## 1. Malaysia: Summary Compliance with the Basel Core Principles ## Source details **Canonical URL:** [1. Malaysia: Summary Compliance with the Basel Core Principles](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1356.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1356.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1356.pdf.json) --- ### Summary of supervisory framework and practice - BNM employs a very well developed risk-focused regulatory and supervisory regime combining hands-on onsite supervision and extensive off-site macro—and micro—surveillance integrated with on-site work. - Supervisory Risk-based Framework (SuRF) supports consistent and effective supervision through individual firm supervision and horizontal/thematic reviews. - Onsite/special off-site reviews led by teams headed by a Relationship Manager (RM), supported by micro-surveillance, a macro-surveillance unit and a Specialized Risk Unit (SRU). - Checks and balances: vetting of ratings and supervisory products through at least one, and sometimes two, independent panels within the Supervision Department. - Ratings and remediation requirements conveyed in writing and through interaction with Boards and senior management; remediation followed in a disciplined way. ### Risk management, capital and liquidity frameworks - Supervisory expectations and frameworks: - Articulated risk management and internal control expectations; higher than international minimum capital requirements in many areas. - Capital framework generally in line with, and in many instances stricter than, international standards, but does not apply to financial holding companies (FHCs) on a consolidated basis. - Liquidity framework: multi-level approach to ensure good liquidity in normal and stress times (also not applicable to FHCs on a consolidated basis). - Impressive coordination and information sharing with foreign supervisors; active in supervisory colleges and overseas examinations. - Basel transition and Pillar implementation: - System-wide risk-weighted capital ratio: 15.6 percent in 2011 (system-wide figures elsewhere cited as 14.9 percent RWCR and 12.9 percent CCR for 2011 in parts of the assessment). - BNM accredited 10 banks to adopt the Basel II foundation IRB approach; 2 banks for standardized operational risk. - Transition impact: "4.8 percentage points and 0.1 to 3.7 percentage points respectively upon transition to the IRB Approach." - Recommendation: fully implement Pillar 2 as soon as possible. ### Gap: Financial holding companies (FHCs) - Six of the eight large domestic banking groups have parent FHCs; current legislative framework does not apply on a parent-only or consolidated basis. - Remaining gaps: - No consolidated capital ratios apply to the FHCs. - Liquidity framework does not apply on a consolidated basis. - Stress testing expectations are not generally applied on a consolidated basis. - BNM actions to mitigate gap: - Imposed conditions on FHCs linked to approval of investments in banks (director/CEO nomination, share acquisitions, issuance of capital instruments, compliance with BNM guidelines). - Applied reporting and examination requirements to affiliates where legal authority permits. - Proposed Financial Services Act (FSA) would address many of these issues. ### Areas for further regulatory detail and supervisory expectations - Improvement opportunities: - More detailed regulation/supervisory expectations on IRRBB, credit concentrations, country risk, operational risk, and requirement for banks to have a separate, independent risk unit. - IRRBB and operational risk management requirements generally in place and adhered to; more detailed regulation and expectations being released. - BNM planning to strengthen regime for credit concentrations. - Full implementation of Pillar 2 expected to strengthen oversight of IRRBB and credit concentration risk. - Country risk: identified and reported properly, but more rigorous and comprehensive regulation should be considered. - Independent risk units: all domestic banking groups have independent risk units in practice, but no regulatory requirement exists. ### Transparency, coordination and legal protection - Recommended transparency improvements: - Increase transparency of criteria for new licenses and for acquisitions. - Wider public consultation on proposed policy measures per the Policy Development Framework. - Clearer communication to banks of supervisory expectations for external auditors where these go beyond usual audit procedures. - Domestic coordination: - Modify MoU with the Securities Commission to focus more on consolidated supervision; negotiate an MoU with the Cooperatives Commission (SKM). - Legal protection: - Clarify that legal protection for BNM staff should not depend on employment status at time of lawsuit; explicitly include former employees. - Consider permitting BNM to indemnify these persons for legal costs in event they are sued. ### BNM self-assessment and legislative reform - BNM conducted a comprehensive BCP self-assessment and identified many areas for improvement. - BNM seeking enhanced legal powers under proposed Financial Services Act (FSA) to enable full application of supervision and regulation of FHCs (including capital framework). - Proposed FSA will further define objectives of financial regulation and supervision by BNM and empower BNM to impose civil and administrative penalties for non compliance. - Assessors recommend using legislative change to introduce clarity on regulatory requirements that "must" be observed rather than "should" be met. ### Capacity and specialized personnel - Increasing sophistication of banks’ risk management and implementation of complex regulatory approaches (Basel II Pillar II and ICAAP) will increase staffing demands. - BNM currently has a relatively small cadre of specialized risk personnel in the SRU; SRU performs model reviews and only occasionally conducts on-site visits at request of relationship managers. - As advanced approaches and recovery/resolution planning are implemented, need for specialized risk personnel will increase; assessors recommend greater SRU field engagement and participation of a risk specialist as banking institution risk profile increases. ### Policy relationships with MOF and PIDM - Some legal provisions could allow Ministerial interference with BNM’s independence in law (examples cited in BAFIA Sections 70 and 73). - In practice, assessors did not find evidence of government interference seriously compromising BNM independence. - Proposed FSA seeks to provide greater independence in supervisory decisions by BNM. - New Strategic Alliance between BNM and PIDM agreed during BCP review; effectiveness should be reviewed over time, particularly on coordination for problem banks, assessment of viability, transparency of criteria, and application to FHCs. ### Assessment context and methodology - Assessment part of a joint IMF-World Bank ROSC mission; conducted from 4 April till 20 April 2012. - Reflects banking supervision practices of BNM as of end of March 2012 for supervision of commercial banks. - Information sources: BNM self-assessment; detailed interviews with BNM staff; review of laws/regulations and supervisory documentation; meetings with banks, banking association and an external auditor. - Assessment performed according to the Core Principles (CPs) Methodology; compliance assessed with both "essential" and "additional" criteria, ratings based on "essential" criteria only. - Assessment based solely on laws, supervisory requirements and practices in place at time of assessment; notes made of initiatives yet to be completed. ### Institutional and market structure highlights (key statistics) - Onshore banking sector assets: some 200 percent of GDP. - Banking sector comprises nearly 50 percent of financial sector assets. - Islamic banks share: around 20 percent of the banking sector. - Labuan OFC banks: 3.2 percent of financial sector assets. - Top 5 domestic banking groups comprise nearly 62 percent of total banking system assets. - Gross NPL ratios: 3.6 percent in 2009; 2.7 percent in 2011. - Total provisions (general and specific): 99.4 percent of NPLs in 2011. - NPLs net of specific provisions: 1.8 percent in 2011 (below 5-year average of 2.3 percent). - System-wide risk-weighted capital ratio: 15.6 percent in 2011. - Core capital ratio: 13.6 percent in 2011. - Non-bank credit intermediation: some 90 percent of GDP. - Employee Provident Fund: 33 percentage points (including substantial government bond holdings). - Insurance companies: 15 percentage points. - DFIs: 16 percentage points. - Bond market size: Malaysian ringgit (RM) 851 billion as at November 2011. - About 40 percent of bonds issued by the ‘private sector’. - DFIs: gross impairment ratio rose 2.3 percentage points to 9.0 percent from 2009 to 2010; provision coverage 80 percent; Leverage Ratio (Total Shareholders’ Funds-to-Assets) 13.9 percent in 2010; gross impairment ratio reduced to 7.3 percent in 2011. - Labuan: as at end of 2011, 60 approved banks with 57 in operations; 25 percent of these banks are part of Malaysian financial groups and subject to consolidated supervision by BNM. ### Macroeconomic backdrop and vulnerabilities - Growth: 7.2 percent in 2010; 5.1 percent in 2011. - IMF staff projection: growth will slow to 4 percent in 2012. - Foreign investor holdings: some 21 percent of domestic bond market and 23 percent of equity market. - Exchange rate: depreciation of around 8 percent against the U.S. dollar since the beginning of August (period referenced in the assessment). - BNM’s foreign exchange intervention: intervenes to prevent extreme movements with no particular level for the Ringgit. - System resilience: financial system appears adequately positioned to withstand spillovers from global financial stress; global liquidity squeeze unlikely to create severe deleveraging pressures in Malaysia, but contagion from a hard landing in China or escalation of the Eurozone crisis could be significant. ### Key supervisory recommendations and priorities - Enact the proposed Financial Services Act to: - Provide explicit authority to supervise/regulate FHCs (including consolidated capital/liquidity/stress testing). - Clarify licensing criteria and strengthen fit-and-proper and shareholder assessment requirements. - Introduce clarity that regulatory requirements "must" be observed where appropriate. - Fully implement Pillar 2/ICAAP and strengthen supervisory review of IRRBB, credit concentrations and country risk. - Issue guidance requiring banks to maintain a dedicated, independent risk management unit. - Strengthen transparency on licensing and acquisition criteria; expand public consultation per the Policy Development Framework. - Expand domestic MOUs (notably with the Securities Commission and SKM) to cover consolidated supervision and information sharing on group affiliates. - Increase number and field engagement of risk specialists, operational risk and AML/CFT specialists; ensure specialists participate in on-site examinations for higher risk institutions. - Require at least annual senior management sign-off on prudential returns (digital/physical sign-off) and clarify supervisory expectations to external auditors. - Clarify legal protections and indemnity for current and former BNM staff involved in supervisory actions. *IMF-World Bank ROSC assessment (assessment conducted 4 April–20 April 2012; supervisory practices reflected as of end-March 2012).