1III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
Ahmad Shahril Mohd Shariff
Bank Negara Malaysia
Regulatory reforms to strengthen oversight and regulation of shadow banking post-GFC
Member of
workstream
Progress and timelines
FSB
established
five
1. Mitigate spill-over effect
between regular banking
system and shadow banking
system
BCBS • To finalise proposed supervisory framework for
banks’ large exposures and capital treatment
for investments in equity of funds by end 2013
• To complete work on scope of prudential
consolidation in 2014
2. Reduce money market
funds (MMFs’) susceptibility to
“runs”
IOSCO • Final policy recommendations issued (Nov
2012)
• Peer review on national implementation in 2014
3. Assess and mitigate systemic
risks posed by other shadow
FSB Task
Force
• Policy framework issued (Sept 2013)
• To develop an information-sharing process to
2III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
five
workstreams
to mitigate
potential
systemic
risks
risks posed by other shadow
banking entities
Force • To develop an information-sharing process to
activate high-level policy framework by Mar
2014
4. Assess and align incentives
associated with securitisation
IOSCO and
BCBS
• Final policy recommendations issued (Nov
2012)
• Peer review on national implementation in 2014
5. Dampen risks and pro-
cyclical incentives associated
with securities financing
transactions (i.e. repos &
securities lending)
FSB Task
Force
• Policy framework issued (Sept 2013)
• To complete proposed recommendations on
minimum haircuts by spring 2014
• To develop standards/ processes for data
collection and aggregation at global level by
end 2014
BCBS = Basel Committee on Banking Supervision, IOSCO = International Organization of Securities Commissions
Banks are dominant component in most Asian financial system
40
50
60
70
80
90
Composition of Financial Sector Assets in Selected Asian economiesAs % of
financial
sector assets• Banking system account for at least half of financial sector assets• Share of assets of other financial institutions (OFIs) typically less than
global average of 25%* of financial sector assets
3III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
0
10
20
30
40
Australia China Indonesia India Japan Korea Malaysia New Zealand
Pakistan Sri Lanka Singapore Thailand
Banks Insurance and Pension Funds Non BanksOther Financial Institutions (OFIs)
Source : National authorities and various IMF Financial System Stability Assessment Reports. Data as at 2011
* As reported in the FSB’s Global Shadow Banking Monitoring Report 2012
Country experience Measures taken
China • Regulatory arbitrage concerns arising from
interaction between banks and trust companies
involving sale of credit-related wealth
management products to evade regulatory capital
requirement
• CBRC strengthened oversight on interactions
between banks and trust companies
• Require banks to shift loans sold to trust
companies back onto balance sheets
• Tightened capital requirements for trust
companies (risk weighted capital of 10.5%)
India • Relatively lighter regulations for non-bank
financial companies (NBFCs) vis-à-vis banks
• Steady increase in bank lending to NBFCs may
potentially result in transfer risks from NBFC
sector to banks
• RBI established a working group to review
regulatory framework of NBFCs
• Published (Dec 2012) draft guidelines to
strengthen regulation on capital, liquidity
management and corporate governance &
Enhanced focus to strengthen oversight on NBFIs despite relatively small concentration and low interactions with banks
4III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
sector to banks management and corporate governance &
disclosures
New
Zealand
• Failure of a number finance companies since
2006 due to low level of capital and concentration
risk in loan portfolios
• Inadequate regulation & supervision of non-
bank deposit takers (NBDTs)
• Absence of uniform measurement
standards and limited transparency for
authorities to conduct risk assessment
• Introducing new legislation to enhance
regulation of NBDTs
• Licensing requirements and strengthens
RBNZ’s powers in relation to prudential
regulations of NBDTs
Source: Article published by RBNZ on “Regulating non-bank deposit takers” (2010), Report by RBI’s Working Group on the “Issues
and Concerns in the NBFC Sector” (2011), Presentation by CBRC on “Shadow banking activities and its supervision in China from
an emerging market perspective “ (2011)
Other Financial Institutions (OFIs)
Pension Funds
Assets as a % of GDP Composition of Financial System Assets*
Similarly, Malaysian financial system predominantly bank centric- But, NBFIs gaining prominence amid evolution of a more diversified
