ahmad shahrilmohdshariff bank negara malaysia … · 2013-12-11 · ahmad shahrilmohdshariff bank...

1III Meeting on Financial Stability

7 – 8 November 2013

Lima, Peru

Ahmad Shahril Mohd Shariff

Bank Negara Malaysia

[email protected]

Regulatory reforms to strengthen oversight and regulation of shadow banking post-GFC

Member of

workstream

Progress and timelines

FSB

established

five

1. Mitigate spill-over effect

between regular banking

system and shadow banking

system

BCBS • To finalise proposed supervisory framework for

banks’ large exposures and capital treatment

for investments in equity of funds by end 2013

• To complete work on scope of prudential

consolidation in 2014

2. Reduce money market

funds (MMFs’) susceptibility to

“runs”

IOSCO • Final policy recommendations issued (Nov

2012)

• Peer review on national implementation in 2014

3. Assess and mitigate systemic

risks posed by other shadow

FSB Task

Force

• Policy framework issued (Sept 2013)

• To develop an information-sharing process to



Lima, Peru

five

workstreams

to mitigate

potential

systemic

risks

risks posed by other shadow

banking entities

Force • To develop an information-sharing process to

activate high-level policy framework by Mar

2014

4. Assess and align incentives

associated with securitisation

IOSCO and

BCBS

• Final policy recommendations issued (Nov

2012)

• Peer review on national implementation in 2014

5. Dampen risks and pro-

cyclical incentives associated

with securities financing

transactions (i.e. repos &

securities lending)

FSB Task

Force

• Policy framework issued (Sept 2013)

• To complete proposed recommendations on

minimum haircuts by spring 2014

• To develop standards/ processes for data

collection and aggregation at global level by

end 2014

BCBS = Basel Committee on Banking Supervision, IOSCO = International Organization of Securities Commissions

Banks are dominant component in most Asian financial system

40

50

60

70

80

90

Composition of Financial Sector Assets in Selected Asian economiesAs % of

financial

sector assets• Banking system account for at least half of financial sector assets• Share of assets of other financial institutions (OFIs) typically less than

global average of 25%* of financial sector assets



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0

10

20

30

40

Australia China Indonesia India Japan Korea Malaysia New Zealand

Pakistan Sri Lanka Singapore Thailand

Banks Insurance and Pension Funds Non BanksOther Financial Institutions (OFIs)

Source : National authorities and various IMF Financial System Stability Assessment Reports. Data as at 2011

* As reported in the FSB’s Global Shadow Banking Monitoring Report 2012

Country experience Measures taken

China • Regulatory arbitrage concerns arising from

interaction between banks and trust companies

involving sale of credit-related wealth

management products to evade regulatory capital

requirement

• CBRC strengthened oversight on interactions

between banks and trust companies

• Require banks to shift loans sold to trust

companies back onto balance sheets

• Tightened capital requirements for trust

companies (risk weighted capital of 10.5%)

India • Relatively lighter regulations for non-bank

financial companies (NBFCs) vis-à-vis banks

• Steady increase in bank lending to NBFCs may

potentially result in transfer risks from NBFC

sector to banks

• RBI established a working group to review

regulatory framework of NBFCs

• Published (Dec 2012) draft guidelines to

strengthen regulation on capital, liquidity

management and corporate governance &

Enhanced focus to strengthen oversight on NBFIs despite relatively small concentration and low interactions with banks



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sector to banks management and corporate governance &

disclosures

New

Zealand

• Failure of a number finance companies since

2006 due to low level of capital and concentration

risk in loan portfolios

• Inadequate regulation & supervision of non-

bank deposit takers (NBDTs)

• Absence of uniform measurement

standards and limited transparency for

authorities to conduct risk assessment

• Introducing new legislation to enhance

regulation of NBDTs

• Licensing requirements and strengthens

RBNZ’s powers in relation to prudential

regulations of NBDTs

Source: Article published by RBNZ on “Regulating non-bank deposit takers” (2010), Report by RBI’s Working Group on the “Issues

and Concerns in the NBFC Sector” (2011), Presentation by CBRC on “Shadow banking activities and its supervision in China from

an emerging market perspective “ (2011)

Other Financial Institutions (OFIs)

