Safeguarding the stability of the financial systemfinancial institutions through enhancing the role...
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Safeguarding the stability of the financial system
Transcript of Safeguarding the stability of the financial systemfinancial institutions through enhancing the role...
Safeguarding the stability of the financial system
responsibleponsive
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responsible
4.1 The regulatory and supervisory regime
4.2 Raising the standards of governance and risk management
4.3 Regulation and greater regional and international integration
Aregulatoryand supervisoryregime
that effectively maintains the stability of the financial
system and soundness of financial institutions is necessary
for sustainable growth and the orderly development of the
financial sector.
Significant attention has been directed over the recent
decade towards strengthening the effectiveness
of the regulatory regime, in line with leading standards
and practices, and providing an enhanced focus on
governance practices and risk management.
The implementation of the Basel II capital adequacy
rules for banking institutions in 2008 and the Risk-Based
Capital Framework for insurers in 2009 have aligned
regulatory requirements to the specific risk profiles and
circumstances of individual financial institutions.
Strengthened corporate governance, risk management
and disclosure standards have engendered prudent
risk taking, while a risk-based approach to supervision
and a pre-emptive intervention framework have supported
comprehensive risk assessments and mitigation of risks to
ensure the soundness and stability of financial institutions
and the financial system. Pre-emptive responses to
address risks in the financial system have ensured
continued confidence and have minimised any disruption
to the financial intermediation process during the recent
global financial crisis. The enactment of the Central
Bank of Malaysia Act 2009 has further reinforced the
foundations for financial stability in Malaysia by enabling
the Bank to respond more effectively to potential threats to
the stability of the financial system.
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Goingforward, the regulatory and supervisory regime
will continue to focus on safeguarding the stability of the
overall financial system, including key market infrastructure;
further strengthening the resilience of individual financial
intermediaries; sustaining the Bank’s ability to effectively
regulate and supervise financial institutions on an ongoing
basis; and promoting responsible and fair dealings towards
financial consumers with due regard to financial stability.
In doing so, key trends affecting the financial landscape will
need to be taken into consideration, including:
• The increasing size and complexity of financial institutions,
with higher levels of financial innovation;
• Continued evolution of financial institutions towards financial
conglomeration;
• A more competitive and vibrant operating environment;
• A greater role of development financial institutions (DFIs)
in financial inclusion;
• The growing significance of Islamic finance and its trend
toward greater internationalisation; and
• The greater diversity of players in the Malaysian financial
system, with cross-border linkages, a significant overseas
presence of Malaysian financial institutions and greater
participation of foreign financial institutions in Malaysia.
The recommendations will therefore focus on ensuring the
continued effectiveness of the regulatory and supervisory
regime that includes:
• Ensuring that potential risks to financial stability in the
new financial landscape continue to be addressed
through timely and appropriate policy measures;
• Raising the standards of corporate governance, risk
management and control functions; and
• Establishing a regulatory and supervisory
environment appropriate for a more regionally- and
internationally-connected financial sector.
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Theregulatoryandsupervisoryregime,
includinginstitutionalarrangements,willbe
furtherdevelopedtoaddresspotentialrisks
tofinancialstabilitythatmayemergefrom
theevolvingfinanciallandscape.Thiswill
involveenhancingthelegislativeframeworkto
promoteaconsistentapproachtoregulation
andsupervisionacrossthefinancialsector;
supportamorerisk-basedapproachto
regulationandsupervision;strengthenthe
Bank’scapacitytomanagerisksassociated
withfinancialintermediationactivitiesthat
occuroutsidethebankingsystem(suchas
non-bankcreditandfinancialintermediation
activities);andprovideenhancedpowersfor
theBanktotaketimelyinterventionactions
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theregulatoryand
supervisoryregime
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todealeffectivelywithvulnerableinstitutions
intheinterestofdepositors,insurance
policyholdersandtakafulparticipants.
Recommendation 4.1.1
Enactacomprehensivelegislativeframework
fortheconventionalandIslamicfinancial
systemsrespectively.Theproposedlegislation
willreinforceasound,transparent,and
accountablesystemforeffectiveregulation
andsupervisionthatisconsolidatedacross
thebanking,insurance,takaful,financial
intermediaryandpaymentsystem
servicessectors.
Recommendation 4.1.2
Reviewregulationsontheownership
structuresoflicensedfinancialinstitutionsto
encouragetheparticipationand
long-termcommitmentofstronginstitutional
shareholderswhilepreservingappropriate
safeguardstopromotethesafetyand
soundnessoffinancialinstitutions.