financial system
• Driven by growth in
assets of NBFIs and
enhancement in
data capture of
such entities
66%6%
19%
9%
2002Banks
Insurers
Pension Funds
Other Financial Institutions (OFIs)
5III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
0% 50% 100% 150% 200% 250%
Banking System
Insurers
% of GDP in 2002 % of GDP in 2012
52%
5%
18%
25%
2012Banks
Insurers
Pension Funds
Other Financial Institutions (OFIs)
Source: Survey and Bank Negara Malaysia
* Excluding central bank assets
OFIs refers to non-bank financial intermediaries (NBFIs) excluding insurance companies and pension funds. Includes fund management industry
(including unit trust funds), DFIs, money lenders, pawnbrokers, co-operatives, leasing & factoring companies and securitization entities
such entities
% of GDP
Institutions (OFIs)
NBFIs undertake less complex financial intermediation activities - Focused on investment in plain vanilla securities and traditional
lending
Composition of NBFIs (based on
asset size)
Fund management industry, 28%
DFIs, 12%
Insurance companies,
11%
Composition of financial intermediation
activities undertaken by NBFIs
39%
33%
25%
20%
30%
40%
6III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
Pension and providend funds, 36%
11%
Non-bank lenders*, 6%
Public Financial
Institutions, 2%
National Mortgage Corp., 2%
Others**, 3%
2%
0%
10%
20%
Debt Securities Holding
Equity Holding Loan Origination
Credit Guarantee & Securitisation
Source: Survey and Bank Negara Malaysia
* Non-bank lenders Include money lenders, pawn brokers, cooperative societies, leasing & factoring companies, building
society and non-bank credit card issuers
** Others include brokerage firms, venture capitalist, securitisation entities and social security institution (PERKESO)
..and typically contributes towards socio-economic, economic and financial sector development
Development of niche
markets & services
Financial inclusion & access to
basic financial services
• Insurance & takafuloperators
• Credit guarantee institution
• DFIs*
• Unit trust funds
• Pension & provident
• Co-operatives
• Pawnbrokers
• Money lenders
• Building societies
• Leasing companies
• Public Financial Institutions
• Financial guarantee (bond)
• Securitisationentities
• Housing finance agency
7III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
• Pension & provident funds
Institutions*DFIs = development
financial institutions
Socio-economic development Economic development Financial development
Provision of loans to
SMEs, exporters/ importers and new
growth sectors
Provision of credit guarantee to
SMEs
Issue mortgage-backed securities
to promote capital market
development
Provision of mortgage guarantee
Provision of loans for welfare
needs (e.g. education, medical,
entrepreneurship microfinance)
Provision of housing finance to
promote home ownership
Characteristics of OFIs in Malaysia
• Large volume, low value, serving niche market
• Operations funded mostly by internally generated funds
• Debt securities issued account for 3.9% of bonds outstanding, mainly with
No. of institutionsAverage asset size per
institution (USD mil)
Co-operatives 9,073 0.55
Money lenders 2,574 0.41
Pawnbrokers 348 1.98
8III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
• Debt securities issued account for 3.9% of bonds outstanding, mainly with
maturity > 1 year
• Low susceptibility to a sudden market liquidity shock or liquidity dislocations
• Moderate maturity mismatch
• Average maturity of debt securities issued (8.2 years) vs financing granted
(typically ≤ 9 years)
Whilst bulk of NBFIs subject to oversight, regulatory objectives and regimes differ across domestic regulators
Relative asset size of NBFIs and regulatory objective of various oversight bodies
Consumer/contributor
protection
Investor
protection, capital
market stability and
Prudential
Development of
specific areas
None
• Entities regulated by BNM: 244% of GDP
• Entities regulated by other supervisory authorities: 60% of GDP
• Entities subject to oversight of Ministries: 84% of GDP**
9III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
Source: Bank Negara Malaysia survey, Securities Commission Malaysia, Malaysia Co-operative Societies Commission, various Ministries and various
financial statements
**Bulk of which are assets of public pension and provident funds , whose establishment, management and operations are governed under specific legislation
(administered by respective Ministers)
Banks Investment Banks Insurers and takaful operators DFIs (under DFIA)
Asset management industry Securitisation entities Cooperatives Money lenders and pawn brokers
Provident and pension funds Other DFIs Public Financial Institutions Building Societies
