Banking Regulation - Malaysia

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For the past two decades, the world has been experiencing banking and financial crises at a higher frequency than during the previous decades and with significant costs to the economy. The recent 2008 Financial Crisis has caused the threat of total collapse in large financial institutions, downturn of stock markets as well as bail out of banks by many governments. This has brought more concern on banking supervision and regulation. There is a need to reform the financial regulation as it is one of the factors that contributes to the crisis. Many efforts have come underway to address many of the limitation in the financial infrastructure. Massive global legislative and regulatory responses are generated to address perceived market and regulatory failures responsible for occurrence of the crisis. At that time, majority of countries have experienced a systemic banking crisis requiring a major and expensive cost to fix their banking system. Therefore, it is important for a country to ensure their banking system is safe and sound.

While the impact was being felt more in Europe and the United States (US) during the crisis, increasingly it was becoming an issue in Malaysia. Malaysia has appeared to be in a prepared position to manage the spill over effects of the turmoil given that it has experienced and learnt the lesson of such crisis in just over ten year ago. From that, Malaysia is now said to be resilient to face shocks to the system as the effort of strengthening the foundation has been done. This has then ensured Malaysia to maintain its condition in the time crisis. Though the bank regulation is much better now, Malaysia should not take for granted that crisis could not happen following from greater capital account liberalization. Thus, further enhancement in the current regulation is needed. The difficult decision is how much to regulate lies in the tradeoffs associated within financial regulation. While too much regulation can constrain the credit channel and slow productivity, too little would only encourage risky activities in the financial sector. This was the exact dilemma regulators faced in the wake of the Asian Financial Crisis. The recent Financial Crises in Europe and US posed a key downside risk to domestic growth prospect. So far, the response on the domestic economy has been manageable. Deposit insurance is not to blame for this banking crisis; instead it is the existence of government safety net. It is where the government stand ready to bail out banks whether deposit insurance is an important feature of the regulatory environment or not. Furthermore, it is also the cause of the increase in moral hazard incentives for excessive risk taking on the part of banks. Therefore, there is a need to restructure and reform the financial regulatory.

During the Asian crisis, the activity of indiscriminate lending to corporate sector was noted. This can be seen through the investment activity which was in excessive in comparison to many economies in Asia. Statistics has shown that the ratio of investment to GDP exceeding 35% (Bank Negara Malaysia, 2008). The imprudent lending practise was also seen to be contributed to sub-prime crisis. The building of excess and increasing asset values was also built up by the low interest rate environment. There is also lack of capacity to manage the increased risk associated with the transformation of the financial sector. However, for Malaysia, the impact of these developments of crisis would be limited as the expectation of Bank Negara Malaysia (BNM) in terms of governance and risk management were already well aligned with the specific risk profiles of individual institutions. Zamani Abdul Ghani, Deputy Governor of BNM at that time, added that, “BNM had continued to focus on developing and consolidating a comprehensive set of standards on corporate governance and risk management practices at the height of the financial crisis.” In Malaysia, the financial institutions are all...
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