Thisincludes:
i. Allowinggreaterflexibilityonthemaximum
permittedshareholdingsbyinstitutionsand
cross-shareholdingsinfinancialinstitutions,
withaviewofallowinggreaterflexibility
forshareholdersthatmeetsuitability
requirementswhichareappropriatewiththe
levelofinterestheldinthefinancialinstitution.
Suchflexibilityinshareholding
structuresshouldnotundulyamplifythe
inter-connectednesswithintheMalaysian
financialsystem,createexcessive
industryconcentration,orundermine
competitioninthefinancialsector.
ii. Strengtheningandenhancingthe
transparencyofsuitabilitycriteriafor
significantcontrollinginterestsinfinancial
institutions.Thiswillincludefactorssuchas
theabilityofprospectiveshareholdersto
providecontinuingfinancialsupporttothe
financialinstitution;theircharacter,integrity,
businessrecordandexperience;andwhether
theirgroupstructuresoractivitiesimpede
effectivesupervisionandunderminefinancial
stability.Inaddition,controllerswillalsobe
expectedtodemonstratethesoundness
oftheirplansforthefinancialinstitution’s
business.Toensurethesuitabilityofall
personsexercisingmaterialinfluenceover
financialinstitutions,includingthosethatmay
notnecessarilyholddirectequitypositions,
thenotionsof“interest”and“control”willalso
befurtherclarifiedandenhanced.
Recommendation 4.1.3
Strengthenthesupervisoryoversightover
financialholdingcompaniestoavertrisks
tothesafetyandsoundnessoflicensed
financialinstitutionsthatmayemanate
fromotherentitieswithinfinancialgroups.
Accordingly,financialholdingcompanies
willbesubjecttoappropriateprudential
A comprehensive legislative
framework will be enacted
to reinforce a sound, transparent
and accountable system
for effective regulation and
supervision
regulationswithagreaterlevelofsupervisory
oversight.Thiswillbeachievedmainlythrough:
i. Theformalauthorisationoffinancialholding
companies,whichwillincluderequirementsfor
financialholdingcompaniestomeetrelevant
suitabilitycriteriaanddemonstratecapabilities
forensuringprudentmanagementover
financialgroups.
ii. Moretransparentgroupstructuresand
appropriatelimitsonthenatureandscopeof
non-financially-relatedactivitiestoensurethat
depositors,insurancepolicyholdersandtakaful
participantsarenotexposedtoexcessiverisk
andleverage.
iii. Requirementsforfinancialgroupstocomply
withprudentialstandards,includingoncorporate
governance,riskmanagement,capitaland
liquiditytoensureeffectiveriskmanagement
andsoundnessofoperationsofgroups.
iv. AppropriatepowersfortheBanktoexamine,
requestinformationandimplementsupervisory
interventionsinfinancialgroups.
Recommendation 4.1.4
Strengthentheinstitutionalstructureof
financialinstitutionstoprovideadequate
safeguardsfordepositors,insurance
policyholdersandtakafulparticipantsagainst
contagionrisksandexcessiveleverage.This
willbeachievedthrough:
i. Implementingmeasurestoensurethatretail
depositsarenotexcessivelyleveragedby
bankinginstitutionsinhigh-riskandcomplex
activities.Thisincludesrequirementsfor
high-riskactivitiestobeconductedoutof
investmentbankingorspecialisedentities,
alongwithothersafeguardstomaintain
effectivering-fencingofretaildepositssuch
aslimitationsorprudentialrequirements
governingintra-grouptransactionsandthe
sharingofoperationalinfrastructure.
ii. Requiringlifeandgeneralbusinessesof
insurers,andfamilyandgeneralbusiness
oftakafuloperatorstobecarriedout
underseparateentitiesduetothedifferent
riskcharacteristicsandnatureofthese
businesses.Transitionarrangementswill
beputinplacetoallowforanorderly
segregationofbusinessesbyexisting
compositeinsurersandtakafuloperators.
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Recommendation 4.1.5
Promotethelong-termsustainabilityand
enhancedcapacityofDFIsinsupportoftheir
mandates.Thiswillinclude:
i. Enhancingtherisk-sharingandaccountability
arrangementsbetweentheDFIsand
theGovernment.
ii. Introducingspecificmeasurestofurther
strengthenthecorporategovernanceandrisk
managementofDFIssoastosecuretheir
self-sufficiencyinfundingandcapital.