* ### 1. Malaysia: Summary Compliance with the Basel Core Principles .....................................104 ### 1. Malaysia: Summary Compliance with the Basel Core Principles ### Summary of supervisory framework and practice - BNM employs a very well developed risk-focused regulatory and supervisory regime, consisting of a hands-on and comprehensive program of onsite supervision and extensive off-site macro—and micro—surveillance that is well integrated with its on-site supervision. - Supervisory Risk-based Framework supports consistent and effective supervision across BNM’s portfolio through individual firm supervision and horizontal or thematic reviews. - Decision-making on onsite reviews and special off-site surveillance is carried out by teams headed by a Relationship Manager (RM), supported by micro-surveillance personnel, a macro-surveillance unit and a Specialized Risk Unit (SRU). - Checks and balances: vetting of ratings and supervisory products through at least one, and sometimes two, layers of independent panels within the Supervision Department. - Ratings and supervisory recommendations/remediation requirements are conveyed in writing and through extensive interaction with Boards and senior management; remediation is followed through in a highly disciplined way. ### Risk management, capital and liquidity frameworks - BNM supervisors guided by articulated risk management and internal control expectations, specified higher than international minimum capital requirements, a comprehensive liquidity risk framework, and effective coordination and information sharing with foreign supervisory authorities. - Capital framework: generally in line with, and in many instances stricter than, international standards, although not covering financial holding companies and with some minor differences from international standards. - Liquidity framework: a multi-level approach to ensure good liquidity in normal and high stress times (also not applicable to financial holding companies). - Coordination: an impressive network of formal and informal coordination and information sharing arrangements with foreign supervisors; active in hosting and attending supervisory colleges and conducting overseas examinations. ### Gap: Financial holding companies (FHCs) - Six of the eight large domestic banking groups have parent financial holding companies (FHCs); current legislative framework does not apply on a parent-only or consolidated basis. - Many affiliates of banks are regulated by BNM, but some (such as asset managers) are not. - BNM has imposed conditions on FHCs linked to approval of investments in banks (directors/CEO nomination, acquisitions of shares, issuance of capital instruments, compliance with BNM guidelines) and used authorities applicable to affiliates to apply reporting and examination requirements to FHC and subsidiaries. - Remaining gaps: - No consolidated capital ratios apply to the FHCs. - Liquidity framework does not apply on a consolidated basis. - Stress testing expectations are not generally applied on a consolidated basis. - Proposed legislative change (Financial Services Act) would address many of these issues. ### Areas for further regulatory detail and supervisory expectations - Improvement opportunities in regulation: need more detailed regulation on interest rate risk in the banking book (IRRBB), credit concentrations, country risk, operational risk, and requirement for banks to have a separate, independent risk unit. - IRRBB and operational risk management requirements generally in place and adhered to; more detailed regulation and supervisory expectations are being released. - BNM planning to strengthen regime for credit concentrations. - Full implementation of Pillar 2 expected to strengthen oversight of IRRBB and credit concentration risk. - Country risk: properly identified, assessed and reported, but more rigorous and comprehensive regulation should be considered. - Independent risk units: all domestic banking groups currently have independent risk units, but no regulatory requirement exists to have them. ### Transparency, coordination and legal protection - Transparency improvements recommended: - Increase transparency of criteria for new licenses and for acquisitions. - Wider public consultation on proposed policy measures per the Policy Development Framework. - Clearer communication to banks of supervisory expectations for external auditors where these go beyond usual audit procedures. - Domestic coordination: BNM’s MoU with the Securities Commission should be modified to focus more on consolidated supervision; an MoU with the Cooperatives Commission (SKM) should be negotiated. - Legal protection: clarify that legal protection for BNM staff should not depend on employment status at time of lawsuit; explicit inclusion of former employees recommended. Consider permitting BNM to indemnify these persons for legal costs in event they are sued. ### BNM self-assessment and legislative reform - BNM conducted a comprehensive BCP self-assessment and identified many areas for improvement. - BNM seeking enhanced legal powers under proposed Financial Services Act (FSA) to enable full application of supervision and regulation of FHCs (including capital framework). - Proposed FSA will further define objectives of financial regulation and supervision by BNM and empower BNM to impose civil and administrative penalties in event of non compliance with legal provisions. - Assessors recommend using legislative change to introduce clarity on regulatory requirements that “must” be observed rather than “should” be met. ### Capacity and specialized personnel - Increasing sophistication of banks’ risk management and implementation of complex regulatory approaches (Basel II Pillar II and ICAAP) will increase staffing demands. - BNM currently has a relatively small cadre of specialized risk personnel in the SRU; SRU performs model reviews and only occasionally conducts on-site visits at request of relationship managers. - As advanced approaches and recovery/resolution planning are implemented, need for specialized risk personnel will increase; assessors recommend greater SRU field engagement and participation of a risk specialist as banking institution risk profile increases. ### Policy relationships with MOF and PIDM - Some legal provisions could allow Ministerial interference with BNM’s independence in law (examples cited in BAFIA Sections 70 and 73). - In practice, assessors did not find evidence of government interference seriously compromising BNM independence. - Proposed FSA seeks to provide greater independence in supervisory decisions by BNM. - New Strategic Alliance between BNM and PIDM agreed during BCP review; effectiveness should be reviewed over time, particularly on coordination for problem banks, assessment of viability, transparency of criteria, and application to FHCs. ### Assessment context and methodology - Assessment part of a joint IMF-World Bank ROSC mission; conducted from 4 April till 20 April 2012. - Reflects banking supervision practices of BNM as of end of March 2012 for supervision of commercial banks. - Information sources: (i) BNM self-assessment; (ii) detailed interviews with BNM staff; (iii) review of laws, regulations and documentation on supervisory framework and financial sector structure/development; (iv) meetings with individual banks, banking association and an external auditor. - Assessment performed according to the Core Principles (CPs) Methodology; compliance assessed with both “essential” and “additional” criteria, ratings based on “essential” criteria only. - Assessment based solely on laws, supervisory requirements and practices in place at time of assessment; notes made of regulatory and supervisory initiatives yet to be completed. ### Institutional and market structure highlights (key statistics) - Onshore banking sector assets: some 200 percent of GDP. - Banking sector comprises nearly 50 percent of financial sector assets. - Islamic banks share: around 20 percent of the banking sector. - Labuan OFC banks: 3.2 percent of financial sector assets. - Top 5 domestic banking groups comprise nearly 62 percent of total banking system assets. - Gross NPL ratios improved from 3.6 percent in 2009 to 2.7 percent in 2011. - Total provisions (general and specific) were 99.4 percent of NPLs in 2011. - NPLs net of specific provisions stood at 1.8 percent in 2011 (below 5-year average of 2.3 percent). - System-wide risk-weighted capital ratio: 15.6 percent in 2011. - Core capital ratio: 13.6 percent in 2011. - Non-bank credit intermediation: some 90 percent of GDP. - Employee Provident Fund: 33 percentage points (including substantial government bond holdings). - Insurance companies: 15 percentage points. - DFIs: 16 percentage points. - Bond market size: Malaysian ringgit (RM) 851 billion as at November 2011. - About 40 percent of bonds issued by the ‘private sector’ (includes government-linked companies counted as private in official statistics). - EPF and insurance companies invest majority of portfolios in domestic bond market (government and private debt securities). - DFIs: gross impairment ratio rose 2.3 percentage points to 9.0 percent from 2009 to 2010; provision coverage 80 percent; Leverage Ratio (Total Shareholders’ Funds-to-Assets) 13.9 percent in 2010; gross impairment ratio reduced to 7.3 percent in 2011. - Labuan: as at end of 2011, 60 approved banks with 57 in operations; 25 percent of these banks are part of Malaysian financial groups and subject to consolidated supervision by BNM. ### Macroeconomic backdrop and vulnerabilities - Growth: 7.2 percent in 2010; 5.1 percent in 2011. - IMF staff projection: growth will slow to 4 percent in 2012. - Foreign investor holdings: some 21 percent of domestic bond market and 23 percent of equity market. - Exchange rate: depreciation of around 8 percent against the U.S. dollar since the beginning of August (period referenced in the assessment). - BNM’s foreign exchange intervention: intervenes to prevent extreme movements with no particular level for the Ringgit. - System resilience: financial system appears adequately positioned to withstand spillovers from global financial stress; global liquidity squeeze unlikely to create severe deleveraging pressures in Malaysia, but contagion from a hard landing in China or an escalation of the Eurozone crisis could be significant. *IMF-World Bank ROSC assessment (assessment conducted 4 April–20 April 2012; supervisory practices reflected as of end-March 2012).