The Malaysian Banking Industry

Policies and Practices after the Asian Financial Crisis

Rozaimah Zainudin, Chan Sok-Gee, Aidil Rizal Shahrin

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351000499
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

The book provides students and academics in finance and banking with the most recent updates and changes in the Malaysian banking sector post-AFC period. The book explores the evolution of banking policies and practices after the "Tomyam Goong Crisis" and investigates the health of Malaysian banks via efficiency measurement. In addition, it also presents the evolution of bank risk management regulations and practices in Malaysia. The book also discusses the effectiveness of the Malaysian bank bailout strategy with comparison to the banks' bailout in developed countries such as the US.

This book is important and timely since there are very limited books in the market that cover the recent developments on Malaysian banking sectors post-AFC period. Hence, this book serves as the valuable resource for all finance and banking students, academic researchers, and practitioners not limited to the Asian region that require in-depth insights on the latest policies and practices in the Malaysian banking sector.

1
The Malaysian banking industry

Policies and practices after the Asian financial crisis

Rozaimah Zainudin and Chan Sok-Gee

1.1 The banking sector landscape since the Asian financial crisis

The health of the banking industry has always been of concern to both regulators and researchers alike. This is because banking industry failures have drastic, if not crippling, effects on the economy. This was evident during the 1997 Asian financial crisis (AFC) and the 2008 global financial crisis (GFC), where bank runs led to the impairment of the economies in developing and developed countries. It is crucial for banking sector sustainability to be capable of absorbing very high levels of unpredictable economic shock. Crises generally appear with many signals, but the questions are how the economy can detect the warning signals and how strong each country’s banking sectors needs to be to absorb the shock. This is crucial because banking failure leads to impairment in the payment system that distorts economic growth in the long run.

In context of Malaysia, the AFC demonstrated the fragility of domestic banks to the external shock that moved contagiously from the other ASEAN countries. The AFC challenged the Malaysian banking sector’s financial performance and its soundness as the medium of financial intermediation within the Malaysian economy. During the crisis, the Malaysian government, along with the national central bank, Bank Negara Malaysia (BNM), aggressively introduced various monetary and fiscal policies to strengthen the financial system, and especially the operation of banking institutions. The banking sector reform policies were implemented to boost public and external confidence in the role of the banks as lending and deposit-taking institutions during the crisis period. Since the AFC period, these measures have acted as precautions against potentially enormous systematic risk in the banking sector (BNM, 1999). Amongst the measures taken were:

• i) bank consolidation exercises among the financial institutions;
• ii) the introduction of Danaharta as the national asset management organization responsible for the excess of nonperforming loans (NPLs) that arose during the AFC period;
• iii) the establishment of Danamodal to act as the special purpose vehicle to rescue financial institutions that faced capital shortage;
• iv) the setting up of a Corporate Debt Restructuring Committee to rescue large companies that faced extreme debt problems, as such problems in larger corporations would cause the negative effects to spill over and to increase the already high levels of NPLs held by the banks.

Most countries in South East Asia were affected by the AFC and resorted to major bank consolidation and reregulation processes as part of a bank bailout policy. Such actions were initiated by the national governments or by the International Monetary Fund (IMF). Unlike other countries in Asia, the Malaysian authority opted not to accept any bailout from the IMF, instead implementing various in-house policies – including forced mergers – to improve the performance of Malaysian banks and to strengthen their positions, in order to withstand future economic shocks. In Malaysia, the 1997 AFC severely affected the solvency of the banking industry, leading to a major consolidation of the industry through forced mergers by BNM, as well as capital injections. By 31 December 2000, 50 out of 54 locally owned banking institutions in Malaysia had been consolidated into ten banking groups. This exercise effectively rationalized and consolidated 94% of the total assets of the domestic banking industry in Malaysia, in order to protect the banking industry from the negative effects of the financial crisis.

Apart from bank consolidation, BNM also implemented various measurements to improve the weak risk management controls of banks. These included recapitalization and restructuring of the banking industry for a more resilient and sound financial system. The dearth of bank risk management further contributed to the mismatch between the Malaysian banks’ risk profile and the minimum capital controls imposed by BNM. This gap resulted in overstated bank levels of capital, and hence an inability to absorb the large shock of the AFC (BNM Annual Report, 1999). Since the AFC period, the central bank has thus revisited the capital adequacy framework to ensure that the real bank risk profiles are commensurate with strengthening bank risk management practices. A revised risk management framework was thus introduced

to enable identification, quantification, monitoring, and management of all associated risks. The risk management framework must also be flexible and sophisticated to accommodate for changes in the electronic environment and advancements in technology.

(BNM Annual Report, 2000, p. 5)

In addition, the implementation of the Malaysia Deposit Insurance System in 2011, the revision of the Corporate Governance Code of Conduct since 2000, and the adoption of Basel III requirements after the GFC were undertaken to improve the risk-taking aspects of the domestic banking industry in Malaysia. These measures were meant to further strengthen the banking industry and safeguard depositors, while building a sustainable payment system that would contribute to the economic growth of the country.

