topic 4 central bank (bnm)

8/12/2019 Topic 4 Central Bank (BNM)

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CENTRAL

BANK

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STRUCTURE OF CENTRAL BANKS:MALAYSIA

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BANK NEGARA MALAYSIA

Established on 26 January 1959, under the CentralBank of Malaya Ordinance, 1958

The CBA 1958 has been repealed by the Central

Bank of Malaysia Act 2009 which became effectiveon 25 November 2009.

It is a statutory body wholly owned by theGovernment 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 matterspertaining to monetary and financial sector policies.

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http://www.bnm.gov.my/index.php?ch=14http://www.bnm.gov.my/index.php?ch=14http://www.bnm.gov.my/index.php?ch=14http://www.bnm.gov.my/index.php?ch=14


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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 ofmonetary policy

Fostering a sound and progressive financial sector.Financial system stability

Developing financial system infrastructure with major emphasisplaced on building the nation's efficient and secured paymentsystems

Developing the necessary institutions (including SecuritiesCommission, Bursa Malaysia and Credit GuaranteeCorporation)

Developmental role

Improving access to financial services for all economic sectorsand segments of society,Promotes financialinclusion

Advising on macroeconomic policies and managing the public debt.

Issuing currency

Managing the country's international reserves.

Banker and adviserto theGovernment

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OBJECTIVES

Stable economicgrowth

High level ofemployment

Stability in theRinggits purchasing

power

Eradication ofpoverty

Restructuring ofsociety

Rising livingstandard

Reasonable positionin the countrys

balance ofpayments

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FUNCTIONAL AREAS

Economics &Monetary

Policy

Investment andoperations

Regulation

PaymentSystem

SupervisionOrganizationalDevelopment

Communication

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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 andprogramme management functions to drive its performance-improvement processes andstrengthening the capacity building of the Bank. It also leads and drives human resourcesinitiatives 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 heighteneddemands of the various stakeholders, seeking greater transparency and disclosure.

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FUNCTIONS OF BNM

Banker forCurrency Issues

Keeper ofInternational

Reserves

GovernmentBanker 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 Malaysiancurrency is renamed as Ringgit and Sen respectively

The par value of Malaysian Ringgit was defined as equivalent to0.290299 grams of fine gold

Under Part IV of the CBO, the currency is required to have aminimum cover of 80.59% in gold and foreign exchange

In practice, BNM maintains an external asset cover well above100% of its current liabilities

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Functions of the BNM

Keeper of International Reserves

BNMs international reserves comprise of gold, foreign exchange, reserveposition with the International Monetary Fund (IMF) and holdings ofSpecial 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 allowRinggit to float upwards to ensure the basic strength of Malaysian Ringgitto be reflected in the international exchanges, and the gold regime wasabolished

From 27 September 1975, the external value of RM has been determinedin terms of a composite basket comprising of the currencies of majortrading partner of Malaysia, and the principal currencies used in externalsettlements

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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 manageliquidity in the banking system

Additional measure to ensure that government does not optfor deficit financing

As fiscal agent, BNM acts on behalf of government for itspublic loan program, including raising the internal andexternal loans and debt management

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Responsibility for Monetary Policy

Promoting monetary stability and sound

financial structure and influencing the creditsituation to help achieving the nations overalleconomic objectives

Management of banking system to avoidsystemic failure

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Banker to the Banks

Promote sound financial structure

Licensing of banks and non banks Banking relationship

Currency distribution

Inspection and investigation of banks and nonbanks

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-2013When?

To replace IBA 1983, BAFIA 1989, ExchangeControl Act 1953, Takaful Act 1984, InsuranceAct 1996 and Payment Systems Act 2003Why?

Facilitate and catalyze Malaysias transitiontowards becoming a high value-added, highincome economyHow?

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Purposes:

Firstly, the legislation better supports effective regulation and supervision inanticipation 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 theregional and global financial systems, it ensures that the financial sector activities

continues to support and positively contribute to the Malaysian economy

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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/


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ADMINISTERED LEGISLATIONS

Central Bank of

Malaysia Act 2009BAFIA 1989

Islamic Banking

Act 1983Insurance Act 1996

Exchange Control

Act 1953Takaful 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 ofMalaysia 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 ofinstitutions carrying on banking, finance company, merchant banking,

discount house and money-broking businesses, for the regulation ofinstitutions carrying on certain other financial businesses, and formatters incidental thereto or connected therewith. Incorporating Latest

Amendments up to Act A1256/2005 - cif : 1 Apr. 2006

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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 settlementof property, and for purposes connected with the matters aforesaid. IncorporatingLatest 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 forother related purposes. Incorporating Latest Amendments up to Act A1247/2005 - cif :1 Jan. 1997

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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 theoffence of money laundering, the measures to be taken for the prevention of money launderingand terrorism financing offences and to provide for the forfeiture of terrorist property and propertyinvolved in, or derived from, money laundering and terrorism financing offences, and for matters

incidental thereto and connected therewith. Incorporating Latest Amendments up toPU(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 paymentinstruments 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 Jul2006

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to regulate the operation and conducts of financial institutions,including discount houses, and money and FOREX brokersThe Need for BAFIA

to monitor and control financial institutions more effectively with the aimof ensuring a stronger and more stable financial systemPowers of Supervision

Non-adherence to the law could result in serious criminal violation oflaw where prosecutors will seek criminal sanctions against the bank.