* ### 20. The legal framework in Malaysia is based on a common law legal system. Law ### _cr1356 - 20. The legal framework in Malaysia is based on a common law legal system. Law ### Legal framework and courts - Malaysia’s legal framework is based on a common law legal system. - Laws are enforced through a single structured judicial system consisting of superior and subordinate courts whose decisions are enforceable, with avenues for appeal consistent with common law systems. ### Alternative dispute resolution and debt workout mechanisms - Arbitration: governed by the Arbitration Act 1952, or the Kuala Lumpur Regional Center for Arbitration (KLRCA) Rules modeled after the UNCITRAL Arbitration Rules of 1976, revised in 2010. - Financial Mediation Bureau (FMB): independent body that helps settle disputes between consumers and financial service providers, including banking institutions; handles a wide scope of disputes at no cost to the consumer; decisions are binding on the financial institution but not the consumer. - Corporate Debt Restructuring Committee (CDRC): platform for corporate borrowers and their creditors to work out feasible debt resolutions with CDRC mediating. - Credit Counseling and Debt Management Agency: enables individuals to enroll in a Debt Management Program to facilitate rescheduling or restructuring of personal credit facilities. ### Accounting, reporting, and audit requirements - Companies Act 1965: companies required to prepare accounts based on approved accounting standards issued by the Malaysian Accounting Standards Board (MASB); financial statements should show a “true and fair” view of financial position, performance and cash flow. - Public interest entities: required to report using Financial Reporting Standards (FRS) set by MASB, in compliance with IFRS in content and timing; IFRS is directly transposed into Malaysian FRS, with text changed only where absolutely necessary. - Audit: companies’ accounts required to be audited annually by approved auditors; reports and audit procedures comply with National Auditing Standards, in full compliance with the International Standards on Auditing. - Professional requirements: Membership of the Malaysian Institute of Accountants is a pre-requisite for employment in Malaysia as a professional accountant or auditor; all members required to comply with the MIA By-Laws on Professional Ethics. ### Payments, settlement, and central securities depository - Malaysian Electronic Clearing Corporation (MyClear), a wholly owned subsidiary of BNM, operates RENTAS (Real Time Electronics Transfer of Funds and Securities). - RENTAS: a real time gross settlement system for interbank funds transfer, a securities settlement system and a scripless securities depository for all unlisted debt instruments. - RENTAS linked with the USD Clearing House Automated Transfer System in Hong Kong to mitigate settlement risk for Ringgit and USD FX transactions; allows simultaneous settlement of Ringgit in Malaysia and USD in Hong Kong and settlement for USD denominated securities deposited with RENTAS during Malaysian business hours. ### Credit information and reporting - Centralized Credit Reference Information System (CCRIS), operated by BNM, collects and disseminates credit information from and to participating financial institutions. - Credit reports contain factual information, including outstanding loan obligations with no thresholds, conduct of accounts, and repayment behavior; no opinion is expressed about supplied information. - Private sector credit reporting agencies: Credit Bureau Malaysia Sdn. Bhd. (CBM), RAM Credit Information Sdn. Bhd (RAMCI), Financial Information Services Sdn. Bhd (FIS) and CTOS Sdn. Bhd. - Regulation: Private sector credit agencies will be regulated from this year by the Registrar of Credit Reporting Agencies under the Credit Reporting Agencies Act 2010. ### Effective market discipline and transparency for banking institutions - Banking institutions subject to MASB FRS (in compliance with IFRS) and additional BNM transparency and disclosure requirements: - Guidelines on Financial Reporting to Banking Institutions: set minimum disclosure requirements to assess risks associated with banking institutions’ operations. - Pillar 3 disclosure requirements under Basel II: provide additional transparency on risk management practices and capital adequacy, including quantitative and qualitative disclosures on credit risk, operational risk, and interest rate in the banking book. ### Crisis management, systemic protection, and safety net - Central Bank of Malaysia Act (CBA) empowers BNM with broad powers to avert or reduce risks to financial stability, including intervention and resolution measures to reduce systemic risks from regulated and non-regulated entities and to stem institutional or market liquidity shocks. - Elements already in place: - BNM responsibility: BNM assumes responsibility for addressing financial stability concerns; functions led by the Financial Stability Committee (FSC) as BNM’s internal high level forum for discussing risks and deciding policy responses. - Coordination powers: CBA empowers BNM to enter into arrangements with other supervisory authorities; BNM engages regularly with Securities Commission Malaysia and Malaysian Deposit Insurance Corporation (PIDM) for surveillance, supervision, and timely pre-emptive responses to systemic risk. - Deposit insurance (PIDM): - PIDM established under PIDM Act 2005 to administer and provide deposit insurance and takaful/insurance benefits protection. - Coverage: conventional and Islamic deposits, for all types of depositors (business or individuals). - Maximum limit of coverage: RM 250,000 per depositor per member institution (namely commercial and Islamic banks); includes principal and interest/return. - Membership: by law, all commercial banks under BAFIA and Islamic banks licensed under IBA including foreign owned banking institutions are member institutions of PIDM. - Premiums: member institutions subject to a differential premium system linked to certain risk and financial parameters. - Liquidity support: - BNM provides overnight liquidity via operational standing facility framework and has broad powers to provide liquidity assistance through a broad range of instruments. - BNM empowered to enter into arrangements with other central banks to provide liquidity assistance to subsidiaries or branches outside Malaysia of any financial institution established in Malaysia. - Development underway: a more formal and structured emergency funding liquidity assistance framework to institutionalize practices for the lender of last resort function, including strengthened internal arrangements for viability assessments, more formalized operating procedures, and predefined features of lending arrangements (e.g., acceptable collateral, interest rates). ### Islamic banking (Box 1) — scale, structure, regulation, and legal issues - Scale and structure: - Total assets in the Islamic banking sector (including DFIs) increased by 23.8% to RM 434.6 billion to account for 22.4% of total banking system assets as at end-2011. - Islamic banking mostly conducted through separately incorporated banks: 16 Islamic banks (ten domestically owned, six foreign owned). - Islamic banking windows: three commercial Islamic banking windows and seven investment banking windows. - Regulatory objectives: - In a dual system, regulatory consistency across conventional and Islamic sectors is critical to eliminate regulatory arbitrage while reflecting differences in risk inherent to Islamic products. - Standards: regulatory framework encompasses standards equally applicable to commercial or investment banks and standards modified or distinct for Islamic banking risks; Shariah requirements observed through Shariah unit involvement and consultation with the Shariah Advisory Council on Islamic Finance established under the Central Bank of Malaysia Act 2009 (SAC). - Supervision: - Supervisory approach at BNM similar to commercial banks with an additional operational risk assessment for Shariah compliance analyzed as both embedded compliance risk and overarching operational risk. - BNM employs a team of Shariah officers and a Shariah compliance expert in the Specialist Risk unit with recourse to the SAC as needed. - Legal and legislative gaps (examples identified): - Lack of explicit power for BNM to revoke licenses for Islamic banks under IBA as compared to BAFIA; revocation currently reliant on contraventions of provisions of IBA. - No specific share ownership threshold in IBA driving application requirements, though by regulation BNM has imposed the same 5% threshold. - IBA does not require external auditors to report matters of material significance to the supervisor (e.g., failure to comply with licensing criteria). - Lack of explicit power to obtain information from holding companies of Islamic banks; Section 41 of IBA allows BNM to request information from subsidiaries only. - Lack of power for BNM to access auditors’ working papers (not yet used for commercial banks in practice). - Where law provides for MOF decisions, BAFIA explicitly requires MOF to act upon BNM recommendations; this explicit requirement is not in IBA. - Legislative developments: - Enhancements envisaged under the FSA and IFSA to streamline legal and regulatory requirements and powers of BNM across Islamic and conventional sectors. - About 75% of IFSA provisions are the same as in the FSA to ensure consistency. - Proposed new legislation for Islamic finance seeks to provide greater visibility to Shariah compliance and Shariah governance, including provisions to allow the Bank to specify standards on Shariah matters and clarify nature of Shariah contracts and priorities in winding up. ### Main findings (selected) - Objectives, independence, powers, transparency, and cooperation (CP 1): - Laws are in place and the role of BNM and other authorities is clearly defined; statutory responsibilities and objectives of BNM stated in the CBA and BAFIA, supported by internal governance arrangements. - Adoption of the new Policy Framework expected to increase transparency in policy activities. - Governance arrangements and roles/responsibilities within BNM need more explicit definition; BNM is well funded and staff have credibility based on professionalism and integrity. - Assessors found instances where the Minister could interfere with BNM’s independence; no evidence of de facto interference in practice. Removing such provisions would provide greater legal certainty. - Legal protection for bank supervisors exists; recommendations include explicitly stating protection beyond termination of appointment/employment and clarifying financing of legal defense costs from the start of proceedings. - Information sharing: good framework with foreign supervisors, but domestic arrangements could be improved. - Recommendation: expand MOU with the SC to cover more than investment banks co-regulated by SC and BNM (e.g., include asset management companies) and to provide for SC to share information on entities supervised by them that are part of FHCs and for BNM to alert SC on supervisory developments in broader banking groups. - Suggest formalizing information sharing with the SKM and entering into MOUs with countries of major new entrants (e.g., Japan). *Source: _cr1356 - 20. The legal framework in Malaysia is based on a common law legal system. Law* ### 38. The Malaysian banking law appropriately defines and controls the business of ### 38. The Malaysian banking law appropriately defines and controls the business of ### Overview and structural evolution - Bank Negara Malaysia (BNM) strongly oversees the evolution of the banking structure, with some areas of required concurrence (e.g., license approval) from the Minister of Finance. - BNM has publicly presented long term plans for banking and financial structure that guided decision-making following the Asian banking crisis of the 1990s, leading to consolidation into eight large banking groups dominating the domestic market. - No new licenses for conventional commercial banks were granted from 1970 until 2009. - A number of Islamic bank licenses have been granted since 2004 consistent with long run plans to develop the Islamic banking sector. - Licensing and acquisitions in recent years have been reviewed by BNM from a safety and soundness viewpoint and to ensure contribution to market development. - Areas for improvement: - Greater public transparency on the criteria used for licensing and acquisition approvals (BNM has chosen to share expectations only directly with applicants). - Ensuring appropriate focus is given to shareholders of banks in addition to applicant banks. ### Prudential regulation and requirements (CPs 6-18) - Minimum capital adequacy requirements: - BNM has set prudent and appropriate minimum capital adequacy requirements. - Banks are well capitalized with strong system-wide risk-weighted capital ratio and core capital ratios. - BNM has accredited ten banks to adopt the Basel II foundation IRB approach for credit risk and two banks to adopt the standardized approach for operational risk. - BNM lacks power to include the financial holding company in the scope of application of capital adequacy requirements; the draft FSA, if enacted, would remedy this gap. - Basel III implementation is planned in accordance with the international timetable. - Asset quality and provisioning: - BNM issued comprehensive guidelines specifying requirements and regulatory expectations for effective management of problematic assets and processes to ensure adequacy of provisions and reserves. - BNM can require banks to increase provisions and reserves and to strengthen financial position via higher minimum capital requirements. - Regulations and supervisory framework cover the overall credit risk process in identification, management and mitigation. - Areas recommended for strengthening: - More detailed regulation and supervisory expectations for interest rate risk in the banking book, credit concentrations, operational risk and country risk. - Formal requirement for banks to have a separate and independent risk management unit. - Full implementation of recently released prudential regulations covering Pillar 2 is required to further strengthen oversight of interest rate risk in the banking book and credit concentrations. ### Methods of ongoing banking supervision (BCP 19-21) - Supervisory framework: - BNM supervises banks with a well-structured risk focused supervisory approach integrating on-site practices, extensive regulatory reporting, and off-site monitoring. - The Supervisory Risk-based Framework (SuRF) enables consistent and effective supervision through individual firm supervision and horizontal/thematic reviews. - Decision-making on onsite reviews and special off-site surveillance is carried out by teams headed by a Relationship Manager (RM). - Supervision is supported by micro-surveillance personnel, a macro-surveillance unit and a Specialized Risk Unit (SRU). - A system of checks and balances vets ratings and supervisory products through at least one, and sometimes two, layers of independent panels within the Supervision Department. - Ratings and remediation requirements are conveyed effectively in writing and through interaction with Boards and senior management; remediation is followed through in a disciplined way. - Emerging practices and specialized expertise: - BNM is incorporating increasingly sophisticated supervisory techniques (Basel II, Pillar 2, ICAAP) and will address recovery and resolution planning. - BNM currently has relatively few specialists in the SRU; much of their time is spent in-house providing guidance to general supervisors. - Assessors expect expansion of specialized staff and greater direct interaction of specialists with bankers over time. ### Accounting and disclosure (CP 22) - BNM has adequate regulations for accounting and disclosure by banking institutions. - BNM approves external auditors for banks on an annual basis and maintains ongoing dialogue during the audit cycle. - Market feedback indicated a need for clearer communication of auditors’ supervisory expectations to banks. - Recommendation: BNM should more clearly communicate supervisory expectations to banks, particularly when additional procedures beyond normal audit procedures may be required. ### Corrective and remedial powers (CP 23) - BNM has broad discretion and uses a well designed early intervention program. - The Supervisory Intervention Guide sets out clear steps for deteriorating bank conditions, and BNM has clear power to issue directives for remediation. - A new Strategic Alliance between BNM and the Malaysian Deposit Insurance Corporation (PIDM) was agreed while the BCP review was taking place; its effectiveness should be reviewed over time. - Issues to address over time include how viability assessments are made (and transparency of criteria) and how the resolution framework could be applied to financial holding companies. ### Consolidated and cross-border banking supervision (CP 24-25) - Legislative gap: - A clear gap exists in BNM’s legislative authority for supervision and regulation of financial holding companies. - Six of the eight large domestic banking groups have parent financial holding companies; current legislation does not apply to those firms on a parent-only or consolidated basis. - No consolidated capital ratios apply to financial holding companies; the liquidity framework does not apply on a consolidated basis; and no consolidated stress testing expectations are applied. - BNM has narrowed but not eliminated the gap through conditions imposed on financial holding companies at approval (covering nomination of directors and CEO, acquisitions, issuance of capital instruments, compliance with BNM guidelines) and by applying reporting and examination requirements to affiliates where possible. - The proposed legislative change (draft FSA), if enacted, would address many of these issues. - Information exchange and supervisory cooperation: - BNM has a well developed program of information exchange and supervisory cooperation with appropriate foreign supervisors, with extensive MOUs and less formal mechanisms. - BNM hosts and participates in supervisory colleges, conducts overseas examinations, and offers training programs to other supervisors in the region. - Recommendations as good practice: - In licensing foreign bank subsidiaries, conduct a formal independent assessment of consolidated home country supervision and seek MOUs with countries of major new entrants. - Modify MOU with the Securities Commission to make it more directed to consolidated supervision. - Negotiate an MOU with the Cooperatives Commission. ### Detailed assessment — Principle 1 (Objectives, autonomy, powers, and resources) - Principle summary: - An effective system requires clear responsibilities and objectives, operational independence, transparent processes, sound governance, adequate resources, accountability, suitable legal framework, powers to address safety and soundness, legal protection for supervisors, and arrangements for information sharing and confidentiality. - Principle 1(1) — Responsibilities and objectives: - Section 5 of CBA provides for BNM’s responsibility to regulate and supervise banks (commercial, investment and Islamic banks) with the objective to promote monetary and financial stability conducive to sustainable growth of the Malaysian economy. - Powers for BNM to regulate and supervise conventional and Islamic banks are provided under BAFIA and IBA respectively. - Investment banks are jointly regulated and supervised by BNM and the Securities Commission (SC); MoU describes BNM focusing on prudential aspects and SC on market conduct aspects. - BNM is designated competent authority under the Anti Money Laundering and Anti terrorism financing Act (2001). - The SC is governed by the Securities Commission Act (1993). - The Malaysia Deposit Insurance Corporation (PIDM) is governed by the Malaysia Deposit Insurance Corporation Act (2011). - The Malaysia Cooperative Societies Commission is governed by the Malaysia Cooperative Societies Commission Act (2007). - Parts VII, VIII and IX of BAFIA set legislative requirements for banking institutions and provide BNM power to issue binding prudential regulations (guidelines or circulars); BNM is