Under the Banking and Financial Institution Act (BAFIA), 1989, specific regulations were issued by BNM defining the scope of activities each group of banks are allowed to undertake (see Figure 5).
Figure 5
Scope of Activities of the Banking Groups
Banking Group
List of Banking Activities
Deposits Lending Guarantees Treasury Forex Derivatives Other DCB and LIFB Yes. In the form of current, fixed deposit, savings accounts. No Limit. Yes. In the form of term, revolving, trade finance, overdraft, housing loans and hire purchase. Provision of financial guarantees to any persons. Yes. Yes, including Gold. Yes, but subject to compliance with Bank’s guidelines. i. Paying or collecting cheques. ii.Factoring. iii. Leasing. iv. Money remittance. v. Agents of unit trust of property trust and insurance. vi Ancillary services. vii. Safe deposit box facilities and intermediation role. InvB Yes. Fixed deposit account only at minimum RM500k. Yes, but only to complement fee- based activities. Provision of financial guarantees to any person. Yes. Yes, excluding Gold. Yes, but subject to compliance with Bank’s guidelines. i. Consultancy and advisory services relating to corporate and investment matters. ii. Business of making or managing investment on behalf. iii. Securities. iv. Future broking. v. Fund management. vi. Unit trust schemes. IBs Similar to DCBs and LIFBs with additional feature of having to obtain Syariah Council approvals for all transactions.
The Role of Central Bank 2.
2.1 As Liquidity Provider
The role of BNM in providing or withdrawing liquidity stems from its objectives of achieving monetary and financial stability. The ultimate goal of monetary stability is to achieve price stability in order to manage inflation and the economy. This is done by influencing the level of interest rates and management of liquidity in the banking system. For example, when the economy is weak, liquidity would be injected into the banking system and interest rates lowered in order to boost consumption and investment to stimulate the economy.
Financial stability, on the other hand, refers to an environment where financial institutions licensed and supervised by BNM remain strong in terms of liquidity and continue to meet their contractual obligations. BNM acts as financial regulator and supervisor as well as lender of last resort in order to ensure the financial institutions remain solvent and are capable of meeting their liquidity responsibilities.
There are a few methods used by BNM to inject or mop up liquidity. They include sale and purchase of BNM and Malaysian Government papers and other eligible securities under REPO agreement, changes in the statutory reserve requirement (SRR), and direct lending and borrowing in the interbank market. These methods may be used by BNM in normal time or during a crisis.
A classic REPO arrangement is where the seller of REPO requires cash and sells to REPO buyer a security with a commitment to repurchase the said security. Under REPO agreements, BNM would withdraw liquidity through the sale of eligible securities to the banking system and would repurchase these securities back in a future time. A reverse REPO would be used by BNM in order to provide liquidity vide purchasing eligible securities from the banking system.
SRR is the required reserve that banks in Malaysia must maintain as a percentage of Eligible Liabilities (EL) in order to manage liquidity. In using SRR to inject and mop up liquidity, BNM relaxes or makes more stringent some of the requirements under this guideline. For example, under the guidelines issued in 2007, EL was originally defined as MYR (Malaysia Domestic Currency) denominated liabilities net of interbank assets and placements with BNM. Furthermore, between 2008 and 2009
BNM made 3 downward revisions of SRR ratios from 3.5% to 1%. The last revision to SRR ratio prior to 2008 was in September 1998 where the SRR rate was 4% of EL.
The last method that could be employed by BNM to provide liquidity is to directly lend and borrow in the interbank market. BNM drew up extra tools to manage liquidity in the banking system to allow it to influence interest rates in the interbank market which came in the form of “New Interest Rate Framework” guideline. The guideline gives BNM the power to set overnight rate known as Overnight Policy Rates (OPR). The OPR, in turn, is a guide for banks to set their overnight interbank rate. BNM also stipulates, under the same guideline, that banks’ overnight interbank rates should be within the operating corridor as specified by BNM. The current specified corridor is within (-25bps+25bps) of the OPR. The guideline makes available Standing Facilities (SF) for the banking and insurance systems in the event they are faced with liquidity problems under normal or crisis scenarios. The SF includes Lending and Deposits facilities which are priced at ceiling limit for Lending and floor limit for Deposits. However, as BNM is a lender of last resort, banks are required to go through the interbank market first before resorting to borrowing from the central bank.