BAFIA provides for Scheduled Offences and Penalties as set out in theFourth Schedule. This includes jail term and fines

Consequences ofBreaches

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Banking and Financial Institutions Act 1989

(Amendment 2010)


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Salient Features

The licensing of banks and otherfinancial institutions [Part III];

Restrictions in respect to deposits[Part IV];

Requirements for maintainingreserve fund, capital funds, liquid

assets, and the furnishing of

financial information [Part VII];

Restrictions on business oflicensed institutions, such as theprohibition of credit facilities to

directors or officers of the licensedinstitutions as contained in Section

62 of BAFIA [Part IX];

Powers of supervision and control

over licensed institutions [Part X];

Licensed institutions duty ofsecrecy as laid down in Section 97of BAFIA and the circumstances in

which disclosure of confidentialinformation are required orpermitted under Section 99 of

BAFIA [Part XIII].

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Institutions Under BAFIA

Licensed Institutions

Commercial banks, merchant banks, finance companies, discount houses, moneybrokers 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 financialinstitutions, building societies and housing credit institutions, factoring companies andleasing 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 takingPowers and Duties

of AuditorsShareholding

Powers ofInvestigation,

Search and SeizureSecrecy

Electronic FundTransfer

Penalties Local Incorporation

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BASEL III

"Basel III" is a comprehensive set of reform measures, developed by the BaselCommittee on Banking Supervision, to strengthen the regulation, supervision and riskmanagement 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 bankinginstitutions to periods of stress.

macroprudential, system wide risks that can build up across the banking sector as well as theprocyclical amplification of these risks over time.

These two approaches to supervision are complementary as greater resilience at theindividual 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 = CapitalAdequacyFramework

A = AssetQuality

M =

Management

E = Earning

Capacity

L = LiquidityFramework

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CAMEL Rating Frameworks

C

CapitalAdequacy

Support ups and

downs ofbusiness to

finance the fixedassets

Cushion onunexpected

losses

Continuingcommitment ofshareholders

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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 approachfor computing regulatory capital adequacy ratios, as wellas the levels of those ratios at which banking institutionsare required to operate.

The framework has been developed based oninternationally-agreed standards on capital adequacypromulgated by the Basel Committee on BankingSupervision (BCBS).

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Source: Bank Negara Malaysia


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CET1

Fully paid up andpermanently viable

Freely availableand not earmarkeda particular asset

of bankingactivities

Ability to absorblosses occurring in

the course ofongoing business

Represents nofixed charge on

the earnings of aninstitutions

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BNM: Capital Adequacy Framework


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Risk Weighted Capital Adequacy Framework (RWCR)

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A

AssetQuality

Poor creditevaluation

Connectedlending to

directors orstaff

Criminalbreach of trust

Riskdiversification

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M

Management Integrity

Professionalcompetence

Qualities of Service

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Earning Capacity

InterestIncome

InterestExpenses

Non InterestIncome/ Off

Balance

SheetActivities

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L: LIQUIDITY FRAMEWORK


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Two-Tier Regulatory System

Shareholders funds (Net investment in subsidiaries) ofRM500 million by end-1995

Shareholders funds (Net investment in subsidiaries) ofRM500 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 isRM250 million, and finance companies of RM300 million

By end of 1998, Tier-I merchant banks and financecompanies are required to have shareholders funds ofRM500 millions and RM600 millions respectively

Tier-I Status:

Merchant Banksand FinanceCompanies

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THE BNM BALANCE SHEET

Referred to as monetary liability, are currency in circulationand reserves.

Important part in money supply as increases in both or eitherwill lead to increase in the money supply (everything elsebeing 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 andconsequently 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 monetarystability and sound financial system

The BNM plays a key role of overall macroeconomic policy andthe final objectives, primarily to regulate money supply incirculation 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 orhigh 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-sectoror 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

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MONETARY POLICYS TOOLS

Interbank

Rate

Reserve

Requirement:SRR and Liquidity

Open

MarketOperations

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STATUTORY RESERVE REQUIREMENTS


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(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 itsfifth 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, andexpect this level to stay for most of 2013. What is your expectation of the prevailing interest rates inthe market? Discuss.

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(SRR)

Implications

Cost of funds to banking institutions

Inequality issues among FIs

Disruption in forward planning

Announcement effect of SRR adjustment has a verypowerful effect in influencing the psychology of economic

agents and market participants

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Components of Liquid Assets

Cash Clearing Balances with BNM

Money at Call

Cash and CashEquivalence

Treasury Bills

Bank Negara Bills Bills Discounted or Purchased

Bank Negara Certificates

Government Investment Certificates

State Government Certificates

Short-term Bills

Government Securities

Cagamas BondsMedium Term

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Forces that Affect Flow of Money and Credit in the Economy

Central Bank Business PlansFlow of international

trade

Distribution of

income andallocation of income

GovernmentBudgetary Policies

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MONETARY POLICY STRATEGY

Monetarytargeting 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 as5% 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, whichare more responsive to the tools chosen will then be aimed at.

By using intermediate and operating targets, CB can judge morequickly whether its policies are on the right track, rather than waitinguntil it sees final outcome.

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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 expansionarymonetary 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 tounforeseen 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

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CHANGING FINANCIAL LANDSCAPE

Rapid developmentof deeper and

broader securitiesmarket

Consolidation offinancial

institutions

Broader range offinancial products

and services

Growth of Islamicbanking andIslamic bond

market

Increasing globalintegration

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I i Fi i l M k t d I tit ti


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Issues in Financial Markets and Institutions

BNMs Perspective

Interest Ratesand Regulation

Increase/Decrease in

Reserves

BLR, BFR,OPR

BAFIA1989,

BASEL II

Securities Exchange Act 1996

Risk

Default Risk

LiquidityRisk

OperationalRisk

Others

TransactionCosts

Asymmetric of Information Peach vs.Lemon

Adverse Selection

Moral Hazard

Conflict of Interest/ Agency Theory

topic 4 central bank (bnm)

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