empowered under section 126 of BAFIA to impose other regulatory requirements for safety and soundness. - BNM publishes “Best practice” documents which may state mandatory requirements highlighted in specific boxes. - BNM publishes the Financial Stability and Payment Systems Report (FSPSR) annually, and the Monthly Statistical Bulletin and Quarterly Bulletin; these are available on BNM’s website. - Assessment: Compliant. - Comment: Adoption of the draft FSA will further enhance definition of objectives of financial regulation and supervision by BNM. - The BNM issued the “Financial Sector Blueprint 2011-2020”. - Recommendation: BNM should use stronger language in guidelines, stating banks “must” observe regulatory requirements instead of “should”; BNM’s Policy Development Framework was rolled out for implementation on 17 May 2012. - Principle 1(2) — Independence, accountability, and transparency: - BNM is established as a statutory body with role and authority derived from CBA; powers under CBA are exercised by the Governor (or Deputy Governor in absence). - Section 3(1) of BAFIA provides for the Governor to perform supervisory and regulatory functions and may authorize other officers under section 3(2). - Where law provides for decisions to be referred to the MOF, BAFIA explicitly provides that MOF decisions should be made upon the recommendation of BNM; MOF is required to consider public interest and promotion of sound financial system. - Section 14 of CBA provides for constitution and composition of the Board of Directors of BNM, responsible for general administration, approval of budget and operating plan. - Board Committees include the Board Governance Committee, Board Audit Committee and Board Risk Committee; functions described in section 21 of CBA. - Provisions relating to appointment, reappointment, termination and disqualification of Governor, Deputy Governor(s) and other directors are contained within relevant law (text truncated in source). *Source: IMF staff assessment text provided in the content unit.* ### part IV of CBA. The Governor and directors of the Board are appointed by the Yang di- ### _cr1356 - part IV of CBA. The Governor and directors of the Board are appointed by the Yang di- ### Governance and independence of BNM - Governor and directors of the Board are appointed by the Yang di-Pertuan Agong (the King); Deputy Governors are appointed by the MOF. - Services of the Governor, Deputy Governor or any other directors of the Board may only be terminated on the grounds set out in CBA. - Since establishment of BNM, no Governor, Deputy Governor or member of the Board has been removed from office. - Certain statutory powers of the Minister could undermine BNM autonomy: - Section 70 of BAFIA allows the Minister to direct BNM at any time to make an examination of the books or other documents, accounts or transactions of any licensed institution and its offices inside and outside of Malaysia. - Section 6 of BAFIA: Minister has authority to license and withdraw licenses from commercial banks on recommendation of BNM. - Section 15 of BAFIA allows companies to use the word “bank”, “banking” (...) or any derivatives of this word with the explicit approval of the Minister. - Section 73 of BAFIA authorizes BNM to direct institutions to take corrective actions, but only with the concurrence of the Minister remove and/or appoint new officers and directors; BNM can also recommend to the Minister the revocation of a banking license. - In practice the MOF/Minister has not deviated from or attempted to influence BNM recommendations; Section 70 of BAFIA has never been used. - Assessment summary: Largely compliant. - Key comment: Greater legal grounding of BNM independence and removal of provisions that permit ministerial interference would provide greater certainty. ### Accountability, transparency, and oversight - BNM publishes the Financial Stability and Payment Systems report (FSPSR) annually describing regulatory and supervisory activities and developments in risks to financial stability. - Accountability mechanisms: - Section 72 of CBA requires BNM keeps the MOF informed on policies relating to its objectives. - BNM may be requested to provide explanations on any policy issues to the Parliament (via the Public Accounts Committee of the Parliament). - Accountability to the Board (section 14 of CBA). - Requirement to publish the Annual Report (section 13 of CBA). - CBA specifies mechanisms to resolve differences in opinion between BNM and MOF through the Cabinet and Parliament (section 72). No such situation has arisen since BNM’s establishment. - Assessment comment: Transparency in policy activities should be increased; adoption of the new Policy Framework will help. Governance arrangements and roles remain to be disclosed publicly for clarity and accountability. ### Internal governance, conduct, and human resources - BNM has internal governance arrangements and procedures supporting accountability and sound decision making; certain actions require approval of the Financial Stability Executive Committee (majority external members). Terms of reference published in the 2010 annual report. - BNM staff: - Subject to a Code of Conduct covering confidentiality, conflicts of interest and dealings with the banking industry. - Staff profiling programs create a pool of talent for various job levels. - Industry feedback on professionalism, integrity and expertise was positive. - Resourcing and remuneration: - Supervisory functions are self-funded. - In 2011, 25 percent of the total budgeted operational expenditures was allocated to the regulatory and supervisory functions. - Under Section 7 of CBA, BNM has full discretion to determine salaries, allowances and benefits for its staff. - Remuneration and benefits package is benchmarked to the market every three years. - Turnover of staff in the supervision and regulation department is around 9%. - BNM addresses turnover by employing a 30% buffer on top of minimum required staff. - BNM has invested in training programs and scholarships. - Legal authority to appoint any person to assist in performance of its functions (section 3 of BAFIA). - Assessment: Largely compliant (with positive feedback from stakeholders). ### Terms and tenure - Section 15(4) CBA: Governor appointed for a term of five years; Deputy Governors appointed for a term of three years. - Assessment: Largely compliant. - Comment: Transparency in policy activities should be increased via the Policy Framework; governance arrangements yet to be publicly disclosed. ### Legal powers and enforcement - BAFIA/CBA provide BNM powers to issue regulatory requirements (e.g., Section 37 on maintenance of capital funds) and to issue guidelines, circulars and notices (e.g., Section 126). - Courts have opined that BNM guidelines and circulars issued pursuant to the general power are legally binding on banking institutions. - BNM consults with banking industry and stakeholders on proposed policy measures; industry feedback on consultation processes was positive. - Information-gathering and supervisory powers: - Section 43 of BAFIA empowers BNM to require institutions to submit information concerning assets, liabilities, statistics and reports; applies to offices outside Malaysia. - Section 1138 of BAFIA provides power to obtain information from any licensed institution, scheduled institution or foreign institution or from any person engaged in provision of finance for exercising BNM’s powers or duties. Section 113 enables obtaining information on related corporations to facilitate assessment of banking groups. - Section 30 of CBA empowers BNM to obtain, in the interest of financial stability, information concerning any financial institution, market participant or any person that may pose a risk to financial stability, from domestic supervisory authorities or directly if not under oversight. - Section 40 of CBA allows BNM to obtain information from supervisory authorities outside Malaysia to promote financial stability and support cross-border cooperation. - Enforcement and corrective actions: - Section 73 of BAFIA: BNM can take a broad range of supervisory actions where institutions are detrimental to depositors’ interests or public interest, or contravene BAFIA or CBA. - Section 71 of BAFIA: BNM has full access to books and records and to officers and directors. - Section 73 authorizes BNM to direct institutions to take corrective actions, and with concurrence of MOF remove and/or appoint officers and directors; BNM can recommend revocation of a banking license. - Assessment: Compliant for powers to address compliance and safety and soundness concerns. - Comment: BNM should enhance transparency and align terminology (circulars, guidelines, best practices) since these are generally considered binding. ### Legal protection for supervisors - Section 87 of CBA and Section 114 of BAFIA provide protection for BNM staff, persons lawfully acting on behalf of BNM and persons appointed pursuant to the CBA from lawsuits for actions or omissions in good faith in performing duties; protection includes Governor, Deputy Governor and other directors. - Legal representative stated protection extends to staff after they leave the agency. - In practice BNM assumes legal costs for defending lawsuits when supervisors discharge duties in good faith, although no precedents exist. - Assessment: Compliant. - Comment: Consider explicitly anchoring assumption of legal defense costs in law; explicitly include former employees and permit BNM to indemnify persons for legal costs. ### Cooperation and information sharing - Section 40(1) of CBA: BNM may enter into cooperation and information sharing arrangements with domestic authorities for financial stability. - MOUs exist with the Securities Commission (SC): one broad and one narrow (covering investment banks co-regulated by BNM and SC). Current MOUs do not require SC to share information on other entities (e.g., asset management companies) that can be part of banking groups. - Periodic discussions occur with the Cooperatives Commission of Malaysia (SKM) but no formal information sharing arrangement. - BNM recently entered into an updated Strategic Alliance Agreement (SAA) with the Malaysia Deposit Insurance Corporation (PIDM). - BNM cooperates with the Labuan Financial Services Authority; BNM supervises Labuan operations of Malaysian banks. - Section 40(1) also permits cooperation with foreign supervisors; MOUs exist with authorities in four countries (Cambodia, Vietnam, China, and Indonesia). - Section 86 of CBA: officers and staff obligated to maintain