Recommendation 4.1.6
ImplementtheBaselIIIreformpackageto
promoteamoreresilientMalaysianbanking
system.Thestandardswillbeimplementedin
Malaysiainphases,beginning2013until2019,
inlinewiththeglobally-agreedimplementation
timeline.Thiswillinclude:
i. Raisingthequalityofcapitalheldbybanking
institutions,whilealsocreatingincentivesfor
bankinginstitutionstobuildupcapitalbuffers
thatcanbedrawndownintimesofstress.The
enhancementstothecapitalstandardswillalso
considertheriskprofileofbankinginstitutions
andthenatureoftheiroperationsincluding
cross-borderactivitiesandinvestments,aswell
astheofferingortradingofexoticproducts.
ii. Strengtheningtheliquiditystandardsofbanking
institutionsbyenhancingtheexistingliquidity
frameworkinMalaysia,whilealsointroducing
incentivesforbankinginstitutionstotapstable
long-termfunding.
Implementationoftheglobalstandardswillalso
carefullyconsidertheoperatingenvironment
inordertoavoidunintendedconsequences.
Thiswillalsoincludeaddressingstructural
issuessuchasthedominantroleofinstitutional
fundsinmobilisinghouseholdsavingsand
thelimitedavailabilityofhigh-qualityliquid
assets,particularlythosewhichareShariah-
compliant.Inovercomingtheseimplementation
challenges,theBankwillalsoencouragethe
developmentofsolutionsbytheindustryand
cooperatewithotheragenciestoformulate
anappropriateregulatoryframeworkfor
newinstrumentsthatwillsupportbanking
institutions’compliancewiththenewstandards.
Recommendation 4.1.7
Strengthentheregulatoryandsupervisory
frameworkoftheLabuanInternational
BusinessandFinancialCentre(IBFC)inline
withinternationalstandardsandbestpractices.
Thisincludes:
i. EnhancingthecapitalstandardsforLabuan
financialinstitutionsintandemwiththeir
growingsophisticationandthedevelopment
ofotherestablishedfinancialcentres.
Arisk-basedcapitalmodelwillbeimplemented
forLabuanbanking,andinsuranceandtakaful
sectors.Theminimumstatutoryandpaid-up
capitalofLabuanfinancialinstitutionswillalso
beprogressivelyincreased.
ii. Strengtheningcorporategovernanceandrisk
managementpracticesofLabuanfinancial
institutionsandotherserviceproviderswith
afocusonstrengtheningtheoversight
functionsoffinancialinstitutions,and
promotingsoundmanagementofcredit,
market,operational,liquidityandotherrisks.
Recommendation 4.1.8
Developaframeworkformonitoringand
managingrisksarisingfromentitiesand
activitiestakingplaceoutsidethedirectly
supervisedfinancialsystem.Thiswillinclude:
i. Enhancingdatacollectionandsurveillanceof
suchentitiesandactivities,particularlythose
ofsystemicimportance.
ii. Implementingappropriateregulatory
responsestopre-emptivelymanageemerging
risks.Whererelevant,thesewillbeemployed
incoordinationwithotherauthorities.
Recommendation 4.1.9
Enhancetheinstitutionalarrangementsfor
effectiveandorderlyresolutionofdistressed
financialinstitutionsthroughenhancing
theroleoftheMalaysiaDepositInsurance
Corporation(PIDM)asaresolutionauthority
fordealinginanorderlymannerwith
large,non-viablefinancialinstitutionsin
Malaysiathatcanaffectfinancialstability.
Recognisingtheexpertiseandcapabilities
beingdevelopedwithinPIDMtoundertake
theresolutionofmemberinstitutions,PIDM
iswellpositionedtofacilitatetheresolution
ofawiderrangeoffinancialinstitutionsin
Malaysiaincludingnon-memberinstitutions.
Thiswillbesupportedbyappropriate
accountabilityandfinancialarrangementsto
ensuretheeffectivecoordinationbetweenthe
BankandPIDMaswellaswithotherrelevant
authoritieswithinandoutsideMalaysia.
