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BNM Monetary Instruments. SRR Minimum liquidity requirement Open market operation Interest Lending policy Moral suasion Discount house. SRR. Variation or adjustment will immediately affect the deposits and loans level If increases SRR – restrictive, would reduce deposits and loans level
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BNM Monetary Instruments • SRR • Minimum liquidity requirement • Open market operation • Interest • Lending policy • Moral suasion • Discount house
SRR • Variation or adjustment will immediately affect the deposits and loans level • If increases SRR – restrictive, would reduce deposits and loans level • If decreases SRR – expansionary, would increase deposits and loans level • First introduced in Jan. 1959 and since then the ratio has ranged from 2% to 14%.
Minimum liquidity requirement • Effective from Feb. 1987, commercial banks are required to keep 17% of its eligible liabilities in liquid assets and 8% in primary liquid assets • Primary liquid assets includes RM notes, coins, balances with BNM, overnight money, money at call with discount houses, Malaysian Govt securities and Cagamas bonds (< 1 year maturity) • Liquidity ratios work in the same way as the SRR. The only difference is , unlike required bank reserves which are immobilised in BNM , statutory liquid assets do yield a return
Open market operation • Involves buying and selling of Govt sec by BNM in open organised markets to control the flow of bank credit and banks reserves • If BNM buys Govt sec – expansionary policy – pumping money into the banking system and vise versa
Interest rate regulation • BNM can influence the availability and cost of bank credits as well as the interest charged for bank deposits • Variations in bank interest rate will induce or discourage suppliers of fund (depositors) and the seekers of these funds (borrowers) • Prior 1978 use ‘administered’ interest rate regime to: • i. Influence level of savings • Ii. Influence maturity structure of savings • Iii.promote growth of local banks by limiting rate competition with foreign banks • Iv. Protect balance of payments – capital inflows and outflows depends on return on capital invested
Interest rate regulation • In Oct 1978, BNM introduced a new interest rate regime to foster greater competition • Commercial banks were allowed to determine their own interest rates for deposits as well as prime lending rate • Recent years, use Base lending rate (BLR): • BLR is the lending rate applicable to the bank best customers –excellent credit standing. Other customers will have to borrow at a margin above BLR • BLR introduced on Nov 1983 is based on: • a bank’s cost of funds ( after provisions for the cost of holding cash, SRR and liquid asset requirements), • Overhead costs, plus profit margin
Interest rate regulation • BLR= Bank’s cost of fund +overheads + Profit Margin • Profit margin is based on: • Customer’s credit standing • Nature of project • Repayment schedule • collateral
Moral suasion • Refers to a traditional BNM technique of informally inducing a positive voluntary response from the financial system to its policy initiatives • Particularly to change attitudes and approaches in banking techniques
Discount house • There are also seven discount houses in Malaysia that specialise in short-term money market operations and mobilise deposits from the financial institution and corporations. • They are permitted to invest funds in treasury bills, government securities, banker's acceptances, negotiable instruments of deposit and private debt securities, and accept short-term funds. • I.einvolved in money market – institution adjust their liquidity position with D.H – ex; need money sell money market paper to discount house. If have excess liquid – buy money market paper from D.H
