 1 capital ratio = Tier 1 capital after
regulatory adjustment / RWA

(v) Total Capital Ratio (v) Computation for RWCR:

(a) Total Capital = Tier 1 capital after RWCR = Capital Base / Total RWA
regulatory adjustments + Tier 2 capital –
regulatory adjustment for Tier 2 capital
(b) Total Capital Ratio = Total Capital / RWA
 CAPITAL BUFFER REQUIREMENT
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22
• Capital buffer requirements:
i. To hold additional capital buffers above the minimum CET
1 Capital, Tier 1 Capital, and Total Capital Adequacy
levels.

• Buffer Requirements:
i. A Capital Conservation Buffer of 2.5% of total RWA
ii. A Countercyclical Capital Buffer ranging between 0% and
2.5% of total RWA
Effective 2019
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23 BNM CAPITAL ADEQUACY

FRAMEWORK

Capital Adequacy Framework

Development
Commercial
Islamic Banks Financial
Banks
Institutions
 COMPARISON BETWEEN COMMERCIAL
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BANKS / ISLAMIC BANKS AND DEVELOPMENT

24
FINANCIAL INSTITUTIONS
Commercial Banks / Islamic Banks Development Financial Institutions
(i) Required to comply with Capital (i) Required to comply with Risk Weighted
Adequacy Framework at entity and Capital Ratio (RWCR) requirement at all
consolidated level. times at the entity level – Malaysian
operations of a DFI.
(ii) Minimum requirements: (ii) Minimum requirements:
(a) Minimum capital adequacy ratio: (a) Minimum capital: RM300 million
CET 1 Capital => 4.5% (b) Minimum RWCR: 8% at all times at
Tier 1 Capital => 6.0% entity level.
Total Capital => 8.0%
(iii) Common Equity Tier 1 Capital
(a) CET 1 capital after regulatory
adjustment = common equity –
proposed dividend – regulatory
adjustment
(b) Tier 1 capital ratio = CET 1 capital
after regulatory adjustment / RWA
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COMPARISON BETWEEN COMMERCIAL BANKS /
ISLAMIC BANKS
25 AND DEVELOPMENT FINANCIAL
INSTITUTIONS (CON’T)
Commercial Banks / Islamic Banks (Con’t) Development Financial Institutions
(Con’t)
(iv) Tier 1 Capital (iv) Core Capital Ratio
(a) Tier 1 capital after regulatory Core capital ratio = Tier 1 capital /
adjustment = Common Equity Tier 1 Total RWA
capital after regulatory adjustments +
Additional Tier 1 capital – regulatory
adjustment for Tier 1 capital
(b) Tier 1 capital ratio = Tier 1 capital after
regulatory adjustment / RWA

(v) Total Capital Ratio (v) Computation for RWCR:

(a) Total Capital = Tier 1 capital after RWCR = Capital Base / Total RWA
regulatory adjustments + Tier 2 capital –
regulatory adjustment for Tier 2 capital
(b) Total Capital Ratio = Total Capital / RWA
 CAPITAL BUFFER REQUIREMENT
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26
• Capital buffer requirements:
i. To hold additional capital buffers above the minimum CET
1 Capital, Tier 1 Capital, and Total Capital Adequacy
levels.

• Buffer Requirements:
i. A Capital Conservation Buffer of 2.5% of total RWA
ii. A Countercyclical Capital Buffer ranging between 0% and
2.5% of total RWA
Effective 2019
 IMPORTANT
27 BASEL
• Objective:
Encourage leading banks around the world to keep
their capital positions strong, reduce inequalities in capital
requirements among different countries to promote fair
competition, and catch up with recent rapid changes in
financial services and financial innovation.
• Basel I:
Introduced in 1988 by BCBS but went into effect in January 1993

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 28 BASEL

• Basel II:
i. Initially published in June 2004

ii. To create an International Standard for banking regulators to

control how much capital banks need to put aside to guard against
the types of financial and operational risks banks.

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BASEL (CON’T)
29
• Currently we are in the process of implementing Basel III

• Why Basel II has changed to Basel III?

i. Aimed at strengthening global capital and liquidity rules with the goal of
strengthening the resilience of the global banking system.

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30 BASEL III

• "Basel III" is a comprehensive set of reform measures.

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
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31 BASEL III PHASE IN

ARRANGEMENT