Recommendation 4.1.10
Enhancetheframeworkforfinancialcrime
preventionandinvestigationtopreserve
theintegrityofthefinancialsystem.This
takesintoconsiderationtheincreasing
sophisticationofthenatureandmethods
forperpetratingfinancialcrimes,which
necessitatesmorecoordinatedmechanisms
foreffectiveprevention,investigationand
prosecutionoffinancialcrimes.Inthenear
term,existinginter-agencycoordination
mechanismswillbeenhancedwithaviewto
considermorefundamentalreformstothe
institutionalandlegalframeworktoaddress
financialcrimesinthefuture.Giventhe
moreregionally-andinternationally-connected
financialsectormovingforward,particular
focuswillalsobedirectedatstrengthening
arrangementsforcross-bordercollaboration
infinancialcrimeinvestigation.
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raisingthestandardsof
governance andriskmanagement
Theincreasedsizeandcomplexityof
thefinancialservicesindustryinthe
emerginglandscapewillrequirestandards
ofgovernanceandriskmanagement
infinancialinstitutions,aswellasthe
roleofmarketdiscipline,tobefurther
strengthenedtoensureeffectiveoversight
andprudentmanagementofrisks.
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Recommendation 4.2.1
Strengthenthecorporategovernanceoffinancialinstitutionsandtherole
ofmarketdisciplineinensuringeffectiveoversightoverfinancialinstitutions.
Specificmeasuresthatwillbepursuedinclude:
i. Requiringdisclosuresofperiodicauditsofcorporategovernanceand
Shariahgovernancesothatshareholdersandotherstakeholdersbetter
understandwhetherdisclosedgovernancepoliciesandproceduresare
reflectedinactualpractice.
ii. Codifyinginlawthefunctionsofboardsandresponsibilitiesofindividual
directors,withemphasisontheneedfordirectorstogivedueregardtothe
interestofdepositors,insurancepolicyholdersandtakafulparticipants.
iii.Supportingthedevelopmentofapoolofindependentdirectorsto
facilitateboardsuccessionandrenewal.Thepool,whichwillbeestablished
undertheFinancialInstitutionsDirectors’Education(FIDE)Programme
withintheICLIFLeadershipandGovernanceCentre,willbedeveloped
throughasystematicprocessofidentifying,trainingandprofilingpotential
candidatesfornewappointmentsinfinancialinstitutions.
iv. Elevatingtheroleofcompanysecretariesthatsupporttheeffective
functioningofboards,includingimprovingboardinteractionswith
management.Forthispurpose,therolesandresponsibilitiesofcompany
secretariesinfinancialinstitutionswillbemoreclearlydefined,and
suitabilitycriteriaintroducedtoensurethatcompanysecretarieshavethe
necessaryskills,competenciesandexperiencetoperformtheirdutiesand
responsibilitieseffectively.
v. Continuedevelopingasuitablecomplementofeducationprogrammesfor
directorsoffinancialinstitutionsundertheFIDEinitiative.
Recommendation 4.2.2
Raisethestandardsofriskmanagementand
internalcontrolfunctionsacrossthefinancial
sectorinlinewithdevelopmentsinthefinancial
servicesindustry.Thiswillinclude:
i. Enhancingriskmanagementstandardsto
addressnewandpotentialriskswhichmay
emergefromevolvingindustrypractices
andchangesintheoperatingenvironment,
includingtheexpansionofmarket-based
financialactivitiesandinstruments;thegreater
interdependenciesarisingfromsharedfunctions
andserviceswithinfinancialgroups;themore
dynamicpricingofinsuranceandtakaful
productsandmoreliberalisedrulesonexpense
managementforinsurers.
ii. Requiringinsurersandtakafuloperatorstobe
servedbyindependentanddedicatedheads
ofriskandobservehigherstandardsforrisk
managementsystemsandprocesses,inline
withtheirgrowingsignificanceandimportance
inthefinancialsector.Theroleofactuariesand
theirinteractionswithkeycontrolfunctionswill
alsobereviewed,withfurtherclarificationon
therolesofactuariesinlifeinsurersandfamily
takafuloperators,andamoreprominentrole
foractuariesingeneralinsurersandgeneral
takafuloperators.
iii. Introducingspecificriskmanagementstandards
formicrolenderstoensuresustainablepractices
andthatinstitutionalsafetyandsoundness
Corporate governance of
financial institutions and the
role of market discipline will
be further strengthened to
ensure effective oversight
of financial institutions and
prudent management of risks
ismaintained,whilealsoavoidingthe
emergenceofpredatorylendingpractices
asfinancialinclusionfurtherdeepens
inMalaysia.
