75956 FINANCIAL SECTOR ASSESSMENT MALAYSIA MARCH 2013 FINANCIAL AND PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCY EAST ASIA AND PACIFIC REGIONAL VICE PRESIDENCY This report summarizes the findings of the initial Financial Sector Assessment Program (FSAP) exercise for Malaysia undertaken in 2012 by a joint IMF/World Bank team. 1 The first mission (April) assessed the observance of selected international standards and codes, and initiated discussions on a broad range of financial sector stability and developmental issues. The second mission (August/September) completed its review, documented its assessment in a draft Aide- Memoire, and reviewed with the authorities the Aide-Memoire as well as draft Technical Notes covering a range of topics. The objectives of the FSAP were to review developments in the financial sector and in light of the lessons from the global financial crisis, assess and formulate recommendations related to financial stability, financial development, and the financial sector oversight framework. The FSAP also updated the 2002 assessment of the Labuan International Financial Centre. This report presents main findings and recommendations. The team worked closely with the staff of BNM, SC, LFSA and PIDM, as well as with the Ministry of Finance, and met with representatives of government, academia, and the private sector. Findings and recommendations were discussed with the heads and senior staff of the BNM, SC, LFSA, PIDM and MoF. The team would like to express its gratitude to the authorities for the excellent working relationship and their cooperation. Special thanks go to the authorities for providing timely and high quality data and other information, and for their availability and hard work in facilitating the tasks of the mission and the overall support provided to the FSAP team. 1 The team comprised of Aditya Narain (mission chief, IMF); David Scott (mission chief, World Bank); Simon Gray and Alexander Pankov (deputy mission chiefs, IMF and World Bank respectively); Ravi Balakrishnan, Su Hoong Chang, Julian Chow, Mohamed Norat, Roberto Piazza and Mamoru Yanase (all IMF); Katia D'Hulster, Damodaran Krishnamurti, Ketut Kusuma, José De Luna Martínez, Claire McGuire, Harish Natarajan, William Price, Clemente Del Valle (all World Bank Group); Mark Causevic, Denise Dias, Ken Dorph, Tanis MacLaren, Richard Pratt and William Rutledge (external experts). OVERALL ASSESSMENT Malaysia, as many of its Asian neighbors, experienced significant macro/financial distress in the late 1990s. Its policy responses proved largely successful in mitigating the worst consequences. The authorities also responded by initiating far-reaching reforms of the financial system. A 10-year Financial Sector Masterplan, led by the Bank Negara Malaysia (BNM), and a parallel Capital Market Masterplan led by the Securities Commission Malaysia (SC), supported a restructuring of the financial sector, underpinned by the development of a strong regulatory and supervisory framework, and investment in a modern financial markets infrastructure. This appears to have produced strong and conservatively-managed financial institutions. The transformed and strengthened financial sector has been able to weather the recent global financial crisis well. Financial market intermediaries’ reliance on cross-border and interbank funding remains limited. Mergers have led to the emergence of a number of strong banking and financial groups as well as capital market intermediaries which are now able to expand into neighboring markets. Banking institutions are well capitalized and are expected to be able to meet Basel III capital requirements comfortably by the 2019 implementation deadline. Asset quality has improved significantly over the last 5 years and banks are profitable, with low cost-to-income ratios compared to regional peers. Stress tests indicate that the banking system overall is resilient to economic and market (interest and exchange rate) shocks. Liquidity is a potential vulnerability, as banks are reliant on a high level of non-retail customer deposits, virtually all at call. In practice, these deposits appear to be stable, reflecting confidence in the banking system and its regulation and deposit protection, a preference for ringgit-denominated deposits (ringgit cannot be held offshore), and possible comfort from state equity stakes in several of the major banks. The authorities have taken steps to monitor and mitigate the potential significant risks of recent rapid loan growth. Strong growth in household lending has led to household debt rising to be one of the highest in the region, and house prices in urban centers have risen fast in recent years, prompting an increased supervisory focus on household and mortgage lending. The authorities introduced a range of supervisory measures prior to 2010 and macroprudential measures since then. The importance to some Malaysian banks of overseas assets and earnings has now reached levels which have led to intensified supervision by BNM. Practices including annual on-site examinations of overseas operations and hosting supervisory colleges should be continued. The regulatory and supervisory regimes for banking, insurance and securities are well developed and exhibit a high degree of compliance with international standards. The authorities have initiated action to address most remaining shortcomings, with a new law passed in December 2012 which eliminates gaps in banking and insurance supervision. Banking supervision is comprehensive and intensive, and gaps mainly relate to formal powers to include financial holding companies in the consolidated supervision framework, to the existence of certain legal provisions that could potentially compromise supervisory independence, and to lack 2 of clarity in the definition of connected lending. The insurance supervision regime is well developed. Regulatory guidance is comprehensive and supervision is effective and appropriately focused. Shortcomings include the need to better incorporate expectations into current guidelines, to strengthen the regulation of financial guarantee business, and to enhance transparency. Securities regulation is robust in design. Areas which would benefit from further enhancement include the legal underpinning of the SC’s operational independence and the disclosure deadlines for issuers and their substantial shareholders. 2 PIDM’s deposit insurance framework broadly conforms to best international practice. The current reserve level for conventional deposits, however, is sufficient only for payouts in smaller banks, highlighting the need to execute a back-up funding agreement with MoF. Eventually legislation should be amended to give PIDM authority to approve operational matters currently approved by the Minister of Finance in order to enhance PIDM’s independence and effectiveness. The national payment system is well-developed, with a clear demarcation of oversight, regulatory and supervision jurisdiction between SC and BNM. The assessment found a high level of compliance with the recently adopted FMI Principles for all the institutions and systems covered. The building blocks for a crisis management framework are in place. The system has relevant experience from the Asian Financial Crisis. Further formalization of the framework would preserve valuable institutional memory. Important elements that could be enhanced include an apex monitoring and crisis coordination committee involving on a regular and permanent basis the key financial sector authorities, and undertaking formal interagency contingency plans. Government equity holdings in the financial sector, both direct and indirect, are extensive. Government-linked companies are classified as private sector in some statistics (though not in national accounts data). Some products sold by some state-linked intermediaries carry an explicit government guarantee, while in other cases there is a perceived implicit guarantee. Banks, insurance companies and capital market intermediaries are subject to the same regulatory standards regardless of ownership; but some state-controlled non-bank providers are exempted from certain rules applicable to private sector competitors. However, the authorities state that government does not interfere with management, and governance is subject to the same standards as the private sector. This mitigates reliance on state support, which can no longer so readily be taken for granted (in part because of the constrained fiscal headroom), while—as recognized by the authorities’ development plans for this decade—the transition to a high- income, high-value added economy will need to rely much more on private sector. Further development of the domestic Islamic financial system presents both opportunities and challenges. Malaysia has a sizeable Islamic capital market and banking sector promoted by a facilitative regulatory framework and targeted incentives. As products with a greater degree of risk-sharing are developed the authorities must continue to assess the regulatory and supervisory 2 Since the assessment mission, new frameworks for oversight of credit rating agencies and investment managers have been implemented. 