BNM published Financial Stability Review for the first half of 2019. The review presents the assessment of BNM on current and potential risks to financial stability and resilience of the financial system in Malaysia. It also covers actions taken to manage risks to financial stability and contains articles (in Box) on topics of special interest. The review uses data available up to June 30, 2019, unless otherwise stated. The review highlights that, in the first half of 2019, domestic financial stability remained intact amid continued challenges in the external and domestic environment.
Strong domestic institutional investors, including financial institutions, have continued to provide an important source of stability to the domestic markets during periods of heavy portfolio outflows. Active risk management and hedging strategies by banks continued to contain market risk exposures to manageable levels, well within the prudent internal loss limits. This in part reflects greater caution observed by banks amid prevailing uncertainties during the first half of 2019. Similarly, insurance and takaful operators also continued to actively manage their investments in line with their liability structures. In the insurance sector, regulatory reforms are supporting improvements in persistency and pricing, which in turn will sustain longer-term performance.
Overall, the financial sector remained resilient, underpinned by strong capital and liquidity buffers, and sustained profitability. Liquidity in the banking system remained sufficient to support domestic financial intermediation, with the liquidity coverage ratio (LCR) of the banking system strengthening further over the past six months. As part of efforts to ensure that banks maintain a stable funding profile, the net stable funding ratio (NSFR) requirements will come into effect on July 01, 2020. Based on data gathered during the observation period, most banks are well-positioned to meet these requirements. Banks as well as insurers and takaful operators maintained strong capitalization levels, well above the regulatory minimum and higher than internal target capital levels. This is further underpinned by strong buffers against potential losses, in line with more forward-looking financial reporting standards and regulatory requirements.
Stress tests conducted by BNM affirm the resilience of the Malaysian financial system to severe macroeconomic and financial strains, with financial institutions maintaining capital buffers in excess of the regulatory minima, even under adverse simulated shocks. BNM remains vigilant to external and domestic developments that may pose risks to domestic financial stability, including weaker global growth prospects amid increased volatility in capital flows, the elevated level of household debt, soft property market conditions, and operational disruptions from increasing cyber threats. Banks, however, remained cautious in lending to the non-residential segment, with low exposures that continue to be largely performing. Furthermore, based on the sensitivity analysis of BNM, banks have sufficient capital buffers to withstand severe losses under adverse stress scenarios in the broad property market.
Keywords: Asia Pacific, Malaysia, Banking, Insurance, Securities, Financial Stability Review, Stress Testing, LCR, NSFR, Financial Stability, BNM
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