chapter 2 : central bank


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chapter 2 : central bank

  2. 2. SPECIFIC OBJECTIVE OF TOPIC At the end of the unit you will be able to : 1. Explain the formation of Bank Negara Malaysia (BNM) 2. Explain the system’s objectives and the functions of BNM. 3. Explain the organizational structure of BNM, two-tier regulatory system, the BNM and International Institutions relationship and the direction of creditcredit guidelines. 4. Explain the objective and the monetary policy instruments 5. Explain the techniques that are used by BNM in influencing the fund supply, credit and interest through monetary control-statutory reserve requirements (SRR), liquidity requirements (LR), interest rate management, money market operations, discount operations and moral suasion. SITI NURAZANI MUSTAFFA/PB303/JUN 2012 2
  3. 3. Formation of Bank Negara Malaysia • Bank Negara Malaysia (BNM) of Malaya Ordinance 1959 (CBO) which established the BNM was enforced on January 26, 1959. • The establishment of BNM in 1959 can be fundamentally attributed to the recognition then for the need for deliberate management of the money and credit situation in the country. SITI NURAZANI MUSTAFFA/PB303/JUN 2012 3
  4. 4. BANK NEGARA MALAYSIA • Bank Negara Malaysia is entrusted with the task of overseeing the nation's economic and financial system. • Committed to promoting monetary stability and to foster a sound and progressive financial sector to achieve sustained economic growth for the nation. • Being a Central Bank in an emerging economy, – Bank Negara Malaysia also places high importance in its developmental role with respect to economic management, institutional building and the development of the financial system infrastructure.
  5. 5. • Bank Negara Malaysia is managed by a team led by Tan Sri Dr. Zeti Akhtar Aziz, a highly regarded Governor by the financial community. • Completing the management team are 3 Deputy Governors and 7 Assistant Governors, who together provide a clear strategic blueprint for the long term development of the Bank.
  6. 6. GAVENORS • Since May 2000 Tan Sri Dato' Sri Dr. Zeti Akhtar Aziz • Section 9 (1) of the Central Bank of Malaysia Act 1958 provides that the Governor shall be appointed by the Yang Di Pertuan Agong, and the Deputy Governors by the Minister of Finance. Since the Bank's inception in 1959, there has been seven Governors.
  7. 7. • The policy of the Bank is entrusted to its Board of Directors  Consists of ten members.  The ex-officer members of the Board are the Governor, the Deputy Governors and the Secretary-General to the Treasury.  The other directors are prominent leaders who have vast experience in the public and private sectors.  All members, except the Deputy Governors, are appointed by His Majesty the Yang Di-Pertuan Agong. The Deputy Governors are appointed by the Minister of Finance.  The Governor, or in his or her absence, one of the Deputy Governors, is the chairman of the Board, which is statutorily required to meet at least once a month.
  8. 8. The Objectives of BNM to issue currency and keep reserves while safeguarding the value of the currency. to act as a banker and financial adviser or agent to the Government. to promote monetary stability and a sound financial structure. to influence the credit situation to the advantage of the country. SITI NURAZANI MUSTAFFA/PB303/JUN 2012 8
  9. 9. The Functions of BNM Bank for Currency Issue  arrange for the printing of currency notes and the minting of coins.  issue, re-issue and exchange notes and coins at its office and at such agencies as it may, from time to time and establish or appoint  arrange for the safe custody of unissued stocks of currency and for the preparation, safe custody and destruction of plates paper for the printing of notes and of dies for the minting of coins. SITI NURAZANI MUSTAFFA/PB303/JUN 2012 9
  10. 10. The Functions of BNM Keeper of International Reserves The country’s official external reserves are held and maintained by BNM.  Gold  Foreign exchange assets and reserve in International Monetary Fund (IMF)  Holdings of Special Drawing Rights  investments denominated in the major international currencies, such as bank balances, Treasury Bills, Bonds and other appropriate term securities to secure the best result and returns/benefits for the SITI NURAZANI MUSTAFFA/PB303/JUN 10 2012 country.