3 implications. As risk-sharing is increased, it will be important that users—both domestic and foreign—are clear about the changes involved. Regulators also will need to adhere to policies to manage potential conflicts of interest when they are also involved in promoting the sector’s development. The authorities have published a Financial Sector Blueprint and a Capital Market Masterplan 2, covering the period 2011–2020 and a Corporate Governance Blueprint covering the period 2011-2015. The Financial Sector Blueprint focuses on strengthening the sector’s role in facilitating Malaysia’s transition into a developed nation by 2020 and in intensifying regional integration and internationalisation of Islamic finance. These are reinforced by strategies that promote inclusive access to financial services and further strengthen the consumer protection framework, and the regulatory and supervisory regime to maintain the resilience of financial institutions as well as broaden the scope of surveillance and supervisory activities. Meanwhile, the Capital Market Masterplan 2 calls for a progressive reduction of the direct role of the state in the financial markets, and further liberalization to allow the markets to develop more advanced products – further expansion of the corporate bond market and growth of the private unit trust industry are important elements here—while seeking to ensure that governance structures are adequate to manage the risks involved. Opening up the market to greater foreign competition will involve new challenges; and a progressive, phased implementation of initiatives being undertaken by the government to reduce its involvement in financial intermediaries will require continued commitment and a clear timetable. I. STRUCTURE AND FUNCTIONING OF THE FINANCIAL SYSTEM A. Macro-Financial Environment 1. The Malaysian economy has thus far weathered global economic and financial stresses well. The economy continued to grow strongly in 2012 H1, at 5.1 percent. Inflation is currently at a two year low. Capital inflows, which had rebounded strongly after the 2008 Lehmans’ collapse, have been more volatile over the last two years, but have been managed well, with outflows accommodated by BNM sales of foreign exchange and by bond purchases by EPF and other GLICs. Overall, the financial account has been close to balance in recent quarters. Foreign exchange intervention has generally been two sided. 2. The authorities were proactive in responding to the global financial crisis. Pre- emptive measures were taken by BNM, including reductions in the Overnight Policy Rate, extension of access to the BNM’s standing liquidity facility to insurance companies, temporary reduction of the Statutory Reserve Requirement and the extension of a Government Deposit Guarantee (GDG) on all RM and foreign currency deposits with commercial, Islamic and investment banks. B. Overview of the Financial System 3. Malaysia’s financial sector is large and well diversified. Banking intermediaries, insurance companies and capital market firms have assets of close to 400 percent of GDP as of end-2011 (Figure 1 and Appendix 2). Banking intermediaries account for just over half of the financial system. Those supervised by BNM, which account for 97 percent of the total assets of 4 banking institutions, comprise commercial and Islamic banking institutions, investment banks (co-regulated with SC), and the major DFIs. 3 BNM also supervises insurance companies. Fund management companies, broker-dealers, investment banks, and the securities and derivatives markets are regulated by SC. The Labuan offshore financial centre is supervised by the Labuan Financial Services Authority. Labuan businesses include offshore banking, insurance, trust and fund management, in which activities are carried out in non-Ringgit foreign currencies. Over the last decade Malaysia’s banking assets and deposits grew at an annual compounded rate of 15 percent. The capital market expanded at an annual rate of 11 percent and net funds raised in the markets grew at an annual rate of 8 percent. Figure 1. Structure of the Financial Sector (by asset share), 2011 Fund Management , NBFIs, 2.8% Pensions & 12.0% Provident Fund:, 16.0% Banking Institutions, 50.6% Insurance Cos., 5.6% Labuan IBFC, 7.2% DFI, 5.8% Source: BNM 4. The financial system is highly interconnected through both funding sources and ownership. Banks, non-bank financial companies and mutual funds are linked through the wholesale funding market (Figure 2). The banking sector has undergone considerable consolidation since the Asian crisis, and financial conglomeration has grown. The number of domestic commercial banking groups fell from 22 in 1986 to eight currently. The major banks own insurers, fund management companies and securities firms. 3 The remaining 3%, supervised by various government departments and agencies, include non-bank financial institutions such as credit co-operatives, other specialized DFIs and a building society. 5 Figure 2. Malaysia: Financial System Interlinkages, 2011 Legend: 1st percentile Low 5th percentile Moderate 10th percentile High 20th percentile Significant 30th percentile Highly Significant Source: IMF Staff estimates, BNM data Measured as net claims/GDP. NBFIs (non-bank financial institutions) comprise cooperatives, leasing and factoring companies, building/housing institutions/corporations and Cagamas. 5. The state is a major player in the financial system. The government has substantial de facto ownership in the financial sector: the seven GLICs have substantial interests in the main Malaysian financial and banking groups. For example, 5 percent of Maybank’s shares are held by PNB directly, and a further 12 percent are held by EPF (and unit trust funds managed by PNB own 45 percent). Similarly, the government’s main investment holding vehicle, Khazanah, owns 30 percent of CIMB Group, the second largest banking group in Malaysia, with an additional 12 percent held by EPF and 2 percent held by KWAP. EPF owns 45 percent of RHB Capital, another of the top five banking groups, with an additional 3 percent in total held by KWAP, PNB and LTAT. LTAT owns 59 percent of Affin Holdings, owner of Affin Bank. (See Appendix 2, Table A.2.2.). But these banks are held to the same governance and risk management standards as other banks, while board members and senior management are subject to the same fit and proper criteria. 6. The government owns or controls 19 DFIs. At the end of 2011 they accounted for some 10 percent of total banking system assets. Three deposit-taking DFIs (Agrobank, Bank Rakyat and BSN) account for 40 percent of the total number of deposit accounts in the banking system. DFIs have a large network of branches (708) throughout Malaysia, compared with a total of 2,245 branches of the rest of the banking institutions (commercial, investment, and Islamic banks). 