Many studies have presented empirical evidence of bank performance measurements, risk-taking issues, liquidity issues, and others. These have focused in different ways on bank-related issues, and the results are not conclusive. Furthermore, comprehensive studies are relatively scant for the Malaysian banking industry’s developments, especially in terms of policies and practices in the aftermath of the AFC. Studies of the Malaysian banking industry are important in providing a proof of success and a checklist to banking authorities in terms of the banking consolidation and reregulation, which in this country involved different strategies in the bailout policy. This book thus sheds light on the effectiveness and efficacy of the bailout policy implemented in Malaysia, which could serve as a model to both developing and developed economies. The goal of this book is threefold: First, it provides a comprehensive evaluation of the policies and practices of the Malaysian banking industry since the AFC in context of both general and Islamic banking institutions. We focus on the management and allocation of banking resources by studying the efficiency level of the banks. In this context, we measure the profit, cost, and technical efficiency of these Malaysian banks by comparing conventional and Islamic banks. Second, this book examines the effect of risk-taking activities, policies, and practices at Malaysian banks after the AFC period. Third, it considers how initiation of bank consolidation in Malaysia was meant to strengthen the financial system, which was crucial because bank bailout policy had been widely questioned as it creates excessive risk-taking, defeating the main objective of creating sound, healthy financial institutions through consolidation, as the evidence from the US suggests. This book also evaluates the effectiveness of banking consolidation in Malaysia by looking at banks’ efficiency levels before and after the consolidation exercise. The book also attempts to evaluate the effectiveness of the US bank bailout programs in the GFC period. In a nutshell, this volume aims to shed light on the post-AFC occurrences in the Malaysian banking industry landscape, encompassing the health of the banking industry, bank risk management practices, and the effectiveness of the bank consolidation and bailout strategy in terms of overall bank efficiency. Apart from the domestic analysis, the book compares the best risk management practices and the effectiveness of the bank bailout policies implemented by Malaysian and US banks.

1.2 Contents and organization

This book contains five chapters, summarized as follows:

Chapter 1: The Malaysian Banking Industry: Policies and Practices after the Asian Financial Crisis

Chapter 1 gives an overview of how the Malaysian banking landscape has changed since the AFC period. This chapter further discusses the major changes in the Malaysian banking sector according to three perspectives; namely, bank efficiency, risk-management regulations and practices, and the bank consolidation programme after the AFC crisis.

Chapter 2: The Health of the Malaysian Banking Industry

This chapter presents a comprehensive review of the bank practices in Malaysia since the Asian financial crisis, describing first the general changes in the Malaysian banking landscape, and then proceeding to discuss the changes within Islamic banking institutions. The chapter provides a detailed evaluation of the overall health of the Malaysian banking industry through bank efficiency analyses, involving aspects such as the bank’s allocation of resources through technical efficiency, cost efficiency, and profit efficiency. This is crucial as it deals with the management of bank resources to achieve maximum output while fulfilling the objectives of cost minimization and profit maximization. The chapter then compares the levels of efficiency of conventional and Islamic banks in Malaysia.

Chapter 3: Bank Risk Management

This chapter describes the evolution of the risk management function of banks in Malaysia and continues to evaluate the Malaysian banking industry’s resilience by studying the evolution of this risk management regulations implemented by BNM. It compares the current local situation with that of global best practices. The chapter also identifies the likely future challenges to be faced by the risk management function. This enables us to gauge the effectiveness of the Malaysian banking industry’s risk management practices and provides some insight to policy makers and bank managers, which they can use to develop better strategies for a healthy banking industry.

Chapter 4: Bank Bailout Efficacy

Chapter 4 explains the concept of moral hazard theory and relates it to bank consolidation policy. It provides a detailed review of the Malaysian context before, during, and after the AFC period. Next, the chapter evaluates the effects on the overall Malaysian bank efficiency of the bank consolidation and forced merger exercises after the AFC period. A comprehensive review is then given of the bank bailout experience at US banks before, during, and after the GFC period. In this chapter, we further compare the bank bailout strategy implemented at US banks after the GFC period.

Chapter 5: Conclusion

This chapter concludes the empirical evidence from Chapters 2, 3, and 4. The chapter also provides a few practical suggestions for BNM regulators and bankers to further improve banking sector performance and remain competitive globally.

Chapter 6: Special Topic: Practitioner Insight on Risk-Management Practices

This special topic provides a review of Malaysian risk-management practices from the perspective of a practitioner. The chapter discusses the best practices of risk-management using JPMorgan Chase and Deutsche Bank as examples. Finally, the chapter presents the future challenges for the overall banking industry.

References

Bank Negara Malaysia. (1999). The Central Bank and the Financial System in Malaysia: A Decade of Change (1989–1999). Kuala Lumpur: Bank Negara Malaysia.

Bank Negara Malaysia Annual Report 1999. Retrieved from http://www.bnm.gov.my/index.php?ch=en_publication&pg=en_ar&ac=3&lang=en

Bank Negara Malaysia Annual Report 2000. Retrieved from http://www.bnm.gov.my/index.php?ch=en_publication&pg=en_ar&ac=3&lang=en

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The health of the Malaysian banking industry

Rozaimah Zainudin and Chan Sok-Gee

2.1 Overview

The Malaysian central bank, Bank Negara Malaysia (BNM), began operations on 26 January 1959 with the aim of providing the basic infrastructure of the Malaysian financial system and strengthening domestic commercial banks in the economy. A decade later, BNM began to encourage the establishment of other forms of financial intermediaries, such as investment banks (merchant banks) and financial institutions offering types of services other than those offered by the domestic commercial banks. These financial intermediaries provide a broader variety of business and consumer financing products to the Malaysian financial market.

The main function of BNM is to improve monetary and financial stability through monetary policy. It is crucial to provi...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Preface
• List of abbreviations
• 1 The Malaysian banking industry: policies and practices after the Asian financial crisis
• 2 The health of the Malaysian banking industry
• 3 Bank risk management
• 4 Bank bailout efficacy
• 5 Conclusion
• 6 Special topic: practitioner insight on risk management practices
• Index