  11. 11. The Functions of BNM Government Banker and Financial Advisor (i) Management of Government Accounts It provides cheque facilities, accepts funds and makes payments on behalf of the government and undertakes the foreign exchange business of the government (ii) Source of Funds to Government It provides temporary advances to the Government to cover any deficit in the budget revenue. (iii) Management of National Debt It advises the government on its loan programmes, including terms and timing of loans and the issue of new types of securities. SITI NURAZANI MUSTAFFA/PB303/JUN 2012 11
  12. 12. The Functions of BNM To Promote Monetary Stability and Influence the Credit Situation to the Advantage of the Country. •BNM is obliged to ensure that the supply of money and the volume of credit are sufficiently elastic to the demands in the domestic economy without creating undue pressure on resources. •Influence the level of inflation •Promote saving deposit •Preserving price stability •Sustaining economicNURAZANI MUSTAFFA/PB303/JUN growth SITI 2012 12
  13. 13. The Functions of BNM Banker to the Banks • Promote a sound financial structure • Licensing of banks and non-banks • Banking relationship • Currency distribution • Inspection and investigation of banks and non banks • Lender of the last resort SITI NURAZANI MUSTAFFA/PB303/JUN 2012 13
  14. 14. SELECTIVE INSTRUMENTS GENERAL INSTRUMENTS Selective instruments of monetary control are used to influence credit to a particular subsector or type of lending General instruments of monetary control are those that operate to influence the level of bank reserves 1.Interest Rate (Loan & Deposits) 2.Credit Control & Lending Guideline 3.Moral Suasion MONETARY POLICY INSTRUMENTS 1. Statutory Reserve Requirement 2. Minimum Leiquidity Requirement 3. Money Market Operation 4. Discount Operation SITI NURAZANI MUSTAFFA/PB303/JUN 2012 14
  15. 15. • Under Section 37(1)(c) of the Central Bank Ordinance, the banking institutions are required to maintain a certain percentage of their reserves with BNM. • SRR is known as a bank’s eligible liabilities (EL). The EL foundation comprises of deposits (including negotiable certificates of deposits and repurchase agreements). • INCREASING the SRR ratio will: √ reduce the level of reserves available to the banking institutions. √ decrease the lending ability of the banking institutions • DECREASING the SRR ratio will: √ increase the level of reserves available to the banking institutions. √ increase the lending ability of the banking institutions. SITI NURAZANI MUSTAFFA/PB303/JUN 2012 15
  16. 16. Reserve Requirements -regulations on the minimum amount of reserves that banks must hold against deposits • an increase in reserve requirements means that - banks must hold more reserves and - can loan out less of each RM that is deposited • as a result, it raises the reserve ratio, lowers the money multiplier, and decrease the money supply • a decrease in reserve requirements means that • lowers the reserve ratio  banks hold less reserves • have excess reserves  to be lent out • as a result, it raises the money multiplier and increases the money supply SITI NURAZANI MUSTAFFA/PB303/JUN 2012 16
  17. 17. • Source: SITI NURAZANI MUSTAFFA/PB303/JUN 2012 17
  18. 18. • Under s 38(1) of the BAFIA 1989, the banking institutions are required to observe a minimum liquidity ratio that expressed as a percentage of the EL based on the banking liquid asset • Liquid assest are:          Cash Money at call Treasury bills Government securities Government investment certificates Cagamas Bond Bank Negara Bills Bank Negara Certificates State Government Securities SITI NURAZANI MUSTAFFA/PB303/JUN 2012 18
  19. 19. • INCREASING the MLR ratio will: √ reduce the level of reserves available to the banking institutions. √ decrease the lending ability of the banking institutions • DECREASING the MLR ratio will: √ increase the level of reserves available to the banking institutions. √ increase the lending ability of the banking institutions. SITI NURAZANI MUSTAFFA/PB303/JUN 2012 19
  20. 20. • WHY the minimum liquidity requirement is essential ???? Because commercial banks need to provide enough vault cash and other liquid assets to fulfill the demand for deposits withdrawal and loans. Since February 16, 1987 the minimum liquidity ratio has been fixed at 17 per cent of the total eligible liabilities. SITI NURAZANI MUSTAFFA/PB303/JUN 2012 20