4 4 Currently, there are six institutions regulated by BNM under the Development Finance Institutions Act of 2002: Agrobank, Bank Rakyat, Bank Simpanan Nasional, Bank Pembangunan Malaysia Berhad, EXIM Bank and SME 6 7. Government linked investment companies (GLICs) are by far the most influential players in the Malaysian capital market. The pension providers EPF, KWAP and LTAT have combined assets of around RM 565 billion. Khazanah has over RM 100 billion in assets. PNB, created to encourage corporate ownership and wealth creation among citizens of Malay and indigenous origin, has RM 214 billion in assets under management, and wholly owns two unit trust management companies (one of which operates the largest unit trust in the country), as well as a real estate investment trust management company. The government also operates LTH (known as the Pilgrims Fund), which facilitates savings for the pilgrimage to Mecca (and has RM 32 billion in assets. PNB, KWAP and Khazanah jointly own a long-term investment vehicle (ValueCap Sdn Bhd) with RM 12 billion in assets. 8. The bond market is well developed. At year-end 2011 total federal government debt was RM 456 billion, equivalent to 51.8 percent of GDP. Over 95 percent is domestic debt. The government bond market has clear benchmark issues in the 3, 5 and 10 year tenors. Turnover is around 2.5 times a year, and spreads for benchmark tenors range between 1-4 bps. The issuance of private debt securities has been growing and has become a consistent source of corporate (including GLC) funding. It is concentrated in high-grade instruments, with nearly 90 percent of outstanding bonds in the AAA and AA rating categories. The financial sector is the main issuer of conventional bonds (56 percent of total). Approximately 60 percent of Malaysian bond issuance is Sharia-compliant (sukuk), driven largely by government-related issuers. Housing finance benefits from the use of bond market via Cagamas (see below), which has been an active issuer to support the extension of the maturity of the mortgage loans provided by banks. 9. Two government-created entities absorb some market risks in order to support development of the bond market. Danajamin, a government-backed credit guarantee institution, enable bond issues that might not otherwise be able to come to market at competitive rates. All Danajamin guaranteed issuances have thus far obtained a AAA rating. Cagamas, jointly owned by BNM (20 percent) and the commercial and investment banks (80 percent) promotes home ownership and the growth of the secondary mortgage market by issuing debt securities to finance the purchase of housing loans from financial and non-financial institutions. 10. The listed equity market is similarly well-developed. From 2002–2011 market capitalization grew at a compounded rate of 10.3 percent a year; the end-2011 ratio of market capitalization to GDP was substantially higher than in most high-income countries or other countries in Asia (see Appendix 2 for data). Bursa Malaysia, the single stock exchange, has 941 companies listed on two boards: the Main Market (822 companies), and the ACE Market (119 companies) for smaller and newer companies. Capital-raising in the equity market has been robust, with over RM70 billion raised from 2009 to 2011. Figure 3 depicts Malaysia’s overall financial asset composition. Bank. In addition, 13 other DFIs that operate under separate legal frameworks, including CAGAMAS, Credit Guarantee Corporation, the Pilgrim Fund, and several small lending institutions established by the federal and state governments. 7 Figure 3. Financial Assets Composition in Malaysia (percent of GDP) % of GDP 200 180 160 140 120 100 80 60 40 20 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Private Debt Securities Public Debt Securities Private Credit Equity Market Source: WB Finstat 11. The investment management industry is one of the fastest-growing segments within the capital market. Since 2002, assets under management (AUM) increased from RM75 billion to RM424 billion. Retail unit trusts account for over half of AUM; the government-sponsored PNB is by far the largest unit trust provider, with MY214 billion under management as at June 2012. Capital market intermediaries not only remained resilient throughout the recent global financial crisis but are also taking steps towards internationalization. In anticipation of greater competition arising from market liberalization, Malaysian intermediaries have strengthened their presence in regional markets (particularly ASEAN). Cross-border expansion has been achieved through acquisitions as well as the establishment of subsidiaries. 12. The national financial markets infrastructure (FMI, including RENTAS, the wholesale payment system) is well-developed. BNM is responsible for the oversight of the payment systems and settlement systems for unlisted government, BNM and private debt securities, and SC is responsible for the regulation, supervision and oversight of the FMIs for the corporate securities and derivatives markets. 13. Malaysia has a small offshore financial center, the Labuan International Business and Financial Center (IBFC). The main business of the IBFC is currently bank lending, reinsurance, leasing and trust company business. Capital markets activity is minimal. Most Labuan financial institutions are branches or subsidiaries of Malaysian or foreign financial institutions, and most of the larger banks are Malaysian owned. These banks are mainly engaged in foreign currency lending to Malaysian and foreign (often Malaysian-linked) corporations. In 2011, about 75 percent of insurance business was written by reinsurers/retakaful operators and more than 40 percent of the premiums were for domestic Malaysian risk. 14. Foreign bank claims on Malaysia are relatively large but not a major risk. BIS- reported foreign bank claims are over 50 percent of GDP, significantly higher than for other countries in the region excluding the financial centers (figure 4). These claims comprise mainly the local operations of the foreign banks in Malaysia (approximately 40 percent of GDP) which are predominantly funded in the form of (local) RM deposits. Foreign banks have been in Malaysia for over a century and all foreign commercial banks have to be locally incorporated. 8 15. Over the last decade, Malaysian banks have expanded abroad significantly. The six largest banking groups in Malaysia 5 all have an overseas presence. Branches, subsidiaries, representative offices, and associate companies in 20 countries make up the presence depending on the jurisdiction. The biggest branches and subsidiaries are in ASEAN (Indonesia, Singapore, and Thailand) and Hong Kong SAR, China, where exposures of the biggest three Malaysian banks are just below 30 percent of Malaysian GDP. Malaysian banks’ expansion overseas should continue to be subject to careful monitoring. 16. Overall, Malaysia’s financial sector development indicators compare well with regional peers. Credit intermediation through the banking sector and the corporate debt securities market (including GLCs) are high when benchmarked against regional peers. The domestic stock market, provident/ pension and mutual funds have all grown in tandem with and have outperformed regional peers. The insurance sector, however, remains relatively small, with low penetration rates. See Figure 4. 17. The current level of involvement of the state, the benefits that state players and state-sponsored activities enjoy, and certain practices employed by government-linked entities, may weaken market development prospects. Numerous state-sponsored activities enjoy explicit or de facto preferential treatment, including significant tax incentives for sharia- compliant finance (part of the government’s strategy to promote Islamic finance), and certain features of PNB’s largest unit trusts (part of government’s strategy to promote long-term investing by the public). Some tax incentives granted to Islamic finance are time-bound and accorded to specific contracts to promote new markets, while other are permanent in order to level the playing field between conventional and Islamic products which can have higher underlying costs structures. PNB’s largest equity fund, with some RM 100 billion in assets, is exempted from the mark-to-market valuation requirements applied to other unit trust providers and can use its accumulated surplus to smooth dividend payments to investors. While the exemption from marked-to-market valuation is given to these funds, PNB is required to demonstrate sufficient liquidity arrangement to SC (other funds are not required to do so). Government involvement, including through appointing the Board, may be seen as providing an implicit government guarantee of PNB investments. The SC notes that PNB’s size and scale enable it to offer a more favorable fee structure for investing or redeeming units in the larger funds and lower management fees for the largest fund, while a market-based management fee is charged for all other funds. 