External risks to financial stability

RISKS to domestic financial stability in 2012 are expected to continue to be mainly externally driven.

Uncertainties over the resolution of the European sovereign debt issues and to a lesser extent, concerns over the fiscal position in the United States will continue to weigh on global market sentiment and economic growth. This will continue to adversely affect the balance sheets and funding of global banks, hampering efforts to strengthen the financial systems in the advanced economies.

Spillovers to domestic financial markets will see market volatility remaining at elevated levels, and continued challenges in foreign currency funding. Weaker economic conditions in the advanced economies could also affect businesses in Malaysia through the trade channel, potentially increasing credit risks for Malaysian financial institutions.

The financial sector is on firm footing and well placed to cope with these developments.

The credit risk outlook for the Malaysian financial institutions arising from exposures to businesses and households is anticipated to remain manageable in 2012, under expectations of stable income and employment prospects supported by sustained domestic demand.

Measures taken to promote the continued resilience of households should also take firmer hold, in particular through the observance of requirements for banks to properly assess the ability of borrowers to afford to assume new debt.

The bank will continue to actively monitor the financial position of households, coordinating closely with other relevant authorities in implementing appropriate measures to ensure that the resilience of the household sector is preserved.

While the foundations for financial stability is well entrenched, Malaysia will strive to improve further in safeguarding financial stability in a highly dynamic domestic and external environment.