Leasing & Factoring
Prudential
regulation, financial
sector development
and financial
stability
Bank Negara
Malaysia
Securities
Commission
Malaysia
Malaysia Co-
operative Societies
Commission
Relevant authorities/
ministries
No oversight
authority
• Entities subject to oversight of Ministries: 84% of GDP**
• Not regulated: 9% of GDP
(based on total asset size)
Risks to financial stability
In the opinion of the Bank
• Primary objects of the Bank in Central Bank of Malaysia Act 2009: Promote monetary
stability and financial stability conducive to sustainable growth of Malaysian
economy
• Triggers for exercise of financial stability powers defined in terms of risks to financial
stability
– Flexibility to respond to unforeseen and dynamic circumstances
Monitoring of risks from NBFIs is a key element of BNM’s assessment of financial stability
10III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
Disrupts or is
likely to disrupt
Affects or is
likely to affect
Financial intermediation
process
Orderly functioning of the
money and FX markets
Disrupts or is
likely to disrupt
Public confidence in
the financial system
Stability of the
financial system
• appropriate mix of principle
and rule-based regulations
• differentiated rules based on
risk profile
4. Robust
Financial
Infrastructure
2. Sound
Supervisory
5. Effective Safety
Nets & Crisis
1. Effective
Regulatory
Framework
4. Robust
Financial
Infrastructure
• risk-based and consolidated
supervision
• forward looking and preemptive
• focus on corporate governance
and risk management
• greater macroprudential focus
• effective collaboration with
• lender of last resort• deposit insurance• insurance benefits protection scheme
• payment system• consumer protection and education
• legal framework• accounting standards
Components of financial stability framework
11III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
3. Comprehensive
Surveillance
Framework
Supervisory
Framework
Nets & Crisis
Management
Framework
6. Effective
market
discipline
• effective collaboration with
other supervisors
• Integrated macro and micro surveillance
• scenario-based stress testing
• ex-ante and forward looking
protection scheme• effective crisis resolution & management framework
• consumer and shareholder activism
• transparency and disclosure
Functional organisational structure aligned to financial stability framework
Financial
Surveillance
Insurance &
Takaful
Supervision
Banking
Supervision
Financial
Conglomerate
Supervision
• Conglomerate
Banking Group
• Life, General
• Takaful
• Reinsurers
Macro-surveillance
Micro-Surveillance
• Macro-
prudential risk
analysis
• Financial/ non-financial sectors
• Financial markets
Prudential
Financial
Policy
Consumer
& Market
Conduct
Regulation
• Foreign Banks
• Stand alone Islamic Banks
• Stand alone Investment Banks
12III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
Supervisory Practice Unit
• Ensure consistency of supervisory practices
• Provide guidance and support on RBSF
Risk Specialists : Credit, Market, Operational, Technology, Actuarial
• Provide technical advice and support to line departments
• Conduct horizontal risk assessment and on risk practices
markets
• NBFIs
• Macro-prudential policy
• Crisis management & resolution
Payments System Policy
Banks
• Development Finance FIs
Horizontal Risk Analysis
Inter-linkages between banks and NBFIs
Asset
Loans provided to NBFIs
Liability & shareholder equity
Acceptance of deposits from NBFIs
13III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
Holdings of debt securities & equities issued by NBFIs
Issuance of debt securities held by NBFIs
Issuance of shares held by NBFIs
Exposure to common assets
i.e. holdings of equities and bonds that NBFIs also hold
Annual information submission
Quarterly customisedinformation submission
Regulations
Oversight framework for NBFIs
Systemic importance
14III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
Systemic importance
Factors considered
• Size • Substitutability
• Interconnectedness with banks (e.g. deposit placement with banks, credit exposures via lending
& holdings of debt securities, exposure to common assets)
• Extent of involvement in maturity/liquidity transformation, leverage creation and
facilitation of imperfect credit risk transfer
Cooperatives
Hire Purchase
Asset
managementMoney LendersPawn Brokers
Factoring
& Leasing
Other DFIs
(not under the
Securitisation
vehicles/entities Major
Institutional
investors
Major building societies
DFIs (under the purview
of BNM)
Financial guarantee
(bonds)
Credit card
issuers
Insurance
companiesUnit trust funds
(fixed price)
Public
financial
institutions