confidentiality. Section 40(2) requires undertakings from foreign supervisors on confidentiality and use of information. - Section 40(1) grants BNM discretion to provide or deny information to other supervisors. - Assessment: Largely Compliant. - Comments and suggested improvements: - Expand MOU with SC to include asset management companies and provision for mutual supervisory information sharing across group entities. - More formalized information sharing with SKM. - Enter MOUs with countries of major new entrants (e.g., Japan) where formal agreements are required for information exchange. ### Permissible activities and use of “bank” in names - Section 2 of BAFIA defines bank and merchant bank activities (receiving deposits, paying or collecting checks, provision of finance, consultancy/advisory services, making or managing investments). - Section 4(1) of BAFIA: companies carrying on commercial or merchant banking must be licensed under Section 6(4). - Section 15 of BAFIA: prohibition on use of words “bank”, “banking”, “banking and finance company”, ”deposit-taking company”, “merchant bank” or derivatives without written consent of the Minister of Finance. - Section 25 of BAFIA prohibits taking deposits unless licensed; deposit-taking entities include banks, development financial institutions (six supervised by BNM), cooperatives and building societies (supervised by SKM), and special purpose developmental institutions under their statutes. - Section 18 of BAFIA and Section 13 of IBA require annual publication in a Gazette of all licensed banking institutions established in Malaysia. - Assessment: Compliant. - Comment: Some deposit-taking companies are not regulated by BNM. ### Licensing criteria and process - Section 6 of BAFIA: license applications submitted to BNM for evaluation under licensing criteria; BNM submits recommendations to MOF, which can approve or reject only upon receiving BNM’s recommendation. - Second Schedule of BAFIA provides minimum criteria for a banking license; BNM with concurrence of Minister may prescribe further criteria. - Licensing practice: - BNM has been conservative granting new licenses over past forty years; some Islamic banks approved after 2004; some foreign banks invited to apply in 2009 with some approvals. - BNM applied criteria including financial soundness, nature and sufficiency of significant shareholders, applicant integrity, suitability of persons operating the bank in Malaysia, and contribution to Malaysia’s developmental objectives (echoed in Financial Sector Blueprint 2011–2020). - Specific licensing elements: - Applicants must be locally incorporated subsidiaries (Section 4(1)), with physical presence, dedicated Board and senior management in Malaysia. - Applicants must disclose shareholders with 5 percent or more (directly, indirectly, or through beneficial ownership). - Section 14(1) of BAFIA: license not granted if capital less than prescribed minimum; minimums set in Banking and Financial Institutions (Minimum Amount of Capital Funds) Order 2001, and IBA Gazette Order August 2008. - Second Schedule provides fit and proper criteria for directors/controllers/managers (including CEO) covering probity, competence, soundness of judgment, diligence, and prior criminal convictions for dishonesty, fraud, or violence. - Applicants provide a three-year business plan and pro forma financial statements with projections and key financial ratios for first three years; evaluation ensures capital requirements and buffers. - For foreign banks, BNM contacts home supervisor for a letter of non-objection and confirmation of consolidated supervision; BNM reviews home country FSAPs to support assessment. - Section 7(1) of BAFIA allows MOF on recommendation of BNM to revoke a license if false, misleading or inaccurate information provided. - BNM reviews Board composition and expects annual review by Board’s Nominating Committee per Guidelines on Corporate Governance for Licensed Institutions. - Transitional / legislative enhancements: - Draft FSA and proposed banking law will more explicitly include assessment of group structure supervision, nature and sufficiency of financial resources of significant shareholders, and explicit evaluation of home-country supervision for foreign applicants. - AC/Assessment notes: - AC 1: Financial strength assessment includes consideration of significant shareholders; new legislation will explicitly include nature and sufficiency of financial resources of significant shareholders. - AC 2: BNM monitors compliance of new banks with license conditions; failure to meet conditions can result in license revocation. *Source: _cr1356 - part IV of CBA. The Governor and directors of the Board are appointed by the Yang di- — https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1356.pdf* ### Section 7(1) of BAFIA. ### _cr1356 - Section 7(1) of BAFIA ### Assessment summary - Assessment: Largely Compliant - Core observations: - BNM has a conservative program for the granting of new licenses; no applications for conventional commercial banks have been considered in forty years except when companies were explicitly invited (2009). - New legislation (FSA) would address many current limitations; BNM should in any event address specified transparency, shareholder assessment, home-supervisor evaluation, and officer suitability gaps. ### Licensing and new bank entry (Section 7(1) of BAFIA) - Findings and recommended improvements: - Reflecting the infrequency of applications, the degree of transparency in the criteria to be applied has been less than in other countries and should be improved. - Application review focused most heavily on the immediate applicant; criteria should explicitly include assessment of: - the nature and sufficiency of financial resources of the ultimate shareholder, and - the integrity of the ultimate shareholder. - For foreign banks, there is no explicit independent evaluation of the nature and degree of consolidated regulation and supervision applied by the home country supervisor; review is focused essentially on available FSAPs. - Criteria on suitability of officers need to cover more of the senior team than just the CEO; achievability of business plans should be explicit. The new FSA will address these issues; BNM is developing a key performance indicator framework to monitor achievability of business plans. *BNM Assessment: Largely Compliant* ### Principle 4 — Transfer of significant ownership - Principle statement: The supervisor has the power to review and reject any proposals to transfer significant ownership or controlling interests held directly or indirectly in existing banks to other parties. - Legal framework and practice (EC 1–EC 5): - Under Section 45 of BAFIA the trigger to obtain approval for the acquisition or disposition of shares is set at 5 percent. - Control is defined in Section 2 of BAFIA as: - a) interest of 50% of a bank’s shares; - b) power to appoint a majority of the directors of a bank; or - c) power to make decisions in respect of the business or administration of a bank. - Section 6A of the Companies Act includes beneficial ownership of shares in these assessments. - Approval of BNM is required for changes in ownership, voting rights, or controlling interest using the thresholds described above. BNM uses a two-staged process: preliminary determination of reasonable likelihood of meeting suitability criteria, then formal application. - Sections 45, 46, and 49 of BAFIA provide BNM authority to recommend to MOF approval or rejection; broad criteria include whether the proposal is prejudicial to promotion of a sound financial structure and/or contrary to the public interest (Section 46) or detrimental to soundness of the financial structure (Section 49). - BNM knows names and holdings of all significant shareholders (including beneficial interests through nominees) via the applications process and semi-annual reporting through the Financial Institutions Corporate Profile System; shareholdings are also reviewed as part of ongoing supervision. - Section 54 of BAFIA provides BNM the power to prohibit transfer of shares, exercise of voting rights, or issuance of further shares in the event of a change in control without supervisory approval. The new banking law would further allow BNM to direct persons not approved to cease exercising or to relinquish control, including by divesting shares; failure to comply would trigger penalties. - AC 1 (identified gap): - BNM currently receives information about material changes in suitability of major shareholders through general supervisory process rather than an ongoing reporting requirement; it can prevent further acquisitions by a no-longer suitable shareholder but has limited capacity to address the existing situation. - The new law would codify directors’ obligation to provide material negative information on major shareholders to BNM and subject major shareholders to an ongoing suitability requirement. - Comments / recommended refinements: - BNM must have capacity to address directly unauthorized acquisitions of shares or control (e.g., requiring divestitures and/or cessation of control). - BNM should have an ability to learn about and deal with changes in the suitability of major shareholders. - The draft FSA, if enacted, should address these issues. *Assessment: Largely Compliant* ### Principle 5 — Major acquisitions - Principle statement: Supervisor has power to review major acquisitions or investments by a bank against prescribed criteria, including cross-border operations and that corporate affiliations/structures do not expose the bank to undue risks or hinder effective supervision. - Legal provisions and practices (EC 1–EC 6): - Section 30 of BAFIA requires prior written consent of BNM to open any office inside or outside Malaysia. - Section 29 of BAFIA requires prior approval to establish or acquire any subsidiary in or outside Malaysia. - Limits on a bank’s investments (Guidelines on Investment in Shares, Interest-in-Shares and Collective Investment Schemes): - The aggregate book value of the bank’s investments in shares and interest-in-shares shall not exceed 25 percent of the bank’s capital base; and - The aggregate book value of collective investment schemes, immovable properties and investments in shares and interest-in-shares shall not exceed 50 percent of the bank’s capital base. - Guidelines are considered to have the force of law; BNM is cleaning up regulatory/guidance mechanisms and increasing transparency via web publication. - Existing laws and regulations do not explicitly specify criteria by which