Pension Funds

Assets as a % of GDP Composition of Financial System Assets*

Similarly, Malaysian financial system predominantly bank centric- But, NBFIs gaining prominence amid evolution of a more diversified

financial system

• Driven by growth in

assets of NBFIs and

enhancement in

data capture of

such entities

66%6%

19%

9%

2002Banks

Insurers

Pension Funds




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0% 50% 100% 150% 200% 250%

Banking System

Insurers

% of GDP in 2002 % of GDP in 2012

52%

5%

18%

25%

2012Banks

Insurers

Pension Funds


Source: Survey and Bank Negara Malaysia

* Excluding central bank assets

OFIs refers to non-bank financial intermediaries (NBFIs) excluding insurance companies and pension funds. Includes fund management industry

(including unit trust funds), DFIs, money lenders, pawnbrokers, co-operatives, leasing & factoring companies and securitization entities

such entities

% of GDP

Institutions (OFIs)

NBFIs undertake less complex financial intermediation activities - Focused on investment in plain vanilla securities and traditional

lending

Composition of NBFIs (based on

asset size)

Fund management industry, 28%

DFIs, 12%

Insurance companies,

11%

Composition of financial intermediation

activities undertaken by NBFIs

39%

33%

25%

20%

30%

40%



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Pension and providend funds, 36%

11%

Non-bank lenders*, 6%

Public Financial

Institutions, 2%

National Mortgage Corp., 2%

Others**, 3%

2%

0%

10%

20%

Debt Securities Holding

Equity Holding Loan Origination

Credit Guarantee & Securitisation

Source: Survey and Bank Negara Malaysia

* Non-bank lenders Include money lenders, pawn brokers, cooperative societies, leasing & factoring companies, building

society and non-bank credit card issuers

** Others include brokerage firms, venture capitalist, securitisation entities and social security institution (PERKESO)

..and typically contributes towards socio-economic, economic and financial sector development

Development of niche

markets & services

Financial inclusion & access to

basic financial services

• Insurance & takafuloperators

• Credit guarantee institution

• DFIs*

• Unit trust funds

• Pension & provident

• Co-operatives

• Pawnbrokers

• Money lenders

• Building societies

• Leasing companies

• Public Financial Institutions

• Financial guarantee (bond)

• Securitisationentities

• Housing finance agency



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• Pension & provident funds

Institutions*DFIs = development

financial institutions

Socio-economic development Economic development Financial development

Provision of loans to

SMEs, exporters/ importers and new

growth sectors

Provision of credit guarantee to

SMEs

Issue mortgage-backed securities

to promote capital market

development

Provision of mortgage guarantee

Provision of loans for welfare

needs (e.g. education, medical,

entrepreneurship microfinance)

Provision of housing finance to

promote home ownership

Characteristics of OFIs in Malaysia

• Large volume, low value, serving niche market

• Operations funded mostly by internally generated funds

• Debt securities issued account for 3.9% of bonds outstanding, mainly with

No. of institutionsAverage asset size per

institution (USD mil)

Co-operatives 9,073 0.55

Money lenders 2,574 0.41

Pawnbrokers 348 1.98



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• Debt securities issued account for 3.9% of bonds outstanding, mainly with

maturity > 1 year

• Low susceptibility to a sudden market liquidity shock or liquidity dislocations

• Moderate maturity mismatch

• Average maturity of debt securities issued (8.2 years) vs financing granted

(typically ≤ 9 years)

Whilst bulk of NBFIs subject to oversight, regulatory objectives and regimes differ across domestic regulators

Relative asset size of NBFIs and regulatory objective of various oversight bodies

Consumer/contributor

protection

Investor

protection, capital

market stability and

Prudential

Development of

specific areas

None

• Entities regulated by BNM: 244% of GDP

• Entities regulated by other supervisory authorities: 60% of GDP

• Entities subject to oversight of Ministries: 84% of GDP**



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Source: Bank Negara Malaysia survey, Securities Commission Malaysia, Malaysia Co-operative Societies Commission, various Ministries and various

financial statements

**Bulk of which are assets of public pension and provident funds , whose establishment, management and operations are governed under specific legislation

(administered by respective Ministers)

Banks Investment Banks Insurers and takaful operators DFIs (under DFIA)

Asset management industry Securitisation entities Cooperatives Money lenders and pawn brokers