  21. 21. Money market operations (MMO) are operations conducted by BNM to influence the liquidity situation in the system. MMO can be conducted by the following: (i) Open Market Operations are mainly transacted via the sales and purchase of Government papers or (ii) the borrowing or lending by Bank Negara Malaysia in the interbank market. SITI NURAZANI MUSTAFFA/PB303/JUN 2012 21
  22. 22. Open-Market Operation (OMO) Definition of Open Market Operations: The purchase and sale of government securities in financial market so as to influence the size of bank deposits. Government has authorized the BNM to buy and sell government securities. SITI NURAZANI MUSTAFFA/PB303/JUN 2012 22
  23. 23. •When BNM sells securities in the open market, it receives payment in cash (paid in the form of commercial bank cheques). • The cash balances of the banks will decrease • Reduce their lending activities. • This results in the reduction of credit available. When BNM buys securities, it pays cash to the banks and this will increase the bank’s cash balances and enable them to increase credit for their customers. SITI NURAZANI MUSTAFFA/PB303/JUN 2012 23
  24. 24. The discount operations is defined as deliberate measures by BNM to influence the interest rate and liquidity situations via various terms and conditions under which the commercial banks and money market may have temporary access to BNM’s credit facilities. The INCREMENT of the discount rate by BNM will: √ decrease the reserves of banks √ reduced the credit available to the customers √ decrease the supply of money in the market The DECREMENT of the discount rate by BNM will: √ increase the reserves of banks √ increase the credit available to the customers √ increase the supply of money in the market SITI NURAZANI MUSTAFFA/PB303/JUN 2012 24
  25. 25. Banks may borrow from BNM The interest rate on the loans that BNM makes to banks is called the discount rate A bank borrows from BNM when it has too few reserves to meet reserve requirements This might occur because the bank made too many loans or it has experienced recent withdrawals Therefore, the banking system has more reserves and this allow to create more money BNM can alter the money supply by changing the discount rate SITI NURAZANI MUSTAFFA/PB303/JUN 2012 25
  26. 26. • BNM can control including the bank’s liquidity and cost of bank credit through the interest rates charged on bank loans as well as the rates of interest offered for deposits. • INCREASING of the interest rate will: √ increase the level of cost of funds for bank loans √ decrease the demand for bank loans • DECREASING of the interest rate will: √ decrease the level of cost of funds for bank loans √ increase the demand for bank loans SITI NURAZANI MUSTAFFA/PB303/JUN 2012 26
  27. 27. SITI NURAZANI MUSTAFFA/PB303/JUN 2012 27
  28. 28. BNM impose control on credit and strengthen the credit guidelines to the selected sector, Example such as: – priority sector lending guidelines (ex. Telecommunication and Tourism) – hire-purchase guidelines on motor vehicle – guidelines on credit card operations – credit limit for purchase of stocks and shares and units of units trust funds – credit limit for financing of specific types of property SITI NURAZANI MUSTAFFA/PB303/JUN 2012 28
  29. 29. Refer to a traditional BNM which informally induces a voluntary response from the financial system to its policy initiatives such as:  discouraging financial institutions to lend excessively for speculation activity  encouraging them to extend longer-term financing loans, to be granted on the basis of viability of projects rather than purely dependent on meeting collateral requirements.  commercial banks were encouraged to step up their lending to priority areas such as the bumiputera community and small borrowers  the banking institutions were also urged to limit lending secured by shares to protect the banking system from over exposure to the volatility of the stock market. SITI NURAZANI MUSTAFFA/PB303/JUN 2012 29
  30. 30. BNM versus GLOBAL CONTINUE’
  31. 31. Relationship BNM with International Institutions • BNM has maintained an active role in international, financial and economic matters. • BNM maintains close working relationship with International Monetary Fund (IMF), the World Bank, Asian Development Bank (ADB), Islamic Development Bank (IDB) and World Trade Organization.
