Supporting financial stability

THE regulatory and supervisory framework continued to support financial stability in Malaysia in the face of continuous risks in the external environment and heightened domestic competition.

The framework has also stood up well against the changing character of the domestic financial system which saw the entry of new market participants and the more pronounced regional and international complexion of the financial sector.

In 2011, Bank Negara continued to reinforce and advance further the core tenets of regulation and supervision, building on earlier work undertaken to strengthen the legislative framework and improve risk management, governance and business conduct practices.

The progress made on the global regulatory reforms also had an important bearing on its work.

While taking these reforms carefully into account, the bank has remained focused to ensure relevancy of the reforms and achievement of the intended outcomes.

The bank has continued to leverage its supervisory insights and engagements with the industry to further enhance the integrity and strength of the regulatory and supervisory system in Malaysia.

Regulatory capital and liquidity standards

Further to the announced plans to implement the Basel III reform package in Malaysia in December 2011, Bank Negara released details on the implementation plan, including the timelines.

The plan sets out the bank’s expectations of banking institutions in transitioning towards the new regime, which includes the approach to be adopted by banking institutions for the individual components of the reform package.

The Basel III reform package seeks to strengthen global capital and liquidity standards for banking institutions by improving the quality and quantity of regulatory capital and ensuring adequate high-quality liquidity buffers.

These standards will be implemented in Malaysia in phases, beginning 2013 until 2019, in line with the globally-agreed levels.

While the banking system in Malaysia is well-positioned to meet the requirements of the new regime within a shorter timeframe, the adoption of the extended timeframe set by the Basel Committee on Banking Supervision will allow for more gradual adjustments by banking institutions to the new requirements, thus mitigating any adverse impact on credit intermediation, particularly in an environment of slower global growth.

The current performance trend and projections for banking institutions in Malaysia suggest that the capital requirements can be largely met through prudent earnings retention policies over the period of implementation, thereby avoiding potential market dislocations from synchronous capital-raising actions by the banking institutions.

In addition to the new minimum regulatory capital levels, a primary element of the Basel III reform package is the revised definition of regulatory capital which will ensure highquality and loss-absorbent capital.