Bank Negara Malaysia and

the financial system

Objectives of Bank Negara Malaysia
To issue currency and managing reserves to
safeguard value of the currency,
To act as a banker and financial adviser to the
government
To promote monetary stability and a sound financial
structure
To influence the credit situation to the advantage of
the country.
Broader objectives of BNM
Economic growth
High level of employment
Maintaining price stability
Ensuring a reasonable balance in international
payment position
Eradicating poverty
Restructuring of society
Issue currency
Authority given in 1967 to issue notes and coins
taking over from Board of Commissioners of Currency
Printing, minting, maintain supply, quality and
protection for its assets
Issues commemorative and numismatic coins
Managing reserves
To safeguard value of currency means to maintain a high level of
foreign reserves against total value of currency issued
(reserve backing)
Minimum Ratio  80.6 % ( the ratio of currency in circulation to
reserve)
Reserves = gold and forex; IMF reserve; holdings of Special
Drawing Rights

 Reserve backing ratio = total reserves

currency in circulation
Historical and current ratio of backing
Historically the coverage of currency in circulation
against reserves is good (well-covered):
1990 - 268 %; Oct.1999 - 384 %; Dec 2011 – 684 %,
Now - ??
Calculation
Calculate the latest coverage ratio.
(Get the latest Balance Sheet of BNM)
Banker and Financial adviser to
government
Provide current account and deposits facilities to
government, state government and statutory bodies;
international institutions
Managing accounts and debt position of government
Administer the Exchange Control Act
Dealing with international bodies like Bank for
International Settlements (BIS) and Basle Committee
of Banking Supervisors
Banker to financial institutions
Provide clearing system of cheques and inter bank
settlements
Provide funding under Export Credit Refinancing
(ECR) Scheme
Accepts deposit from financial institutions for
mandatory Statutory Reserve Requirement (SRR)
Act as ‘lender of last resort’ either direct lending or
through financial instruments such as REPO
Lender of last resort
A role played by an institution that has capacity to lend
to another institution when no one else can (no other
borrowing alternative)
Normally a central bank plays this role
In extreme case, such as in US, the Federal Reserve acts
as lender of last resort to banks that are experiencing
financial difficulty or near collapse in which the failure
to obtain this credit would affect the economy
Discussion: When a bank becomes a borrower of last
resort, what is the indication?
Banking supervision
Supervise operations of all banking institutions to
ensure:
- public confidence on the banking system
- banks exercise prudence in their operations
- banks comply with the provision and requirement
Continuously introduces prudential reforms to
strengthen financial system; examples – revision on
guidelines on appointment of directors; on derivatives
trading
‘Moral suasion’ practices – technique of informally
inducing a voluntary response from financial
institutions to its policy initiatives
Monetary policy and sound financial
structure
Regulate supply of money and credit to ensure
adequacy for growth without causing inflation
Ensure a well-organized money and foreign
exchange markets – efficient operations and
settlements
Monetary tools used – (a) direct borrowing and
lending (b) open market operations, (c) selective
credit control and lending guidelines (d) reserve
requirement
Direct borrowing & lending and OMO
Direct borrowing & lending: a straight forward direct
placement of funds/accepting deposits among banks
Open Market Operation: involves the buying and
selling of government securities in the open market
(BNM buys securities to inject funds and sells
securities to mop up funds in the system)
These monetary instruments policy will give impact
to the growth of money and credit; thus managing
reserves and liquidity
Statutory Reserve Requirement (SRR)
a BNM’s monetary policy instrument for the purposes
of liquidity management
all commercial banks, investment banks and Islamic
banks are required to maintain balances in their
Statutory Reserve Accounts equivalent to a certain
proportion of their eligible liabilities  the statutory
reserve requirement rate
SRR is used to manage liquidity and thus manage
level of credit (credit creation) in the financial system
How is liquidity and credit managed through
SRR?
The SRR is used (a) to withdraw liquidity when the
excess of liquidity in the banking system is large and
long-term in nature
(b) inject liquidity when the lack of liquidity is large
and long term
Withdrawing liquidity is by increasing the SRR rate
Injecting liquidity is by decreasing the SRR rate
 SRR, liquidity  less fund available for banks
to offer to the customers
(reduce loan)
Discussion
Refer to the movement of SRR in the attached
historical chart, comment on the liquidity position and
economic situation (refer to page 23 – additional notes)
What is the current SRR? Give reasons.
CAMELS framework
 as a form of surveillance on financial institutions to
ensure a healthy and financially strong institutions
 To ensure customers needs are met
 To ensure a sound financial system
 Components of the framework –
 Capital adequacy
 Asset quality
 Management efficiency
 Earnings performance
 Liquidity position
 Sensitivity
Legislation under BNM
Central Bank of Malaysia Act 2009
Banking and Financial Institutions Act 1989 (BAFIA)
Financial Services Act (2013)
Islamic Banking Act (1983)
Insurance Act 1963 (Revised 1996)
Takaful Act 1984
Development Financial Institutions Act 2002
Anti-Money Laundering and Anti-Terrorism Act 2001
Anti-Money Laundering and Anti-Terrorism Financial Act (2014)
Essential (Protection of Depositors) Regulations 1986
Exchange Control Act 1953
Money Service Business Act (2011)