Intensity of monitoring commensurate with systemic importance
15III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
Major public
pension funds
Credit guarantee company
(not under the
purview of
BNM)Housing finance agency
Major non-bank
deposit inst. Monitor via Monitor via submission of annual submission of annual informationinformation
Monitor via Monitor via submission of annual submission of annual informationinformation
More intensive intensive monitoring via quarterly submission, with possibility of future regulation
More intensive intensive monitoring via quarterly submission, with possibility of future regulation
Subject to prudential regulations by BNM Subject to consumer protection regulations by Ministries
Subject to investor protection regulations by Securities Commission
Subject to regulations by Co-operative Societies Commission to foster sound and orderly development of the sector
Intensity of monitoring commensurate with systemic importance – sample information request
DFI# with asset size
of USD1.7 billion
(Frequency : annual submission)
Size and composition of balance sheet
Pension fund with asset size
> USD23.3 billion
(Frequency : quarterly submission)
Size and composition of balance sheet (by domestic and foreign
currency)
Maturity profile of assets and
16III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
Maturity profile of assets and liabilities
(maturity buckets: <1 year, 1-5 years & > 5 years)
Maturity profile of assets and liabilities (maturity buckets: up to 1
month, 1-3 months, 3 months – 1 year, 1-5 years & > 5 years)
Profile of investments (by type, sector and large exposures)
Income statement
Cash flow position
#Not regulated under DFIA 2002 (non-regulatee)
Central Bank of Malaysia Act 2009
Ex-ante surveillance powers
for timely risk identification
•Access to information
Pre-emptive powers to avert or
mitigate systemic risks
• Macroprudential measures
Power to enter into
arrangements, advice and make
recommendations to other
Comprehensive powers and tools to address financial stability risks under Central Bank of Malaysia Act 2009
17III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
•Access to information
either directly from NBFIs
or indirectly via relevant
authorities
• Macroprudential measures
• Order to undertake corrective
measures for the purpose of
financial stability
• Liquidity assistance
• Enforcement
• On-site examination
• Penalty
recommendations to other
supervisory authorities
•Co-operate and coordinate financial
stability measures
•Promote laws & policies that are
consistent with financial stability
Financial Services Act 2013
Clear triggers
• Poses or likely to pose risk to financial
stability arising from:
Scope of regulation based on nature
and risk profile of entity
• May apply all or any part of the law to
New regulatory law accords the Bank with ability to regulate and supervise NBFIs on on-going basis
18III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
stability arising from:
• Maturity/liquidity transformation, create
excessive leverage, imperfect credit risk transfer
& regulatory arbitrage concerns
• Nature, scope, size, scale or concentration of
financial intermediation activities
• Interconnected with the Bank’s regulatees
• May apply all or any part of the law to
the prescribed financial institution
E.g.
• Prudential requirements
• Consumer protection
• Supervisory intervention
• Resolution
• Penalty
Central Bank of Malaysia Act 2009
Governance arrangements in dealing with risks emanating from NBFIs
• Financial Stability Executive Committee
• Joint Policy Committee
• Financial Stability Committee
Macro prudential measures
• Financial Stability Executive Committee- Order for financial stability
19III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
• Financial Stability Executive Committee
• Financial Stability Committee stability
- Liquidity assistance
• Minister of Finance
Prescription of a financial institution for on going
regulation and supervision
Financial Stability Executive Committee
Establishment
Membership
• Pursuant to section 37 CBA 2009
• Internal: Governor, one Deputy Governor
• External: Secretary General to Treasury, CEO of Malaysian Deposit Insurance Corporation, Chairman of
20III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
Membership
Responsibility
Insurance Corporation, Chairman of Securities Commission, selected independent technical experts and, where relevant, head of other supervisory authority
Decides on recommendations by BNM to
• issue financial stability orders or extend
liquidity assistance to entities not
regulated by BNM; or
• provide capital support to BNM’s
regulatees
to avert or reduce risks to financial stability