Provident and pension funds Other DFIs Public Financial Institutions Building Societies

Leasing & Factoring

Prudential

regulation, financial

sector development

and financial

stability

Bank Negara

Malaysia

Securities

Commission

Malaysia

Malaysia Co-

operative Societies

Commission

Relevant authorities/

ministries

No oversight

authority

• Entities subject to oversight of Ministries: 84% of GDP**

• Not regulated: 9% of GDP

(based on total asset size)

Risks to financial stability

In the opinion of the Bank

• Primary objects of the Bank in Central Bank of Malaysia Act 2009: Promote monetary

stability and financial stability conducive to sustainable growth of Malaysian

economy

• Triggers for exercise of financial stability powers defined in terms of risks to financial

stability

– Flexibility to respond to unforeseen and dynamic circumstances

Monitoring of risks from NBFIs is a key element of BNM’s assessment of financial stability



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Disrupts or is

likely to disrupt

Affects or is

likely to affect

Financial intermediation

process

Orderly functioning of the

money and FX markets

Disrupts or is

likely to disrupt

Public confidence in

the financial system

Stability of the

financial system

• appropriate mix of principle

and rule-based regulations

• differentiated rules based on

risk profile

4. Robust

Financial

Infrastructure

2. Sound

Supervisory

5. Effective Safety

Nets & Crisis

1. Effective

Regulatory

Framework

4. Robust

Financial

Infrastructure

• risk-based and consolidated

supervision

• forward looking and preemptive

• focus on corporate governance

and risk management

• greater macroprudential focus

• effective collaboration with

• lender of last resort• deposit insurance• insurance benefits protection scheme

• payment system• consumer protection and education

• legal framework• accounting standards

Components of financial stability framework



Lima, Peru

3. Comprehensive

Surveillance

Framework

Supervisory

Framework

Nets & Crisis

Management

Framework

6. Effective

market

discipline

• effective collaboration with

other supervisors

• Integrated macro and micro surveillance

• scenario-based stress testing

• ex-ante and forward looking

protection scheme• effective crisis resolution & management framework

• consumer and shareholder activism

• transparency and disclosure

Functional organisational structure aligned to financial stability framework

Financial

Surveillance

Insurance &

Takaful

Supervision

Banking

Supervision

Financial

Conglomerate

Supervision

• Conglomerate

Banking Group

• Life, General

• Takaful

• Reinsurers

Macro-surveillance

Micro-Surveillance

• Macro-

prudential risk

analysis

• Financial/ non-financial sectors

• Financial markets

Prudential

Financial

Policy

Consumer

& Market

Conduct

Regulation

• Foreign Banks

• Stand alone Islamic Banks

• Stand alone Investment Banks



Lima, Peru

Supervisory Practice Unit

• Ensure consistency of supervisory practices

• Provide guidance and support on RBSF

Risk Specialists : Credit, Market, Operational, Technology, Actuarial

• Provide technical advice and support to line departments

• Conduct horizontal risk assessment and on risk practices

markets

• NBFIs

• Macro-prudential policy

• Crisis management & resolution

Payments System Policy

Banks

• Development Finance FIs

Horizontal Risk Analysis

Inter-linkages between banks and NBFIs

Asset

Loans provided to NBFIs

Liability & shareholder equity

Acceptance of deposits from NBFIs



Lima, Peru

Holdings of debt securities & equities issued by NBFIs

Issuance of debt securities held by NBFIs

Issuance of shares held by NBFIs

Exposure to common assets

i.e. holdings of equities and bonds that NBFIs also hold

Annual information submission

Quarterly customisedinformation submission

Regulations

Oversight framework for NBFIs

Systemic importance



Lima, Peru

Systemic importance

Factors considered

• Size • Substitutability

• Interconnectedness with banks (e.g. deposit placement with banks, credit exposures via lending

& holdings of debt securities, exposure to common assets)

• Extent of involvement in maturity/liquidity transformation, leverage creation and

facilitation of imperfect credit risk transfer

Cooperatives

Hire Purchase

Asset

managementMoney LendersPawn Brokers

Factoring

& Leasing

Other DFIs

(not under the

Securitisation

vehicles/entities Major

Institutional

investors

Major building societies

DFIs (under the purview

of BNM)

Financial guarantee

(bonds)

