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.
Keywords: Asia Pacific, Malaysia, Banking, Insurance, Securities, NPLs, Article IV, FSAP, NBFI, Stress Testing, Macro-Prudential Framework, BNM, IMF
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APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.
ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.
BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.
ECB published a decision allowing the euro area banks under its direct supervision to exclude certain central bank exposures from the leverage ratio.
ESAs launched a survey seeking feedback on the presentational aspects of product templates under the Sustainable Finance Disclosure Regulation (SFDR or Regulation 2019/2088).
ECB published input of the European System of Central Banks (ESCB) into the EBA feasibility report on reducing the reporting burden for banks in EU.
EC adopted a decision determining, for a limited period of time, that the regulatory framework applicable to central counterparties, or CCPs, in the UK and Northern Ireland is equivalent to the requirements laid down in the European Market Infrastructure Regulation (EMIR or Regulation 648/2012).
EBA has decided to phase out the guidelines on legislative and non-legislative moratoria of loan repayments, in accordance with the earlier specified end of September deadline.
EBA published an Opinion addressed to EC to raise awareness about the opportunity to clarify certain issues related to the definition of credit institution in the upcoming review of the Capital Requirements Directive and Regulation (CRD and CRR).
ECB finalized the guide on assessment methodology for the internal model method for calculating exposure to counterparty credit risk (CCR) and the advanced method for own funds requirements for credit valuation adjustment (A-CVA) risk.