Malaysian Financial System Can Weather Current Global Financial Turmoil

Quoted from http://www.bnm.gov.my/index.php?ch=8&pg=14&ac=1701

Despite the increased volatility in the global financial markets, Malaysian financial institutions remain resilient . Several years of reforms, institutional development and capacity building, continuous efforts to enhance corporate governance and risk management standards and practices have significantly strengthened the banking system. The level of non-performing loans has also improved to 2.5%. In addition, the standardised approach of the Basel II capital adequacy framework was implemented effective January 2008. There is also ample liquidity in Malaysia ‘s financial system to facilitate the orderly functioning of economic and financing activities. As at end-August 2008, net interbank placements with Bank Negara Malaysia by the banking system amounted to RM198.5 billion.

The banking and insurance industries are therefore operating with adequate capital and liquidity buffers that have been accumulated over several years. Malaysia ‘s financial institutions also have negligible exposure to both sub-prime related securities and to the affected financial institutions of other countries, with more than 90% of total assets of the banks and insurance companies in ringgit denominated assets. In addition, all foreign financial institutions in Malaysia are locally incorporated and have a high level of capital that is committed to support their domestic operations. As at end-August 2008, the risk-weighted capital ratio for these foreign financial institutions was at 12.6%.

The banking system’s leverage position remains manageable and continues to record strong risk-weighted capital ratio of 13.2% as at end-August 2008, exceeding the minimum 8% capital requirement by RM42.3 billion. The insurance industry also recorded high solvency surplus of RM16.5 billion. The strong capital position combined with ample liquidity provides adequate capacity to the banking system to continue to perform its intermediation function and to meet its financial commitments as well as the demands for financing and financial services in supporting domestic economic activities. The aggregate domestic household sector continues to exhibit stable level of indebtedness and wealth where total financial assets are more than two times of total debts. Overall, corporations also continue to exhibit sound financial position and manageable leverage position with debt-to-equity ratio of 48% in the first half of 2008.

The Central Bank has a fully developed supervisory and surveillance system. It continuously monitors all financial institutions under its purview and will take appropriate action to safeguard the soundness of the financial system. The Bank stands ready to provide liquidity, whenever necessary, to financial institutions under its purview. The Bank is also closely engaging with the other monetary authorities in the region to monitor and respond with co-ordinated measures in managing the current challenging environment.

Best Regard
ZULKIFLI HASAN
DURHAM UNIVERSITY

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