topic 4 central bank (bnm)
TRANSCRIPT
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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The CBA 1958 has been repealed by the Central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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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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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 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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FUNCTIONS OF THE BNM
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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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 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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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 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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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 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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CAMEL Rating Frameworks
A
AssetQuality
Poor creditevaluation
Connectedlending to
directors orstaff
Criminalbreach of trust
Riskdiversification
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CAMEL Rating Frameworks
M
Management Integrity
Professionalcompetence
Qualities of Service
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Earning Capacity
InterestIncome
InterestExpenses
Non InterestIncome/ Off
Balance
SheetActivities
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CAMEL Rating Frameworks
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CAMEL Rating Frameworks
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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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 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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STATUTORY RESERVE REQUIREMENTS
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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 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