individual proposals are considered; preliminary discussions between bank and BNM occur prior to formal submission. - Internal BNM criteria used in assessing proposals for investments in subsidiaries or associated companies include: - Financial capacity and soundness of the financial institution (capital, expertise, track record); - Strength of shareholders and ability to provide sustainable support; - Strength of senior management and Board of Directors; - Source(s) of funding for acquisition or investment; - Effects on the bank’s existing operations; - Reasonableness of the business plan; - Bank’s familiarity with and consideration of operating and regulatory environment overseas, where relevant; - If investments abroad, BNM’s ability to conduct on-site examinations and access to data and information and any restrictions that may impede effective supervision. - BNM engages with overseas regulators to ascertain legal or policy requirements that could prohibit BNM from conducting on-site examinations or restrict access to information; BNM will not grant approval where access is restricted. - Assessment of applications considers financial resources, governance structures, track record in managing acquisitions (especially abroad), funding, impact on capital/goodwill, repayment capacity, and qualitative factors such as risk management and governance. - Prior blanket approval is granted by BNM or MOF for investments in “designated companies” (Cagamas Bhd, Credit Guarantee Corporation Malaysia Bhd, SWIFT, ABM-MCD Holdings Sdn Bhd and Financial Park (L) Sdn Bhd) with overall investment limits: - The bank’s total investment in trustee and non-trustee shares does not exceed 25 percent of its paid-up capital and published reserves; and - The bank’s total investment in shares and immovable properties does not exceed 50 percent of its capital base. - Policy: banking groups are not allowed to engage in non-financial activities except if ancillary or incidental to financial services (examples: distribution, administrative and management services, property management for own use). - BNM does not have explicit statutory authority to issue directives of compliance to the FHC or its unregulated affiliates should the affiliate subsequently conduct business in a manner detrimental to the bank. - AC 1 (identified gap): - BNM assesses host-country regulatory environment and ability to exercise effective consolidated supervision, including access to data and on-site examinations; restrictions that impede consolidated supervision are explicitly considered. - Comments / recommended refinements: - BNM needs to codify criteria to be applied to major acquisitions by a bank or FHC more explicitly. - BNM needs more explicit authority to take corrective action against non-banking companies that could be acquired if they subsequently prove detrimental to the interests of the bank affiliate. *Assessment: Largely compliant* ### Principle 6 — Capital adequacy - Principle statement: Supervisors must set prudent and appropriate minimum capital adequacy requirements reflecting risks undertaken and define components of capital; for internationally active banks, requirements must not be less than applicable Basel requirement. - Legal basis and frameworks (EC 1–EC 5): - EC1: Section 37(1) of BAFIA gives BNM legal power to specify a minimum capital ratio for all banking institutions licensed under the legislation. - BNM has established capital adequacy frameworks: - Risk-Weighted Capital Adequacy Framework (General Requirements and Capital Components); - Risk-Weighted Capital Adequacy Framework (Basel II - Risk-Weighted Assets Computations); - Risk-Weighted Capital Adequacy Framework (Basel II—Pillar 2); - Risk-Weighted Capital Adequacy Framework (Basel II—Pillar 3). - Components of capital are described in RWCAF and are consistent with BCBS requirements emphasizing loss-absorbing capital components. - EC2: BNM does not distinguish capital adequacy requirements between internationally active and non-internationally active banks. Paragraph 5.1 of RWCAF (GRCC) requires banking institutions to maintain a minimum risk-weighted capital ratio of 8 percent at all times at the entity and consolidated level. - Areas not yet aligned with international standards: - Scope of application is not extended to the holding company of a banking group (See paragraph 21 of BCBS‟s Basel II standard) as BNM currently does not have explicit legal powers to do so. - Definition of capital: 1. Deductions are currently made at the total capital level (except for goodwill, which is deducted from Tier-I capital) instead of 50% from Tier-I capital and 50 percent from Tier-II capital. (See Part C in Annex 1a of BCBS’ Basel II Standard); 2. For banks using the Standardized Approach for credit risk, inclusion of general provision in Tier-II capital is currently not subjected to the limit prescribed by the BCBS as stipulated in paragraph 49 (x) (a) of BCBS’ Basel II standard. - EC3: BNM has power to impose specific capital requirements under section 37(1) of BAFIA and currently imposes capital charges for credit risk, market risk and operational risk. - EC4: RWCAF (B2-RWA) requires capture of all on- and off-balance sheet exposures. As at June 30 2011, banks adopt the following approaches: - Credit Standardized Approach: 48 banks - Internal Ratings Based Approach (IRB) (foundation): 10 banks - Market Standardized Approach: 58 banks - Operational Basic Indicator Approach (BIA): 56 banks - Standardized Approach (TSA): 2 banks - The capital floor for banks using the IRB approach is still applicable consistent with BCBS standards; BNM may continue to impose the prudential floor beyond the transitional period. - EC5: RWCAF includes refinements to address potential underestimation of risk and to suit the local environment. Examples: - Adoption of more conservative treatment—20 percent credit conversion factor (CCF) applied on unutilized credit card lines instead of 0 percent CCF (paragraph 2.84 of RWCAF (B2-RWA)); - Higher interest rate risk capital charge for market risk for exposures to non-G10 countries (paragraphs 5.51 to 5.52 of RWCAF (B2-RWA)) to reflect more volatile financial market conditions in emerging economies; - No recognition of available-for-sale revaluation reserves in Tier-II capital although BCBS’ Basel II standard (paragraph 49 (vi)) allows recognition of 45 percent of these reserves in Tier-II capital; - Differentiated risk weights to better reflect underlying risk of specific exposures. - Assessment: Largely Compliant *Italic source attribution: _cr1356 - Section 7(1) of BAFIA.* ### 1. Risk weights applied on performing residential mortgages range from 35 percent ### _cr1356 - 1. Risk weights applied on performing residential mortgages range from 35 percent ### Risk-weighting of retail exposures - Performing residential mortgages: - Risk weights range from 35 percent to 100 percent based on the loan-to-value (LTV) ratio of each exposure. - This replaces a standard 35 percent risk weight (paragraphs 2.32 to 2.33 of RWCAF (B2-RWA)). - Term loans for personal use: - Term loans with an original maturity of more than 5 years are 100 percent risk weighted, instead of 75 percent risk weight (paragraph 2.29i of RWCAF). ### Supervisory powers and minimum capital treatment - Legal provisions enabling supervisory measures should a banking institution fall below the minimum capital ratio: - Section 37 (Fourth Schedule), section 73(1)(b)(iii) and section 103(1)(b) of BAFIA; - Section 37. - BNM supervisory approach: - Pre-emptive: banking institutions are not allowed to maintain a capital adequacy ratio below a threshold set for individual institutions (that is above the regulatory minimum of 8%), determined through the supervisory assessment process. - Institutions with higher risk profiles face higher minimum capital ratio requirements. - Under the Supervisory Intervention Guide (SIG), institutions with “High” Composite Risk Rating (CRR) are typically subjected to more intense intervention actions which may include a requirement for capital injection. - Such institutions are also subject to more granular reporting requirements for continuous supervisory monitoring. - Distinction by international activity: - BNM does not distinguish between internationally active banks and non internationally active banks for capital adequacy purposes; treatment is the same as mentioned in EC2. - There is no distinct capital treatment for internationally active banks and non-internationally active banks. - Non-bank holding companies: - Non bank holding companies are currently not subject to any capital adequacy requirements. ### Accreditation and implementation of advanced approaches - IRB accreditation: - BNM has accredited 10 banks for the use of the foundation IRB approach. - Assessment and qualifying criteria (minimum requirements) are stipulated in RWCAF (B2-RWA). - Implementation Guidance (IG) to the Internal Ratings-Based (IRB) Approach for Credit Risk accompanies RWCAF (B2-RWA) and provides additional guidance. - Assessors concluded BNM adopts a rigorous and detailed initial and ongoing review before advanced Basel approaches can be adopted. ### Pillar II, forward-looking capital management, and ICAAP - Forward-looking requirement: - BNM does not have a specific requirement for banking institutions to adopt a forward-looking approach to capital management and setting of capital levels in anticipation of possible events or changes in market conditions that could have an adverse effect. - Supervisory expectations and guidance: - Paragraph 9.4 of RWCAF (B2-P2); - Guidelines on Stress Testing; - Paragraphs 3.354 and 5.168 of RWCAF (B2-RWA), which provide specific requirements for banking institutions adopting the IRB approach for credit risk and Internal Model Approach for market risk. - Pillar II implementation status: - BNM has had discussions with banks on Pillar II implementation and banks prepared a gap analysis, but Pillar II is not yet fully implemented. - Some elements of Pillar II are operating: - Banks are required, on an annual basis, to submit and present their business strategies, including the adequacy of capital to support the strategy. - Banks are required to integrate the outcome of stress tests into their risk appetite and capital management plan. - Formal ICAAPs have yet to be submitted and reviewed by BNM. ### Group-level capital and oversight - Capital adequacy for financial holding companies: - Currently capital adequacy requirements are not imposed on financial holding companies heading a banking group. - Oversight of non-regulated