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March 08, 2019

IMF published its staff report and selected issues report under the 2019 Article IV consultation with Malaysia. The IMF Directors agreed that the financial sector appears resilient, with low non-performing loans (NPLs) and sound profitability and liquidity indicators. However, a few Directors suggested a more cautious approach in phasing out measures related to the "residency-based differentiation" in the property market, as systemic risks dissipate.

The staff report highlighted that the authorities viewed financial sector risks to be appropriately monitored and contained. They noted that the financial sector has the necessary buffers to cope with sizable shocks. Banks are well-capitalized and liquid, with capital and liquidity buffers exceeding the regulatory levels. Loan quality is strong, with aggregate NPLs at 1.5% of gross loans as of third quarter of 2018, and provisions are sizable. The potential for spillovers from the non-bank financial institutions (NBFIs) to the banking sector appears limited. NBFIs’ investments in equities and bonds continue to be the main transmission channel of contagion risk to the financial sector. To help manage these risks, BNM has taken steps to improve the flow of NBFIs’ financial reporting. Macro-prudential norms and credit underwriting standards have been effective in containing household NPLs at 1.4%.

Mortgages, which represent 60% of total household debt, mostly have a variable rate structure and are subject to interest rate risk. Despite high loan quality and the positive outcome of the latest stress testing of BNM, household debt continues to require close monitoring. According to the stress tests by BNM, potential bank losses originating from a possible sharp real estate price adjustment and shocks to income and interest rates are small relative to the capital buffers of banks. Given the sizable exposure of banks to mortgage lending and to the construction industry, a real estate market price correction, through a reduction in household and corporate wealth, and these agents’ debt-servicing capacity, could have a significant impact on growth and financial stability as NPLs rise. While agreeing that household balance sheet risks require close monitoring, the authorities noted that the associated problems do not pose systemic financial stability risks at this juncture. They were of the view that, with real estate price increases moderating and given the strength of the macro-prudential framework, the likelihood of a sizable adjustment with systemic implications is low.

Although the financial sector is deemed resilient at present, the authorities continue to closely monitor risks and consider measures to mitigate them. The authorities are making ongoing efforts to enhance operational resilience and crisis preparedness. These actions could be further strengthened by a comprehensive internal review of crisis preparedness, resolution framework, and related facilities and legislation. This would help ensure seamless inter- and intra-agency functioning at a time of distress. The framework governing the financial oversight functions of BNM appears robust. Regarding the crisis preparedness, the authorities indicated that, in addition to periodic reviews of such preparedness, resolution frameworks, and related liquidity facilities, they were increasingly focused on testing the banking system’s operational resilience, including to cyber risks. Moreover, the 2012 Financial Sector Assessment Program (FSAP) found that the overall supervision of the banking sector and some NBFIs, as mandated, is sound and delivers effective oversight. The main gaps identified by the 2012 FSAP—specifically, improving the administration of licensing standards, extending information-sharing arrangements with foreign supervisors, and strengthening the supervisory powers in the insurance sector—have been addressed.


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Keywords: Asia Pacific, Malaysia, Banking, Insurance, Securities, NPLs, Article IV, FSAP, NBFI, Stress Testing, Macro-Prudential Framework, BNM, IMF

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