Credit card

issuers

Insurance

companiesUnit trust funds

(fixed price)

Public

financial

institutions

Intensity of monitoring commensurate with systemic importance



Lima, Peru

Major public

pension funds

Credit guarantee company

(not under the

purview of

BNM)Housing finance agency

Major non-bank

deposit inst. Monitor via Monitor via submission of annual submission of annual informationinformation

Monitor via Monitor via submission of annual submission of annual informationinformation

More intensive intensive monitoring via quarterly submission, with possibility of future regulation

More intensive intensive monitoring via quarterly submission, with possibility of future regulation

Subject to prudential regulations by BNM Subject to consumer protection regulations by Ministries

Subject to investor protection regulations by Securities Commission

Subject to regulations by Co-operative Societies Commission to foster sound and orderly development of the sector

Intensity of monitoring commensurate with systemic importance – sample information request

DFI# with asset size

of USD1.7 billion

(Frequency : annual submission)

Size and composition of balance sheet

Pension fund with asset size

> USD23.3 billion

(Frequency : quarterly submission)

Size and composition of balance sheet (by domestic and foreign

currency)

Maturity profile of assets and



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Maturity profile of assets and liabilities

(maturity buckets: <1 year, 1-5 years & > 5 years)

Maturity profile of assets and liabilities (maturity buckets: up to 1

month, 1-3 months, 3 months – 1 year, 1-5 years & > 5 years)

Profile of investments (by type, sector and large exposures)

Income statement

Cash flow position

#Not regulated under DFIA 2002 (non-regulatee)

Central Bank of Malaysia Act 2009

Ex-ante surveillance powers

for timely risk identification

•Access to information

Pre-emptive powers to avert or

mitigate systemic risks

• Macroprudential measures

Power to enter into

arrangements, advice and make

recommendations to other

Comprehensive powers and tools to address financial stability risks under Central Bank of Malaysia Act 2009



Lima, Peru

•Access to information

either directly from NBFIs

or indirectly via relevant

authorities

• Macroprudential measures

• Order to undertake corrective

measures for the purpose of

financial stability

• Liquidity assistance

• Enforcement

• On-site examination

• Penalty

recommendations to other

supervisory authorities

•Co-operate and coordinate financial

stability measures

•Promote laws & policies that are

consistent with financial stability

Financial Services Act 2013

Clear triggers

• Poses or likely to pose risk to financial

stability arising from:

Scope of regulation based on nature

and risk profile of entity

• May apply all or any part of the law to

New regulatory law accords the Bank with ability to regulate and supervise NBFIs on on-going basis



Lima, Peru

stability arising from:

• Maturity/liquidity transformation, create

excessive leverage, imperfect credit risk transfer

& regulatory arbitrage concerns

• Nature, scope, size, scale or concentration of

financial intermediation activities

• Interconnected with the Bank’s regulatees

• May apply all or any part of the law to

the prescribed financial institution

E.g.

• Prudential requirements

• Consumer protection

• Supervisory intervention

• Resolution

• Penalty


Governance arrangements in dealing with risks emanating from NBFIs

• Financial Stability Executive Committee

• Joint Policy Committee

• Financial Stability Committee

Macro prudential measures

• Financial Stability Executive Committee- Order for financial stability



Lima, Peru

• Financial Stability Executive Committee

• Financial Stability Committee stability

- Liquidity assistance

• Minister of Finance

Prescription of a financial institution for on going

regulation and supervision

Financial Stability Executive Committee

Establishment

Membership

• Pursuant to section 37 CBA 2009

• Internal: Governor, one Deputy Governor

• External: Secretary General to Treasury, CEO of Malaysian Deposit Insurance Corporation, Chairman of



Lima, Peru

Membership

Responsibility

Insurance Corporation, Chairman of Securities Commission, selected independent technical experts and, where relevant, head of other supervisory authority

Decides on recommendations by BNM to

• issue financial stability orders or extend

liquidity assistance to entities not

regulated by BNM; or

• provide capital support to BNM’s

regulatees

to avert or reduce risks to financial stability

Penalty framework of the Bank


• Fine not exceeding RM10

Financial Services Act 2013

• Fine not exceeding RM50



Lima, Peru

• Fine not exceeding RM10 million (USD3.2 million) or to imprisonment for a term not exceeding 10 years or both