18. The role of most DFIs in Malaysia is becoming redundant. Commercial banks are already providing most of the financing in the segments of the market within which DFIs operate. Large DFIs are aggressively entering into consumer lending activities and direct competition with commercial banks. 5 Maybank, CIMB, Public Bank, Hong Leong, RHB Capital, and AmBank. 9 Figure 4. Malaysia: Financial Development Indicators, 2006–2011 Credit intermediation is higher relative to peers … … and stock market capitalization has been growing at a faster pace … Private Credit / GDP Stock Market Capitalization / GDP 120.0 Malaysia Asian Peer Average 120.0 Malaysia Asian Peer Average 110.0 110.0 100.0 100.0 90.0 90.0 80.0 80.0 70.0 70.0 60.0 60.0 50.0 50.0 40.0 40.0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Provident and pension funds are leading peers … …but mutual funds seem to be lagging. Pension Fund Assets / GDP Mutual Fund Assets / GDP 70.0 120.0 Malaysia Asian Peer Average Malaysia Asian Peer Average 60.0 100.0 50.0 80.0 40.0 60.0 30.0 40.0 20.0 10.0 20.0 0.0 0.0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 1 The insurance sector has lagged behind peers. The corporate domestic debt market continues to grow rapidly…but is mostly associated with GLCs. Insurance Company Assets / GDP Outstanding Domestic Private Debt Securities / GDP 35.0 70.0 Malaysia Asian Peer Average Malaysia Asian Peer Average 30.0 60.0 25.0 50.0 20.0 40.0 15.0 30.0 10.0 20.0 10.0 5.0 0.0 0.0 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 Source: World Bank Note: Regional peers comprise China, Hong Kong SAR, China, India, Indonesia, Japan, Korea, Philippines, Singapore and Thailand. 10 II. OVERALL STABILITY ASSESSMENT A. Banking Sector 19. Banking institutions—conventional and Islamic—are well capitalized and profitable, with good asset quality. The banking sector risk-weighted capital adequacy ratio (RWCR) increased 1.6 percent since 2006 to 15.1 percent in 2011, well above the BNM minimum requirement of 8 percent. Tier 1 capital comprises 73 percent and 80 percent respectively of commercial and Islamic banks’ capital. Return on assets (1.5 percent) and on equity (16.8 percent) is above regional averages (1.2 percent and 14.5 percent respectively). Banks are also relatively efficient as the average cost-to-income ratio at 43.6 percent is lower compared to peers’ 48 percent. Asset quality has improved significantly; the gross NPL ratio has fallen from 8.3 percent in 2006 to 2.7 percent in 2011, and provision coverage is now close to 100 percent of NPLs. See Figure 5. 20. Banks are liquid at present, with sufficient liquid assets to cover short-term liabilities. On average, banks’ liquid assets-to-deposits and short-term funding is in line with the region’s average, at around 22 percent, and banks are required to comply with the BNM’s Liquidity Framework. 6 Deposits comprise 85 percent of total funding, of which around one third is retail deposits. Deposits from business enterprises, including GLCs, account for 37 percent of total deposits. These deposits are predominantly at call, although in practice they appear to be stable. Financial institutions account for 16 percent of deposits. See Figure 5. 21. There has been strong growth in personal loans and mortgage household lending. Lending to households currently accounts for 55 percent of total bank lending. Household debt has risen to 74 percent of GDP in 2011, from 64 percent five years earlier. See Figure 5. While this may not be an immediate concern, potential risks could arise if a global economic downturn adversely affects the labor market and leads to strains in household balance sheet. 7 Ongoing monitoring of household sector leverage is required and envisioned. 22. The results of stress tests conducted as part of the FSAP indicate the banking system is resilient to stress, while highlighting some vulnerability to credit losses in a few smaller Islamic banks. The stress tests used a forecast period to 2016, and covered credit, market (interest rate, exchange rate and equity price moves) and liquidity risks. Exposure to market risk is limited, while liquidity risk indicates potential vulnerabilities arising from the high level of at- call deposits. It is recommended that the BNM adopt multi-year top down and bottom up macroeconomic stress testing, and introduce more conservative credit loss parameters in bottom up stress-tests. 6 BNM requires banking institutions to “bucket” all maturing assets and liabilities by maturity and maintain surplus liquidity of at least 3 percent of total outstanding deposits (current, savings and fixed deposit accounts) for the one- week bucket, and 5 percent of total outstanding deposits for the above one week to one month bucket after taking into account historical adverse behavior assumptions. 7 BNM, in its Financial Stability Report 2011, noted that household financial buffers in aggregate are at comfortable levels as the growth in household debt has been accompanied by a corresponding expansion in household financial assets. 11 Figure 5. Malaysia: Banking Soundness and Performance Indicators Banks are presently well capitalized … Asset quality has improved significantly over the last 5 years … RWCR: Banking Institutions, 2006-2011 Gross NPL ratios, 2006-2011 16 All Commercial Banks 10.0% 14 Conventional 9.0% Islamic Gross NPL ratio (All banks) 12 8.0% Gross NPL ratio (Commercial Banks) 7.0% 10 Gross NPL ratio (Islamic banks) 6.0% 8 5.0% 6 4.0% 4 3.0% 2.0% 2 1.0% 0 0.0% 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 Provision coverage has also been increasing… …and banks are profitable with returns above regional averages … Provision Coverage Ratios, 2006-2011 Banking Sector ROE and ROA, 2011 120.0% 30.0 All Banks Indonesia 100.0% Commercial 25.0 Islamic 80.0% 20.0 China Hong Kong SAR, China Malaysia 60.0% 15.0 India Philippines Thailand 40.0% 10.0 Singapore S.Korea Japan 20.0% 5.0 0.0% 0.0 2006 2007 2008 2009 2010 2011 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Lending to households has been increasing … …household debt has been rising. 12 Bank Lending to Households, 2006 and 2011 Household Debt-to-GDP ratios, 2000-2011 MYR million 80 74.2 250,000 71.7 73 8.6% per year Mortgage Loans (2006) 70 66.3 63.6 Mortgage Loans (2011) 60.4 200,000 60 Unsecured Loans (2006) Unsecured Loans (2011) 50 44.6 150,000 40 11.1% per year 100,000 30 33.8% per 47.4% per 20 50,000 year year 10 0 0 Commercial Banks Islamic Banks 2000 2006 2007 2008 2009 2010 2011 Sources: GSFR, BNM, and Bankscope. B. Insurance Sector 23. The insurance sector does not appear to pose any potential sources of significant risk to financial stability. The sector is relatively small and fragmented, without any apparent major risk accumulations that could impact system stability. While insurer premium growth dropped in 2011, capital adequacy continued to remain strong. Persistent low yields and some investment losses have hurt profitability, particularly for the life insurers. Underwriting losses for motor insurance also continued to pose downward pressure on profitability. In 2011, reinsurers recorded operating losses as claims from business interruption surged due to the Thailand floods, which sharply increased the overall claims ratio for property business. Despite weaker profits, the combined capitalization level of the general and life insurance industry remained strong with the aggregate capital adequacy ratio (CAR) at 222.5 percent, well above the supervisory minimum capital requirement of 130 percent. III. ASSESSMENT OF FINANCIAL SECTOR OVERSIGHT A. Overall Assessment 24. BNM and SC practice effective risk-based supervision of banks, insurance companies, and securities firms. They have adopted appropriate regulatory policies and supervisory techniques that reflect best practices. The main areas identified as having scope for improvement involve the regulation and supervision of financial holding companies (FHCs), legal provisions that might potentially compromise supervisory independence, formal arrangements guiding interagency coordination, 8 recovery and resolution planning, 9 and in legal and regulatory requirements for Islamic banks. In addition, there are legal gaps in the oversight of large pension funds 10 and certain specialized financial companies that should be addressed. 