Recommendation 4.2.3
Strengthenthefoundationsforasoundrisk
cultureinthefinancialsector.Astrongrisk
culturethatpromotesprudentrisktakingand
thelong-termviabilityoffinancialinstitutions
willbecomemoreimportantinthefuture
financiallandscapewhichisexpectedtobe
morediverseandcompetitive.Thiswillbe
advancedthrough:
i. Implementingmeasurestopromotemore
risk-alignedexecutivecompensation.
ii. Developingcodesandpractices,andtraining
programmesthatsupportasoundriskculture.13
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regulationandgreaterregionalandinternational
integration
TheintegrationoftheMalaysianfinancial
systemwiththeglobalfinancialsystem
willfurtherintensifyasitplaysagreater
roleintheintermediationofcross-border
funds.Accordingly,thepromotionofa
regulatoryandsupervisoryenvironmentthat
isappropriateforamoreregionally-and
internationally-connectedfinancialsector
willbeakeyprioritymovingforward.
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Home-hostcoordinationarrangements,particularlywithcentralbanksand
supervisoryauthoritieswithintheregion,willbestrengthenedtoensurethe
orderlyexpansionofMalaysianfinancialinstitutionsoverseas,andtheentry
ofnewforeignfinancialinstitutionsinthedomesticfinancialsector,aswell
asintheLabuanIBFC.Thesewillseektoensurethatcross-borderfinancial
linkagesfosterregionalgrowthinamannerthatdoesnotpropagate
systemicriskacrossborders.
Recommendation 4.3.1
Collaboratewithothercentralbanksandsupervisoryauthoritiestosafeguard
thestabilityofaregionally-andinternationally-connectedfinancialsector.
Thiswillinclude:
i. Achievinggreaterconsistencyintheprinciplesofregulationandsupervision
acrossjurisdictionswithintheregion.Strategiccollaborationandcooperation
initiativeswillbepursuedtobuildcapacityandsupporttheraisingofstandards
acrossjurisdictions,withtheviewofpromotinggreaterharmonisationof
principlesandmutualrecognitionofstandardsinthelongrun.
ii. Establishingchannelsforthetimelyexchangeofinformationbetween
supervisoryauthoritiestosupporttheeffectivesupervisionofcross-border
institutions,financialsystemsurveillance,andcrisisprevention,management
andresolution.Thisincludestheestablishmentandmoreactiveroleof
supervisorycollegesforthesupervisionofregionally-andinternationally-active
financialinstitutions.
iii. Strengtheningliquiditysafetynetstosupportmoreefficientcross-border
provisionofliquiditytomarketsandinstitutionsintimesofstressthrough
bilateralandmultilateralarrangements,whichincludetheimplementationof
cross-bordercollateralandcurrencyswaparrangementswithothercentral
bankswithintheregion.
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beoneffortstoreinforcethefoundations
foreffectiveregulationandsupervision,
particularlywithrespecttostrengthening
thepreconditionsandcreatinganenabling
environmenttosupporttheimplementation
ofvariousrecommendationsunderthe
Blueprint.Thiswillincludemakingnecessary
enhancementstothelegislativeframework,
strengtheningsupervisorycapacity,aswell
asenhancingcoordinationarrangements
withothersupervisoryauthoritieswithin
andoutsideMalaysia.Meanwhile,more
fundamentalreformsandenhancements
thatwillbenecessarytosafeguardfinancial
stabilityinresponsetotheevolvingfinancial
landscapewillbeimplementedinthemedium
tolongerterm.Attentionwillalsobedirected
atcontinuouslyraisingthestandardsof
corporategovernance,riskmanagementand
controlfunctions.
Recommendation 4.3.2
Participateingreatercross-border
arrangementsandsupervisorycooperation
tosupporttheorderlydevelopmentofan
internationalIslamicfinanceindustry.
Thiswillinclude:
i. Acceleratingthedevelopmentofamore
robustinfrastructuretosupportmoreefficient
liquiditymanagement.
ii. Implementingprudentialstandards,
riskmanagementandShariah
governancepractices.
Theseeffortswillbepursuedbyleveraging
onexistingbilateralandmultilateralinitiatives
withintheregion,includingASEAN,
ASEAN+3andtheExecutives’Meetingof
EastAsia-Pacific(EMEAP)CentralBanks,as
wellasthroughinternationalIslamicfinancial
organisationssuchastheIslamicFinancial
ServicesBoard(IFSB).
The Bank will seek to promote
a regulatory and supervisory
environment that ensures the
orderly expansion of Malaysian
financial institutions overseas
and the entry of new foreign
financial institutions into Malaysia
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