• Fine not exceeding RM50 million (USD6.1 million) or to imprisonment for a term not exceeding 10 years or both

Applicable to persons undertaking financial business

BNM’s recent experience in managing risks arising from developments in household sector

Household debt to GDP ratio one

of the highest in the region

Japan, 83.8

UK, 98.3

Australia, 94.9

United

States, 83.6Thailand, 78

New

Zealand, 91.9

80

100

120

Growth of household debt faster

than financial asset

Household debt to GDP ratio (%)

13

14.8

15

20

Annual

growth (%)

Malaysia

(2Q’13: 85.1)



Lima, Peru

Singapore, 77

Indonesia , 17

Malaysia

(2009), 72.4

Phillipines, 6

China, 20

Hong Kong, 61

0

20

40

60

0 10 20 30 40 50 60GDP per capita (%)

11.9

0

5

10

2009 2010 2011 2012 Jul-13

Household debt Household financial assets

While bulk of household debts are for properties, borrowings for personal use are rising rapidly

80.5% 8.5

4.1

0 100 200 300 400 500 600 700 800 900

Banks DFIs NBFIs Treasury Housing Loans Others

HH Sector: Loans by Lender Type

RM bil

• Most lenders are regulated by BNM (89%)

• Bulk of non-bank’s exposures are for personal financing

Compositions

16.816.915.813.912.511

0

5

10

15

20

2007 2008 2009 2011 2012 Mar-

13

Personal financing as % of household debt



Lima, Peru

Residential

properties

16.0%

Transport

vehicles

15.6%

Personal

use

63.2%

Others

4.7%

HH Sector: NBFI* Loans by Facility

Note:

1. DFI – Bank Kerjasama Rakyat Malaysia Berhad (Bank Rakyat) and Bank Simpanan Nasional (BSN)

2. *Non-bank Financial Institutions – Malaysia Building Society Berhad (MBSB) and AEON Credit Service (M) Sdn Bhd (AEON)

Compositions

Issued in July 2013 - Regulates: Banks and DFIs regulated under DFIA 2002

- Non-regulatees: Credit coops and several large non-bank institutions

Issued in July 2013 - Regulates: Banks and DFIs regulated under DFIA 2002

- Non-regulatees: Credit coops and several large non-bank institutions

Macroprudential measures to further promote a sound and sustainable household sector



Lima, Peru

Maximum tenure of 10 years for financing extended for

personal use

Prohibition on the offering of pre-approved personal financing products

Maximum tenure of 35 years for financing granted for the purchase of residential and non-residential properties

• Data gaps and challenges– Lack of structured and granular data capture at NBFIs

• Large volume, low value (e.g. co-operatives, pawnbrokers, money lenders)

– Have we effectively captured all? Do we know them?

– Implication on supervisory resources

• Institutional arrangements and mechanisms to facilitate effective inter-agency

coordination– Variation in oversight regimes of domestic regulators

Yet challenges in managing risks of NBFIs



Lima, Peru

– Variation in oversight regimes of domestic regulators

– Managing conflicting mandates

• Proportionality in regulations– Reconciling developmental imperatives with financial stability considerations

– Identifying appropriate prudential regulations that commensurate with level of

complexity and size

• Setting thresholds for escalation– Intensity of monitoring and regulations

Coordination and cooperation arrangements with domestic regulators

Memorandum of Understanding (enhanced MoU

signed in October 2012)

• information exchange during normal and stress time

• development of policies

• managing threats to financial stability and systemic risks in

capital markets

• regulation, supervision and resolution of investment banks

• joint-investigations

• framework on dual approval (BNM and MCSC) for a



Lima, Peru

Memorandum of

Understanding

(signed in July

2013)

• framework on dual approval (BNM and MCSC) for a

cooperative society to take deposits from non-members

• framework for collaboration on coop-banks (use of the

word “bank”)

• information exchange during normal and stress time

• development of policies

• managing threats to financial stability

• technical assistance and capacity building

(Malaysia Cooperative

Societies

Commission, MCSC)

An effective arrangement is one that is developed and operationalised during

period of stability. Trust is key

ahmad shahrilmohdshariff bank negara malaysia … · 2013-12-11 · ahmad shahrilmohdshariff bank...

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