11 The authorities have already initiated action to address most of these identified gaps, including 8 Mainly with respect to the supervision of FHCs, and crisis preparedness arrangements (addressed in Section IV.) 9 An international standard only recently promulgated by the Financial Stability Board. 10 For example, the EPF is both governed and supervised by the Ministry of Finance. 11 BNM recently initiated reporting requirements and monitoring processes for six large unsupervised financial companies, and expects to have powers under the new law to address any financial stability concerns. 13 importantly by proposing new Financial Services and Islamic Financial Services Acts. The new acts should be implemented at an early date, including strengthening legal and regulatory requirements for Islamic banks. 12 B. Banking 25. The regulatory and supervisory regime for banking is well developed. BNM employs a risk-focused approach supported by a comprehensive program of onsite inspection and extensive off-site macro and micro surveillance. Individual firm supervision is complemented by horizontal and thematic reviews. Necessary remediation is followed through effectively. Supervision is supported by a well-articulated framework of prudential requirements, risk management expectations and information-sharing arrangements with overseas supervisors. BNM has a generally appropriate array of guidelines covering overall risk management and most of the individual risk areas, as well as internal audit, compliance, and control functions. The capital framework is in line with international standards and the liquidity framework is a sound approach for normal and high stress times, although neither covers FHCs. BNM maintains a good network of formal and informal coordination and information sharing arrangements with foreign supervisors and has been active in hosting and attending supervisory colleges and in conducting its own overseas examinations. 26. Areas for further enhancement of BNM supervision include in assessing the systemic importance of financial entities, improving guidance on certain individual risk areas, 13 articulating supervisory expectations for development of recovery and resolution plans, and assessing model risk in areas other than those covered under Pillar 1 of Basel II. In addition, certain provisions in the legal framework could potentially compromise the BNM’s independence. 14 BNM’s independence to take supervisory actions without concurrence of the Minister should be clarified in the law. 27. At present BNM does not have explicit legal authority to supervise FHCs and shortcomings exist in the coverage of the MOU with the SC. 15 Going forward, there should be a formally designated primary regulator for each FHC. GLICs have substantial interests in major banking groups, without either being treated as FHCs or explicitly defined as connected parties under prudential lending limit rules. BNM should strengthen the consolidated supervision framework to address FHCs, including in areas such as consolidated capital standards and risk management expectations, and should strengthen the definition of connected lending. C. Insurance 12 Both Acts passed the legislature in December 2012. 13 IRRBB and operational risk management requirements are generally in place and adhered to, but would benefit from issuance of more detailed regulation and supervisory expectations, which is currently underway. Plans are also underway to strengthen the regime for credit concentrations. More rigorous and comprehensive regulation of country risk should be considered as well. 14 For example, Section 70 in BAFIA allows the Minister to direct BNM examine the books, documents, accounts and/or transactions of any licensed institution if the Minister has certain suspicions with regard to the institution. 15 Six of the eight large domestic banking groups have parent FHCs, and the current legislative framework does not apply to those firms on a parent-only or consolidated basis. An updated MoU between BNM and SC (October 2012) address these weaknesses. 14 28. The regime for insurance supervision is robust and effective. BNM staff are viewed by the industry as knowledgeable, regulatory guidance is comprehensive, and supervision is effective and appropriately focused on relevant activities of the insurance industry. Shortcomings relate to matters of formalizing expectations into current guidelines, clarifying approaches in certain areas, enhancing transparency, and expanding the tool kit. BNM should address gaps in enterprise risk management expectations for insurers, and increase the expectations of insurers to maintain comprehensive contingency plans and information systems capable of generating timely and reliable information on risk accumulation. It should also enhance the regulatory regime for insurance intermediaries and further develop a supervisory approach more specific to them. Efforts are underway to address the identified gaps. D. Securities 29. The SC has developed a robust supervisory framework that exhibits high levels of adherence to international standards. The regimes governing issuers, auditors, collective investment schemes, market intermediaries and secondary markets, and with respect to enforcement, co-operation and information sharing, are extensive and effective. The SC has been proactive in bringing the new risk areas highlighted by the recent crisis under its regulatory remit. SC’s regulatory approach has been relatively prescriptive and it is involved in most aspects of how the capital markets and their participants operate in order to support stable market development. While this level of control may have been necessary and appropriate in the past, SC is now transitioning to a more disclosure based approach to regulation by cultivating market and self-discipline among market participants. SC recognizes the need for proper sequencing of market liberalization initiatives as well as the need to put in place the pre-conditions for effective disclosure-based regulation and supervision. SC’s operational independence would be buttressed by changes to the legal provisions on removal of commission members and to protections given to the members of the Commission and to SC staff. E. Development Finance Institutions 30. The quality of official oversight of the DFIs varies. BNM regulates and supervises six DFIs under the same standards as applicable to commercial banks. The other DFIs, however, are formally supervised by ministries or government agencies with little expertise in financial sector supervision. F. Financial Markets Infrastructure 31. The arrangements for oversight of the national FMIs are generally compliant with applicable core principles, though a number of areas for further improvements were noted. 