  32. 32. Relationship BNM with International Institutions • BNM is an active organization in involving any event includes: – Convention – Meeting – SEACEN – APEC – ASA (Swap ASEAN)
  35. 35. GROUP WORK • • • • • • Economics Department – Group 1 Investment and Treasury Department – Group 2 Bank Examination Department – Group 3 Control of Banking Department – Group 4 Banking Supervision Department – Group 5 Payment System Department – Group 6 SITI NURAZANI MUSTAFFA/PB303/JUN 2012 35
  36. 36. ORGANISATION STUCTURE • The Governor is the Chief Executive Officer of the Bank and is assisted by three Deputy Governors and seven Assistant Governors. Most of the 35 departments/units in the Bank are organized into seven divisions, with each Assistant Governor being responsible for one. • Organizational Chart
  37. 37. DEPARTMENTS • Roles of the functional areas include the following: – – – – – – – Economics Sector Investment and Operations Regulation Sector Supervision Sector Organizational Development Payment Systems Communications Link
  38. 38. ECONOMIC SECTOR • Primarily provides good technical and research support on growth-related issues to enhance formulation of monetary and credit policies in promoting monetary stability and ensuring the availability of adequate credit to finance economic growth. • Strategies and formulate economic and monetary policies – conducting surveillance, identifying emerging risk, forecasting trends and undertake policy research to provide the bank with pre-emptive actions that would promote sound and sustainable economic growth, monetary and financial stability and better understanding of the financial sector in terms of impact with the real economy. • Formulate and manage the Bank's international relations – by recommending policies, conducting negotiations, intelligence gathering and operations on trade financing agreement to promote and protect Malaysia's interest in economic and financial matters. • Analyze and forecast on key – economic indicators, economic outlook and balance of payment movement for the world and domestic economy to formulate economic policy recommendations to Monetary Policy Committee (MPC).
  39. 39. ORGANIZATIONAL DEVELOPMENT • Spearhead the Bank's strategic management, organizational performance management and program management functions – to drive the Bank's performance improvement processes and transition towards a Strategy Focused Organisation, thereby strengthening the capacity building of the Bank. • Strategically lead and drive resources, human resource (HR) initiatives and other strategic activities – to ensure the overall Human Capital Management framework is implemented in an integrated manner. Also design and develop innovative and cutting edge HR solutions in order to address bank-wide issues relating to human resources. • Spearhead and promote state-of-the-art learning practices to enable performance excellence culture and strengthen the Bank's capability development. – This is carried out through effective and efficient management of enterprise-wide learning and implementation by setting the Bank's learning direction, policies and learning pedagogy (learning architecture, adult learning, self-directed learning, life-long learning, and blended learning).
  40. 40. INVESTMENT AND OPERATIONS • Manage domestic liquidity and exchange rates to ensure that monetary policy targets are achieved as well as managing external reserves to safeguard its value and optimize its returns. • It also has the responsibility of providing advice and assistance to the Government in the area of debt and fund management and contributing to domestic financial market development.
  41. 41. REGULATION SECTOR • Promote financial sector stability through the progressive development of sustainable, robust and sound financial institutions policy and infrastructure, thereby enabling a competitive local financial industry that is resilient against the changing future environment as well as leading initiatives to enhance access to financing, including SMEs (Small and Medium Enterprises). • Formulate and implement strategies towards building and positioning Malaysia as a premier integrated Islamic Financial Centre and the development of relevant policies to ensure the soundness of the Islamic finance industry. • Enhance financial capability of consumers via formulation, implementation and enforcement of market conduct and consumer protection policies to safeguard the interest of depositors, consumers and policyholders.
  42. 42. SUPERVISION SECTOR • Develop, enhance and implement an effective surveillance framework – to ensure safety and soundness of financial institutions and to enforce sound practices in them. • Develop policies and strategies – to promote a reliable, secure, efficient clearing, settlement and payment systems and instruments in the country.
  43. 43. PAYMENT SYSTEMS • Develop policies and strategies – to promote reliable, secure and efficient clearing, settlement and payment systems in the country.
  44. 44. COMMUNICATIONS • The communications function has assumed increasing importance in response to the heightened demands of the various stakeholders, seeking greater transparency and disclosure.
  45. 45. Exercise/ Discussion Explain how the following instrument used by BNM to control fund and supply of credit in the economy: 1. 2. 3. 4. 5. 6. 7. Statutory Reserve Requirement (SRR) Minimum Liquidity Requirement (MLR) Money Market Operation Discount Operation Interest Rate Management Credit Control & Guidelines Moral Suasion SITI NURAZANI MUSTAFFA/PB303/JUN 2012 45