Penalty framework of the Bank
Central Bank of Malaysia Act 2009
• Fine not exceeding RM10
Financial Services Act 2013
• Fine not exceeding RM50
21III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
• Fine not exceeding RM10 million (USD3.2 million) or to imprisonment for a term not exceeding 10 years or both
• Fine not exceeding RM50 million (USD6.1 million) or to imprisonment for a term not exceeding 10 years or both
Applicable to persons undertaking financial business
BNM’s recent experience in managing risks arising from developments in household sector
Household debt to GDP ratio one
of the highest in the region
Japan, 83.8
UK, 98.3
Australia, 94.9
United
States, 83.6Thailand, 78
New
Zealand, 91.9
80
100
120
Growth of household debt faster
than financial asset
Household debt to GDP ratio (%)
13
14.8
15
20
Annual
growth (%)
Malaysia
(2Q’13: 85.1)
22III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
Singapore, 77
Indonesia , 17
Malaysia
(2009), 72.4
Phillipines, 6
China, 20
Hong Kong, 61
0
20
40
60
0 10 20 30 40 50 60GDP per capita (%)
11.9
0
5
10
2009 2010 2011 2012 Jul-13
Household debt Household financial assets
While bulk of household debts are for properties, borrowings for personal use are rising rapidly
80.5% 8.5
4.1
0 100 200 300 400 500 600 700 800 900
Banks DFIs NBFIs Treasury Housing Loans Others
HH Sector: Loans by Lender Type
RM bil
• Most lenders are regulated by BNM (89%)
• Bulk of non-bank’s exposures are for personal financing
Compositions
16.816.915.813.912.511
0
5
10
15
20
2007 2008 2009 2011 2012 Mar-
13
Personal financing as % of household debt
23III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
Residential
properties
16.0%
Transport
vehicles
15.6%
Personal
use
63.2%
Others
4.7%
HH Sector: NBFI* Loans by Facility
Note:
1. DFI – Bank Kerjasama Rakyat Malaysia Berhad (Bank Rakyat) and Bank Simpanan Nasional (BSN)
2. *Non-bank Financial Institutions – Malaysia Building Society Berhad (MBSB) and AEON Credit Service (M) Sdn Bhd (AEON)
Compositions
Issued in July 2013 - Regulates: Banks and DFIs regulated under DFIA 2002
- Non-regulatees: Credit coops and several large non-bank institutions
Issued in July 2013 - Regulates: Banks and DFIs regulated under DFIA 2002
- Non-regulatees: Credit coops and several large non-bank institutions
Macroprudential measures to further promote a sound and sustainable household sector
24III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
Maximum tenure of 10 years for financing extended for
personal use
Prohibition on the offering of pre-approved personal financing products
Maximum tenure of 35 years for financing granted for the purchase of residential and non-residential properties
• Data gaps and challenges– Lack of structured and granular data capture at NBFIs
• Large volume, low value (e.g. co-operatives, pawnbrokers, money lenders)
– Have we effectively captured all? Do we know them?
– Implication on supervisory resources
• Institutional arrangements and mechanisms to facilitate effective inter-agency
coordination– Variation in oversight regimes of domestic regulators
Yet challenges in managing risks of NBFIs
25III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
– Variation in oversight regimes of domestic regulators
– Managing conflicting mandates
• Proportionality in regulations– Reconciling developmental imperatives with financial stability considerations
– Identifying appropriate prudential regulations that commensurate with level of
complexity and size
• Setting thresholds for escalation– Intensity of monitoring and regulations
Coordination and cooperation arrangements with domestic regulators
Memorandum of Understanding (enhanced MoU
signed in October 2012)
• information exchange during normal and stress time
• development of policies
• managing threats to financial stability and systemic risks in
capital markets
• regulation, supervision and resolution of investment banks
• joint-investigations
• framework on dual approval (BNM and MCSC) for a
26III Meeting on Financial Stability
7 – 8 November 2013
Lima, Peru
Memorandum of
Understanding
(signed in July
2013)
• framework on dual approval (BNM and MCSC) for a
cooperative society to take deposits from non-members
• framework for collaboration on coop-banks (use of the
word “bank”)
• information exchange during normal and stress time
• development of policies
• managing threats to financial stability
• technical assistance and capacity building
(Malaysia Cooperative
Societies
Commission, MCSC)
An effective arrangement is one that is developed and operationalised during
period of stability. Trust is key
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