16 G. Anti-Money Laundering and Combating the Financing of Terrorism 17 16 These include: i) strengthening legal rights of BNM over collateral placed in the intraday credit facility to obtain liquidity in RENTAS and also enforcement of repo contracts in the event of insolvency and bankruptcy proceedings; ii) recognizing netting and novation arrangements in the securities and derivatives FMIs in legislation; iii) strengthening the stress-testing methodology for the securities and derivatives FMIs; iv) strengthening credit risk management at the securities market FMI ; v) improving disclosure by the authorities of oversight arrangements for FMIs and strengthening and expanding areas of collaboration between the authorities in the oversight of FMIs. 15 32. The financial sector is subject to generally adequate AML/CFT obligations and supervision, though some improvements appear warranted. The authorities have made good progress in strengthening Malaysia’s AML/CFT framework since it was last assessed by the Asia/Pacific Group on Money laundering (APG) in 2007. Improvements can be made in the implementation of requirements for the verification of beneficial owners of accounts and transactions, which appear to be uneven in that reporting institutions hold different views on the degree to which they must drill down to identify the natural person who ultimately owns or controls the customer. The authorities should devote additional supervisory efforts to ensure consistent implementation of customer due diligence requirements regarding beneficial ownership, and consider complementary improvements in the transparency of legal persons and arrangements. H. Labuan International Business and Financial Center (IBFC) 33. The regulatory and supervisory framework for Labuan IBFC needs to be strengthened considerably. The authorities should impose prudential and regulatory requirements on Labuan financial institutions, such as capital requirements for banks and solvency obligations for insurers, that are in line with international standards and best practice. Other regulatory requirements designed to mitigate banking, insurance and securities risks also need strengthening. Labuan Financial Services Authority (LFSA) supervision could be enhanced to make supervision more effective; increased supervisory resources, further training and management engagement are required. The supervisory system relies on home supervisors and auditors but there are weaknesses. 18 LFSA should undertake more proactive engagement and effective communication with home supervisors and external auditors so as to continue to rely on their work. The authorities are aware that the regime needs to be updated to meet international standards. A new Financial Stability Committee, with representatives from the BNM and SC, has been established by the LFSA to strengthen risk management and surveillance practices. The authorities have initiated a number of steps designed to strengthen the regulatory regime, including by enhancing insurance and banking regulatory guidelines by adapting the BNM guidelines, and enhancing cross-institutional collaboration. IV. ASSESSMENT OF MANAGEMENT OF SYSTEMIC RISKS A. Systemic Liquidity Management 34. Thus far during the global financial crisis the BNM has been able to maintain a stable provision of liquidity to the banking sector. This was mainly achieved by allowing existing liquidity-draining operations to roll off and by a temporary reduction in the required reserves ratio, bolstered by adoption of a temporary blanket deposit guarantee. The Malaysian financial sector did not experience any major disruptions, thanks in part to an underlying environment where liquidity is structurally abundant. If required, the BNM can provide 17 While the review included the AML/CFT framework for Malaysia's offshore sector, the Labuan International Business and Finance Centre (LIBFC), the review focused mainly on the implementation and effectiveness in mainland Malaysia only. 18 For example, the LFSA does not confirm with home supervisors that consolidated supervision takes account of the Labuan operations adequately. While the LFSA relies on auditors to help in identifying control weaknesses, in practice many local audit firms do not have the capacity to evaluate the control environment outside Labuan. 16 Emergency Liquidity Assistance (ELA) on a collateralized or uncollateralized basis, but has not needed to extend any ELA since the Asian financial crisis in the late 1990s. The BNM is in the process of reviewing its guidelines with the goal of strengthening its ELA framework. 35. Foreign exchange reserves were vigorously used to manage exchange rate volatility following asset liquidations by foreign investors during 2009 and 2010. A stable core of domestic investors, notably the EPF and PNB, also acted as a buffer against fluctuations in domestic asset demand by non-residents. The downside risk of sharp and unpredictable portfolio flow reversals remains but should be manageable given the combination of ample reserves and a strong domestic investor base. B. Macro-prudential Measures 36. Since 2010, Malaysia has adopted a series of macro-prudential measures with the main goal of curbing the rise in household debt and house prices. The measures mainly targeted the level of credit card debt and terms and conditions for housing loans. The measures on credit cards appear to have had some success. Notwithstanding the measures taken regarding housing loans, house price growth remains at historical highs. Thus far the measures appear to have had limited impact on the overall volume of residential lending, but to have been effective in altering lending composition. Analysis indicates it is unlikely that the volume of residential lending is at the root of the increase in house prices, which may be attributable to the 2009 elimination of the Real Property Gains Tax and demand by foreigners and by Malaysians living abroad. The authorities should conduct further data collection and research to better identify the factors underlying recent developments, and continue monitoring the development of housing loans with LTV ratio above 90 percent. C. Crisis Preparedness 37. The building blocks for a comprehensive crisis management framework are in place. These include the deposit insurance and ELA arrangements for commercial banks, the framework for financial sector supervision, powers to resolve financial institutions, and inter- agency arrangements to promote cooperation and coordination. The system has relevant experience from the Asian Financial Crisis. 38. Further steps to elaborate and formalize the framework would help preserve and build upon institutional memory. Key steps would be to formalize the apex inter-agency financial sector monitoring and crisis coordination committee, 19 strengthening arrangements for the resolution of large complex firms, and enhancing the framework for cross-border interagency coordination. Complementary steps can be taken to institutionalize crisis management team(s), a crisis management manual or reference materials, formal contingency plans (intra and inter- 19 The current Financial Stability Executive Committee (FSEC) primarily enables the BNM to address risks to financial stability arising from entities outside its regulatory sphere. The SC is not a regular member but rather is invited to participate only when considering a proposal involving an entity under its jurisdiction. 17 agency), formal communication plans, and the practice of periodically conducting crisis simulation exercises to test and enhance contingency plans and overall preparedness. In line with new international standards for resolution regimes, the authorities should encourage all SIFIs (large financial groups of systemic importance) to undertake recovery planning, and develop resolution plans for those groups, including by establishing SIFI-specific crisis management groups. D. Deposit Insurance 39. Deposit insurance in Malaysia, managed by PIDM, broadly conforms to best international practice. The framework covers deposits in conventional and Islamic banks under separately administered funds. 20 Member institutions include all commercial banks, including locally incorporated foreign subsidiaries, Islamic banks. Corporate depositors, small businesses and individuals are protected up to a maximum RM 250,000 per depositor per member institution. PIDM is funded by premiums collected from member institutions. The current reserve level for conventional deposits is 0.14 percent of total insured deposits. 40. Overall, PIDM is a strong institution. It has a culture of cooperation with other safety- net players, a strong performance in its exit from the blanket deposit guarantee adopted in response to the GFC, a robust public awareness program, ongoing planning for potential financial institution resolutions, and openness and transparency in its operations and reporting. Areas for improvement include the need for MoF to execute a back-up funding agreement for PIDM and to give PIDM authority to approve operational matters currently approved by the Minister of Finance, in order to enhance PIDM’s operational independence and effectiveness. Additionally, the payout period should be shortened substantially. V. FINANCIAL SECTOR DEVELOPMENT AGENDA A. Money and Foreign Exchange Markets 41. The authorities have expressed their intention to liberalize remaining foreign exchange restrictions and move towards internationalization of the Ringgit. Malaysia maintains a de facto relatively liberal foreign exchange administration regime, with the main remaining restriction being on the ability to transact Ringgit outside Malaysia. One consideration in determining the optimal sequencing and timing of further liberalization is that banks are reliant on a high level of non-retail customer deposits, which are virtually all at-call, although in practice these deposits appear to be stable. It would be advisable to precede the removal of these restrictions by promoting the development and greater use of reliably longer-term funding by banks. 