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Financial Stability
Contents:
What is financial stability?
The financial system plays a critical role in the economy. It enables the financial intermediation process which facilitates the flow of funds between savers and borrowers, thus ensuring that financial resources are allocated efficiently towards promoting economic growth and development.
Financial stability describes the condition where the financial intermediation process functions smoothly and there is confidence in the operation of key financial institutions and markets within the economy.
Importance of Financial Stability
Financial instability and its effects on the economy can be very costly due to its contagion or spillover effects to other parts of the economy. Indeed, it may lead to a financial crisis with adverse consequences for the economy. Hence, it is fundamental to have a sound, stable and healthy financial system to support the efficient allocation of resources and distribution of risks across the economy.
One of the main objectives of central banks is to promote and maintain monetary and financial stability as it contributes to a healthy economy and sustainable growth. Bank Negara Malaysia discharges the responsibility for promoting a sound and efficient Malaysian financial system by preserving the soundness of financial institutions and the robustness of the financial infrastructure to withstand adverse economic cycles and shocks, thereby preventing inordinate disruptions to the intermediation process and maintaining confidence in the financial system. This is primarily achieved through the regulation and supervision of the licensed financial institutions, by ensuring the continued reliability of major payment and settlement systems, and actively contributing to the development of efficient financial markets.
The Bank also remains vigilant to new emerging trends and challenges to the Malaysian financial system which could undermine financial stability by devoting significant resources towards instituting robust surveillance processes which aim to identify vulnerabilities and support pre-emptive actions to prevent systemic disturbances.
Cornerstone of Financial Stability - Supervision and Regulation
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Functions of Regulation Departments
- Financial Sector Development: Progressive development of the financial sector including the promotion of competitive and robust financial institutions (FIs) and financial infrastructure enhancement
- Financial Surveillance: Comprehensive and integrated macro-prudential surveillance and assessments of emerging trends and vulnerabilities of the financial system
- Prudential Financial Policy: Development of a sound & robust prudential framework for FIs that promotes harmonisation & alignment across sectors
- Consumer & Market Conduct: Formulates and enforces market conduct policies to ensure fair treatment of financial consumers as well as undertakes initiatives to increase the financial literacy levels of Malaysian consumers.
- Islamic Banking and Takaful: Create an enabling environment through improvements in the regulatory regime and develop relevant prudential policies to effectively support an Islamic financial system
- Development Finance and Enterprise: Promote the roles of development financial institutions in effectively and efficiently delivering its mandated roles of promoting strategic sectors of the economy. Drive, incentivise and influence financial services providers to provide financing to strategic targeted sectors and the underserved stakeholders
- MIFC Promotion Unit: Develop and implement a comprehensive range of MIFC promotional strategies and initiatives to position Malaysia as an international Islamic financial hub.
Functions of Supervision Departments
- Financial Conglomerates Supervision: Supervision of domestic financial conglomerates and Islamic banks which are part of the domestic banking groups.
- Banking Supervision: Supervision of foreign banks, stand-alone investment banks, stand-alone and foreign licensed Islamic banks, and development financial institutions.
- Insurance and Takaful Supervision: Supervision of insurance companies, reinsurance companies, takaful operators, retakaful operators as well as international takaful operators
- Payment Systems Policy: Development of policies and strategies to promote the safety, security & efficiency of payment systems & payment instruments, and drive migration to e-payment initiatives.
- Specialist Risk Unit: Provide prompt independent assessment and advice on emerging risks in specific and across regulated financial institutions to facilitate pre-emptive actions.
Functions of Regulation and Supervision Administration
- Provide centralised administration services, knowledge management support and coordinate learning/development initiatives for both regulation and supervision departments.
Legislative Powers to Enforce Supervisory and Regulatory Functions
To enable the Bank to meet the objectives of a central bank, it is vested with comprehensive legal powers under the following legislation to regulate and supervise the financial system. These pieces of legislation include:
Central Bank of Malaysia Act 2009
An Act to provide for the continued existence of the Central Bank of Malaysia and for the administration, objects, functions and powers of the Bank, for consequential or incidental matters.
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Banking and Financial Institutions Act 1989 (BAFIA)
An Act to provide new laws for the licensing and regulation of institutions carrying on banking, finance company, merchant banking, discount house and money-broking businesses, for the regulation of institutions carrying on certain other financial businesses, and for matters incidental thereto or connected therewith. Incorporating Latest Amendments up to Act A1256/2005 - cif : 1 Apr. 2006
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Islamic Banking Act 1983
An Act to provide for the licensing and regulation of Islamic banking business. Incorporating Latest Amendments up to Act A1307/2007 - cif : 31 July 2007
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Insurance Act 1996
An Act to provide new laws for the licensing and regulation of insurance business, insurance broking business, adjusting business and financial advisory business and for other related purposes. Incorporating Latest Amendments up to Act A1247/2005 - cif : 1 Jan. 1997
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Takaful Act 1984
An Act to provide for the regulation of takaful business in Malaysia and for other purposes relating to or connected with takaful. Incorporating Latest Amendments up to Act A1306/2007 - cif : 31 July 2007
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Development Financial Institutions Act 2002 (DFIA)
The DFIA, which became effective on 15 February 2002, provides a comprehensive regulatory and supervisory framework for DFIs. The DFIA aims at ensuring the financial and operational soundness of DFIs and that the DFIs perform their mandated roles prudently, efficiently and effectively. The DFIA also ensures that the DFIs' policies and objectives are consistent with the Government's policy direction in developing and promoting the identified targeted sectors of the economy. The DFIA incorporates prudential requirements on lending activities, corporate governance, capital requirements and supervisory authority in the supervision of the DFIs, for safe and sound financial management and operations of DFIs.
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Anti-Money Laundering and Anti-Terrorism Financing Act 2001 (Act 613)
This renamed and revised Act which came into force on 6 March 2007, is to provide for the offence of money laundering, the measures to be taken for the prevention of money laundering and terrorism financing offences and to provide for the forfeiture of terrorist property and property involved in, or derived from, money laundering and terrorism financing offences, and for matters incidental thereto and connected therewith.Incorporating Latest Amendments up to
PUA 153/2011 - cif : 4 May 2011
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Payment Systems Act 2003 (Act 627)
An Act to make provisions for the regulation and supervision of payment systems and payment instruments and for matters connected therewith. Came into force on 1 Nov 2003.
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