1. Monetary Policy Instruments
1.1. Interest rate (loan & deposits)
1.2. Credit control & Lending guideline
1.2.1. Credit control - used to control the demand and supply of money (liquidity) in the economy.
1.2.2. Central Bank administer control over the credit that the commercial bank grant.
1.2.3. Lending guideline - policies that are set in place to create universal gudelines within a financial institution for all potential borrowers. Lending standard may vary from one fin institution to another.
1.3. Moral Suasion
1.3.1. A persuasion tactic used by an authority to influence and pressure, but not force, bank to adhering to policy
1.3.2. Tactic used are closed-door meeting with bank directors, increased severity of inspections, apeals to community spirit or vague threats.
1.4. Statutory Reserve Requirements (SRR)
1.4.1. The banking institution are required to maintain a certain percentage of their reserve with BNM
1.4.2. Known as a bank's eligible liabilities (EL)
1.4.3. Increasing ? Decreasing the SRR ratio will : a) Reduce the level of reserve (lending liability) available to the banking institutions. b) Decrease the lending ability of banking institutions. (vice versa)
1.5. Minimum Liquidity Requirement (MLR)
1.5.1. Banking institution are required to observe a minimum liquidity ratio that is expressed as a percentage of the EL based on the banking asset.
1.5.2. Liquidity assets : cash, money at call (short-term loan), Treasury Bills, gov securities, gov investments certificates, CAGAMAS bond, Bank Negara bills, Bank Negara certificates, State Government Securities.
1.5.3. Increasing / Decreasing MLR ratio will : a) Reduce the level of reserve (lending liability) available to the banking institutions. b) Decrease the lending ability of banking institutions. (vice versa)
1.5.4. Why its important ? Because commercial banks need to provide enough vault cash and other liquid asssets to fulfill the demand for deposits withdrwal and loans
1.5.5. Liquidity Coverage Ratio (LCR) - highly liquid assets held by fin institution to meet short-term obligations. It designed to ensure fin institution have necessary asstes on hand to ride out short-term liquidity disruptions
1.6. Money Market Operation
1.6.1. Operations conducted by BNM to influence the liquidity situation in the system.
1.6.2. Can be conducted by : (a) Open Market Operation via sales & purchase of Gov papers (b) The borrowing/lending by BNM in the interbank market
1.6.3. Open Market Operations : The purchase & sale of gov securities in fin market so as to influence the size of money supply in the market.
1.6.4. When BNM sells securities in open market, it receive payment in cash. So the cash balances of bank will decrease, reduce their lending abilities and result in the reduction of credit available
1.6.5. When BNM buys securities, it pays cash to the banks. So the cash balances of banks will increase, increase their lending abilities and results in an increase in the credit available
1.7. Discount Operation
1.7.1. To influence the interest rate & liquidity situation via various terms and conditions under which the commercial banks and money market have temporary access to BNM's credit facilities
1.7.2. The interest rate on the loans that BNM charges to bank called discount rate
1.7.3. The INCREMENT / DECREMENT of the discount rate by BNM will : (a) Decrease the reserves of banks (b) Reduce the credit available to customers (c) Decrease the supply of money in the market (vice versa)
2. Interest Rate Management (Loans & Deposits)
2.1. BNM can control the bank's liquidity & cost of bank credit through interest rates charged on the bank loans as as the interest rates offered for deposits.
2.2. INCREASING / DECREASING the interest rate will : (a) Increase the level of costs of funds for bank loans (b) Decrese the demand for bank loans. (vice versa)
3. When BNM wants to stimulate / constrains the economy
3.1. Economic growth below potential -> Inflation very low -> Bank Reserves -> Short term interest rate lower -> Loans increase -> Economic Activity increase (vice versa)
4. Financial Service Act (FSA) 2013 & Islamic Financial Service Act (IFSA) 2013
4.1. FSA 2013 - to promote financial stability and in pursuing this objective
4.2. IFSA 2013 - to promote financial stability and compliace with Shariah and in pursuing this objectives
5. BNM
5.1. Established on 26 January 1959
5.2. Governed by the Central Bank of Malaysia Act 2009
5.3. Can be fundamentally attributed to the recognition for the need for deliberated management of money & credit situation in the country
5.4. Mission
5.4.1. Committed the excellence in promoting monetary & fin system stabilty and fostering a sound and progressive financial sector, to achieve sustainable economic growth for the benefit of nation.
5.5. Function
5.5.1. Banker for currecy issue ( to issue currency and keep reserve safeguarding the value of currency)
5.5.2. Keeper of international reserves
5.5.3. Government banker & Financial Advisor ( to act as a banker & financial adviser to the government)
5.5.4. To promote monetary stability and a sound financial structure
5.5.5. Influence the credit situation to the advantage of country
5.5.6. To promote the reliable , efficient and smooth operation of national payment and settlements system & to ensure the national payment and settlement systems policy is directed to the advantage of Malaysia
5.5.7. Banker to the banks
5.6. Roles
5.6.1. To promote monetary stability and financila stability
5.6.2. Monetary stability
6. Central Bank System
6.1. An institution that manage a country's currency, money supply and interest rates.
6.2. Usually oversee the commercial banking system of their respective countries.
6.3. called central bank / reserve bank / monetary authority
6.4. Function of Central Bank
6.4.1. To control the nation's money supply (monetary policy)
6.4.2. Through active duties such as managing interest rates, setting the reserve requirement
6.4.3. Acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis
6.5. Objective of Central Bank
6.5.1. To maintain financial stability in the economy while maximizing growth and employment. Stability is important because financial stability is a systemic risk that affects the economy as a whole and cannot be diversified away.
6.5.2. Achieving macroecoomic stability relating to domestic inflation and forex rate
6.5.3. Arranging for strategic strengthening of the country's financial sector through creation of appropriate financial infrastructure
6.5.4. Ensuring sound financial health of the country's financial institutions