42. The authorities also aim to deepen money markets and make them more liquid. In particular, further development of the repo market in Ringgit and foreign currency will be a focus. Participation will be expanded by allowing corporations that have satisfied the qualifying criteria - regarding size and market activities - to participate in the money markets. The extent of 20 A separate takaful and insurance benefits protection scheme insures policy owners and takaful certificate holders against the loss of part or all of their benefits in the event of a member institution failure. 18 the development of foreign currency repo instruments, however, will likely depend on the pace of the internationalization of the Ringgit and reciprocal arrangements for Ringgit instruments in foreign jurisdictions. B. Corporate Bond Market 43. Measured by its size and by role in financing key sectors such as infrastructure, housing, and banking the authorities have achieved strong corporate bond market development over the past decade. Growth has been enabled by policies that facilitate access to the market, by improvements in market infrastructure, and by programs to promote issuance of sukuk by residents and non-residents, importantly including GLCs. 44. The current development challenge is how to promote access by smaller and lower- credit issuers’ to the market. Numerous market structural features and practices presently constitute barriers to entry for medium-sized and higher-risk companies. 21 The government should encourage more diversity. On the demand side, government-backed institutional investors (e.g., the GLICs, especially EPF) should be encouraged to award additional mandates to private sector asset managers to invest in the high-yield fixed income market. The authorities should provide incentives for asset managers to establish more fixed income (including high yield) mutual funds to facilitate attracting retail investors, and should facilitate their growth by leveling the regulatory and supervisory playing field applied to government-controlled providers offering fixed-income-like returns. An assessment of industry practice on fund sales and distribution would be useful to ensure a healthy environment for growth of fixed income mutual funds. These steps can be accompanied by efforts to encourage more medium-size and lower-rated issuers to tap the market, e.g., by establishing a program to support these issuers through liquidity facility and market marking arrangements. In order to improve liquidity and transparency, the authorities should encourage the establishment of more independent electronic platforms to search price, negotiate, and trade bonds. As the market develops, the authorities may consider moving to a single-supervisor model for the secondary market to more effectively ensure the same quality supervision of all market participants. Promote high-yield fixed-income market by (i) encouraging GLICs to grant additional, relevant mandates to private-sector fund managers, and (ii) promoting the establishment of more fixed income (including high yield) mutual funds to facilitate attracting retail investors. C. Private Pensions 45. The new Private Retirement Scheme (PRS) has recently been launched, introducing a third pension pillar in Malaysia. The authorities expect that PRS and deferred annuity plans will extend coverage (portion of population covered) and improve adequacy (income replaced) for low and higher income workers. The SC has taken a rigorous approach to the legislation and guidelines for the PRS, including strong governance requirements. 21 For example, institutional fixed-income investors are concentrated in the GLICs which are risk averse, generally investing in only AAA and AA rated bonds. Retail fixed income demand is limited partly because EPF and PNB offer retail savings products that are seen to be guaranteed by government and which, in the case of the main PNB equity fund, provides stable fixed-income-like returns. 19 46. There a number of steps the authorities will wish to pursue in order to help ensure the success of the PRS. SC can closely track and review the products and product development processes of the new providers. The stated goal of lowering overall PRS fees is also crucial. The SC has the task of ensuring fees remain competitive and do not favor the provider over the member. Many countries have found that sales agents’ incentives, rather than product features, motivate ultimate product selection. The SC is aware of this and will need to monitor sales practices, and identify and seek to mitigate the possible negative outcomes. The SC also should promote transparency regarding costs, features and (long-term) performance of competing products and investment options to as to help savers make informed choices. 47. Savers should be allowed to transfer EPF-MIS assets into new PRS products. Once established, PRS providers should be accessible directly from the EPF like other approved unit trust providers. D. Development Financial Institutions 48. The authorities should rationalize the DFI sector based on re-evaluation of market gaps that still demand state intervention. The government can exit from those DFIs that have fulfilled their policy mandates (including deposit-taking DFIs, such as Bank Simpanan Nasional, and Agro Bank), and/or which to a large extent now serve markets also served by commercial banks. The exit strategy should include the DFIs partially-owned by BNM, including National Housing Corporation (CAGAMAS) and the Credit Guarantee Corporation (CGC), where BNM’s dual role of supervisor and shareholder may give rise to conflicts of interests. The government should also relinquish their right to appoint the board members of Bank Rakyat, a large cooperative bank owned by its members. 49. The mandates and performance measures for the remaining DFIs should be strengthened. To the extent the re-evaluation of market gaps identifies market niches not served by the private sector (e.g., financing for start-ups, smallholder farmers, etc.), mandates should be updated. Mandates should be reviewed periodically (e.g., every five years) based on updated assessments of market gaps and the past effectiveness of DFIs in fulfilling their mandates. As part of this, DFIs should be encouraged to develop new financial products and advisory services to better serve client needs. The methodology to monitor and evaluate performance of DFIs against their revised policy mandates, capturing not only the financial performance but also economic/development impact, should be strengthened. E. Islamic Finance 50. The authorities currently have two interrelated Islamic finance development agendas. One is to continue to support the growth of Islamic finance domestically while ensuring the proper classification and treatment of different products, which may involve greater risk-sharing. The second is to become a global Islamic financial hub. These involve several challenges. With strong promotion of Islamic finance and current low friction for migration to 20 Islamic financial products, the demand for risk-sharing products is unclear. 22 Reclassifying liabilities according to their underlying legal characteristics should provide a sound basis for future development, but the transition phase involves market, regulatory and supervisory challenges. The authorities are addressing these in order to ensure that user perceptions are in line with the legal reality. The challenges in building a global financial center include developing an environment conducive to attracting foreign exchange and securing global and regional deals. To varying degrees Malaysia is still developing some essential attributes, including a large foreign exchange base, an economic system perceived as market-driven, a diversity of foreign financial institutions, and a deep and highly professional cadre of financial services professionals. 