Eurozone sovereign debt crisis remains a concern

DEVELOPMENTS in the euro area among other externally-driven factors will continue to take prominence where risks to domestic financial stability for 2012 is concerned.

“The key risks stem from the continued uncertainties clouding the prospects for a more entrenched recovery and strengthening of the financial systems in the advanced economies,” the central bank said in the Financial Stability and Payment Systems Report 2011.

Therefore, given the continued fragility in market sentiment, risk aversion and volatility in the global financial markets are likely to remain elevated while in the domestic environment, the accumulation of household debts will continue to be closely monitored although measures already taken are expected to take a firmer hold, thus ensuring that the overall household finances remain sound.

It said domestic financial stability was preserved throughout 2011, providing an environment conducive to economic growth to the country even as risks associated with the sovereign debt crisis in Europe and weaker growth in advanced economies increased sharply in the second half of the year.

“External contagion from events in the euro area and in the United States saw higher volumes and speed in movements in portfolio flows during the year,” it said, adding that these flows were effectively intermediated with domestic financial markets remaining orderly despite the higher observed volatility.

It said funding conditions for Malaysian financial institutions had remained broadly favourable with limited impact observed from the tightening in global wholesale funding markets, given the stable funding structures.

Underpinned by strong fundamentals, the domestic financial system continued to demonstrate a high degree of resilience to unfolding developments in the external environment. Financial soundness indicators were sustained at strong levels, including under the assumptions of stressed scenarios, affirming the capacity of the country’s financial sector, both at the system and institution levels, to withstand shocks.

Bank Negara said continued vigilance over areas of potential risk on the domestic front maintained throughout 2011 has allowed for the early implementation of wide-ranging measures, including supervisory measures, to be taken by the central bank to address emerging risks.

“These measures ensured that financial intermediation continued to function efficiently, as reflected by the steady broad-based expansion in financing activities.”