51. It is important to transparently segregate deposit-taking from “investment” activities. If hybrid institutions are allowed (i.e., a firm that offers risk-sharing investments alongside insured deposits) the authorities must consider the implications, including the moral hazard of any perception of insuring Islamic ‘investments’; regulatory arbitrage of two separate but overlapping markets; competitive distortions caused by advantaged treatment of one market subset; and possible miscalculation of capital adequacy, and subsequent distortions, if banks mix investment funds with banking funds. With a move toward products with greater risk-sharing features, the SC must be involved to ensure compliance with capital-markets activity best practices including on distribution and disclosure. 52. To become an Islamic finance hub, the government should deepen efforts to increase Malaysian financial competitiveness. It should consider giving the advantages already envisioned or granted to Islamic financial institutions to all financial institutions, to further promote broader financial center activity. It should assess obstacles to Kuala Lumpur’s position as a financial center for Islamic Finance (as compared with key competitors) and develop a plan to address those obstacles. It could also consider strengthening and making more autonomous the Malaysian International Financial Centre (MIFC) including by bringing in broader private sector participation from Malaysia and abroad. F. Alternative Banking/Payments Delivery Channels 53. Further progress in increasing access to finance, importantly the actual usage of financial services, requires adoption of innovative distribution channels and products that cater to the underserved in a cost-effective and user-friendly manner. Overall, the regulatory environment is enabling and the market is at a stage of development that permits banks to harness the retail payments infrastructure to invest sustainably and safely in innovative delivery channels. The main challenge for both banks and others will be to develop business models that combine the policy goal of “access” with profitability for intermediaries. The models and partnerships need to provide a solid basis for scalability and profitability, given the typical low margins in many underserved segments. The main challenge for BNM is to strike a balance between targeted market interventions to advance its developmental agenda and creating market- 22 Deposits in Islamic banks are covered by PIDM and most customer liabilities of Islamic banks are perceived to be guaranteed, and as such there is little differentiation among conventional deposits, Islamic deposits, and Islamic ‘investments.’ 21 based incentives for sustainable innovation and healthy competition in retail payments and banking. 22 APPENDIX 1 – MAIN RECOMMENDATIONS Recommendations Priority Macrofinancial Risks and Vulnerabilities (Section II) Enhance data capture for household sector to facilitate a more robust and granular monitoring and assessment of household sector leverage and issues especially in accordance to income category; and H review effectiveness of macro-prudential measures. Adopt multi-year top down and bottom up macroeconomic stress testing, and introduce more H conservative credit loss parameters in bottom up stress-tests. Financial Sector Oversight (Section III) Strengthen framework for consolidated supervision to address FHCs, including in such areas as H consolidated capital standards and risk management expectations. Clarify in the law the independence of BNM to take supervisory actions without concurrence of the M Minister. Ground the operational independence of SC by changing the legal provisions on removal of H commission members and protections given to the members of the Commission and to its staff. Implement proposed new FSA at an early date; and strengthen legal and regulatory requirements for H Islamic banks. Address gaps in enterprise risk management expectations for insurers, and increase the expectations of insurers to maintain comprehensive contingency plans and information systems capable of M generating timely and reliable information on risk accumulation. Enhance the regulatory regime for insurance intermediaries and further develop a supervisory M approach more specific to them. Devote additional supervisory efforts to ensure consistent implementation of customer due diligence M requirements regarding beneficial ownership; consider complementary improvements in the transparency of legal persons and arrangements. Address the legal gaps in the oversight of large pension funds and certain specialized finance M companies Strengthen the definition of connected lending. H Impose prudential and regulatory requirements on Labuan financial institutions in line with H international standards and best practice. Undertake more proactive engagement and effective communication of LFSA with home supervisors H and external auditors so as to continue to rely on their work. Managing Systemic Risks (Section IV) Formalize a high-level committee involving BNM, SC, PIDM and the fiscal authority with the H responsibility for ongoing systemic risk monitoring and information sharing and crisis action Encourage all SIFIs (large financial groups of systemic importance) to undertake recovery planning, and develop resolution plans for those groups, including by establishing SIFI-specific crisis M management groups Promote the greater use of reliably stable long-term financing by banks. M Development Measures (Section V) Promote high-yield fixed-income market by (i) encouraging GLICs to grant additional, relevant mandates to private-sector fund managers, and (ii) promoting the establishment of more fixed income M (including high yield) mutual funds to facilitate attracting retail investors. Support the success of the PRS by tracking and reviewing product development and sales practices to ensure they are driven by member benefit and not differential agent commissions, and promote M transparency regarding costs, features and performance of competing products Re-align the mandates of individual DFIs based on an updated assessment of remaining market failures, and consider divestiture of deposit taking institutions that largely operate in market segments M already served by the private sector. Ensure the wider introduction of risk-sharing Islamic products is appropriately regulated, marketed M and managed. 23 APPENDIX 2 - ADDITIONAL TABLES Table A2.1. Malaysia: Indicators of Financial System Soundness, 2006–2011 24 Government and GLIC Ownership of Commercial Banks Table A2.2. Government Equity Ownership in Banking Groups Principal Government Investment Vehicles(percent of equity held) Total Associated Financial Groups EPF (41.0) 41.0 RHB EPF (15.8); PNB (4.8); PNB Managed Unit Trust (44.5) 65.1 Maybank group Khazanah (29.9); EPF (13.4) 43.3 CIMB Group Holdings LTAT (35.2); EPF (0.1) 35.3 Affin Holdings EPF (64.3) 64.3 Malaysia Building Society LTH (44.5); EPF (5.8) 50.3 BIMB Holdings EPF (12.3) 12.3 Public Bank EPF (12.8) 12.8 Hong Leong Bank Table A2.3. Equity Markets: Malaysia vs. Regional and Global Emerging Markets (2010) Number of Stock Market Stock Market Percent Private Listed Capitalizatio Market Capitalizatio Value Credit/GD Companie n / GDP (%) Turnove n 10 Largest Traded 10 P (%) s r Ratio Companies Traded (%) (%) Companie s (%) Malaysia 957 172.6 27.1 37 37.4 114.8 High Income OECD 196 57.6 71.1 52.9 69.6 114.4 Brazil 373 74 66.4 55.4 50.3 52.3 China 2063 81 164.4 23.3 8.4 132.3 Hong Kong SAR, China 1396 - 63.9 36.9 29.6 189 India 4987 93.5 75.6 27.6 21.9 49 Indonesia 420 51 48.1 40.6 42.3 26 Philippines 251 78.8 22.6 42.9 45.7 29.6 Russian Federation 345 67.9 85.7 60.4 95.5 43 Singapore 461 166.2 82.9 28.1 59.3 102.1 Thailand 541 87.1 104.8 45.4 38.1 97 Vietnam 164 19.7 141.4 - - 125 Table A2.4. Equity Raised on Bursa Malaysia (2007–2011) IPOs Secondary Year No. Of Issues Funds Raised (RM bil) No. Of Issues Funds Raised (RM bil) 2007 26 2.6 133 8.0 2008 23 1.3 58 4.8 2009 14 12 49 15.8 2010 29 19.9 105 13.1 2011 28 6.7 125 8.3 25