group entities: - Entities that are part of a banking group but not regulated by BNM (asset managers, venture capital entities...) are subject to regulatory oversight and site inspections by BNM under the authority derived from BAFIA (see CP 24). - Discretion to require higher capital: - In accordance with paragraph 1.5 of the RWCAF, BNM has the power to require a regulated entity to maintain higher regulatory capital requirements and has exercised this power as part of the supervisory assessment process under SuRF. - BNM adopts a pre-emptive approach to prevent a banking institution’s capital from falling below the level that BNM deems adequate to support the institution’s risk profile. ### Assessment and key statistics - Assessment conclusion: - Largely compliant - System-wide capital metrics (2011): - Risk-weighted capital ratio (system-wide): 14.9 percent - Core capital ratio (system-wide): 12.9 percent - Trend note: - In general, the capital adequacy ratios namely RWCR and CCR declined between 0.4 to *Source: _cr1356 - 1. Risk weights applied on performing residential mortgages range from 35 percent* ### 4.8 percentage points and 0.1 to 3.7 percentage points respectively upon transition to ### _cr1356 - 4.8 percentage points and 0.1 to 3.7 percentage points respectively upon transition to ### Capital framework, Basel II/III transition - Transition impact: "4.8 percentage points and 0.1 to 3.7 percentage points respectively upon transition to the IRB Approach." - Causes: shortfall in loan loss provision against credit expected loss based on IRB estimates; introduction of capital requirement for operational risk. - Scope and alignment: - Recommendation: "The scope of application of the capital framework should be widened to include financial holding companies, as outlined in the Basel II scope of application." - Minor amendments: "Some other, but minor, amendments, to fully align the capital framework with the BCBS standards should also be made." Assessors judge these impacts "not to be material" given areas where BNM is stricter than the Basel minimum. - Pillars and implementation: - Basel II comprises three pillars; BNM should "fully implement Pillar 2 as soon as possible." - Observed gap: Having Pillar 1 and Pillar 3 without full Pillar 2 is not fully in line with sound Basel II implementation. - BNM actions: will have enhanced legal powers under new financial services legislation to apply the capital framework to financial holding companies; is "in the process of fully aligning the definition of capital with the implementation of Basel III in Malaysia." - Intent: "The BNM intends to move to the full implementation of Basel III in accordance with the internationally agreed timetable." ### Principle 7 — Risk management process (overview) - Principle statement: supervisors must be satisfied that banks and banking groups have a comprehensive risk management process (board and senior management oversight) to identify, evaluate, monitor, and control or mitigate all material risks and to assess overall capital adequacy; processes should be commensurate with size and complexity. - Key embedded requirements (EC 1 references): - Guidelines on Corporate Governance for Licensed Institutions; - Best Practices for the Management of Credit Risk—Chapter 2 Section 4 and specific lending policy requirements in the box and Chapter 3; - Risk-Weighted Capital Adequacy Framework (Basel II—Risk-Weighted Assets Computation): IRB credit risk (Section B.3.7 Paragraphs 3.376–3.410); standardized and internal model approaches for market risk (Page 220 Paragraphs 5.16, 5.17; page 308 section D.3.7). - Supervisory powers: - Derived from BAFIA—Sections 69 and 71, and Section 79 for related entities. - Gap: "Currently, there is no similar power for BNM supervisors over non-licensed entities in a banking group, including the FHC parents of groups." BNM has been extending practical reach to FHCs but consistency and strength of application to consolidated FHCs can be improved. ### On-site reviews and supervisory practices (EC 1–EC 4 highlights) - On-site review focus areas: - Review Board and Board Risk Committee (BRC) minutes for business plans, risk management strategies, policies, and process discussions; assess Board identification and understanding of significant risks and constraints (IT, HR). - Review stress test reports to assess scenario setting, Board deliberation, risk-taking direction, and intended mitigation actions. - Review risk reports submitted to Board, BRC, ALCO, Credit Committee, and CEO. - Annual sessions: "For large banking groups, on an annual basis, BNM supervisors will convene a session for senior management of banking institutions on broad strategies, business plans and risk management strategies." Assessors confirmed sessions are held. - Board oversight verification: - Review Board terms of reference, risk management framework, and Board meeting minutes for approval and deliberation on risk appetite and strategies. - Review policies/limits on risk-taking, procedure manuals, Board/BRC minutes, and internal audit reports on risk management and significant risk-taking units. - Transaction testing and branch/offshore reviews: - On-site transaction testing by sampling (top large exposure amounts, recent transactions, transactions during aggressive growth) to check adherence to internal criteria and limits. - Branches and overseas operations examined based on asset size, revenue contribution, risk profile, and internal audit findings. - Exceptions handling: review policies/manuals on authorization and reporting of exceptions, exception reports to Board/committees, and internal audit reports on non-adherence. ### Management information systems, model validation, stress testing (EC 5–EC 8) - Capital management and ICAAP: - SuRF requires review of capital management policies/practices to determine capital adequacy in terms of quality, buffer under plausible stress scenarios, and sufficiency for planned growth; feeds into Composite Risk Rating (CRR). - Reviews ensure policies on capital planning, integration with strategic/business plans, criteria for internal capital targets, stress-testing of capital plans, and periodic capital adequacy review processes. - For large groups: use of experienced supervisors and risk specialists to assess complex models and economic capital models; "model validation on the part of the BNM risk specialists was taking place." - For small/less-complex banks: qualitative capital planning allowed, minimum semi-annual stress testing to identify vulnerabilities and required capital buffers. - ICAAP embedding: requirements in RWCAF — Internal Capital Adequacy Assessment Process (Pillar 2) (Part A Paragraph 1.3; Part B Paragraphs 6.1 and 6.2; Part C Paragraph 12.1). - Model validation (EC 6): - Expectation: risk models and systems validated at least on a yearly basis with clear responsibilities, segregation of duties; outsourced validation governed by policies. - BNM reviews validation/back-testing reports and performs walkthroughs; risk specialists assist technical reviews. - For IRB adopters: BNM reviews credit risk model validations prior to allowing IRBA for regulatory capital computation under Basel II Pillar 1. - MIS and reporting (EC 7): - SuRF requires assessment of MIS quality (accuracy, integrity, depth), timeliness and insightfulness; MIS must capture exposures comprehensively and with sufficient granularity at entity and group level. - New products (EC 8): - Guidelines on Introduction of New Products (2011) require Board annual attestation to BNM that conditions/requirements met; Board to endorse policies and procedures for product risk management. - BNM retains right to disallow any new product; examples shown where BNM stopped banks from implementing products. ### Organizational independence, segregation, and risk function resourcing (EC 9–AC 1) - Segregation of duties: - SuRF requires assessment of segregation between risk-taking and risk management; on-site reviews of organizational structure to ensure independent reporting lines and adequate stature for risk management. - Review of compensation processes for risk professionals to avoid undue influence by risk-taking units. - Ensure risk management units have direct access to information and data (no dependency on risk-taking functions). - Engagement with CRO and risk officers: - BNM meets with CROs and key risk officers to identify constraints on independent risk functions; assessors confirmed regular meetings between senior risk professionals and BNM supervisors. - Dedicated independent risk unit: - AC 1: "Currently, BNM does not have a guideline that specifically requires banks to have a dedicated unit responsible for the risk management process." However, "all of the domestic banks in Malaysia have a dedicated unit" in practice; larger banks have sub-functions (risk model development, validation, portfolio analysis, risk policy). - Recommendation: "BNM needs to issue a guideline that specifically requires banks to have a dedicated unit responsible for the risk management process." ### Stress testing requirements and other material risks (AC 2–AC 3) - Stress testing: - Requirements embedded in Guidelines on Stress Testing (Part A Paragraphs 1.04, 1.08; Part C), RWCAF — ICAAP (Part B Paragraph 9.4), Risk-Weighted Capital Adequacy Framework. - Banks required to submit stress test documents (scenarios, parameters, results) to BNM; weaknesses discussed with bank officers and highlighted in CRR letters with recommended actions. - Note: "These stress testing expectations have not been applied to consolidated FHCs." - Other material risks: - Strategic, legal, and regulatory risks are assessed under SuRF and reflected in CRR. - RWCAF — ICAAP (Part B Paragraphs 8.1(iii), 8.3, 8.5) requires banks to identify and assess all material risks, including reputational risk. ### Assessment, findings, and recommended improvements - Assessment outcome: "Largely Compliant." - Comments and improvement opportunities: - "Increase the number and experience level of risk specialists and ensure they spend more time" - "Ensure that under the current law (as well as the prospective new legislation) that prudential risk management policies are explicitly and consistently applied to consolidated FHCs" - "Ensure in particular that relevant stress tests are applied to consolidated FHCs." - "BNM needs to issue a guideline that specifically requires banks to have a dedicated unit responsible for the risk management process." ### Principle 8 — Credit risk (introductory points) - Principle statement: supervisors must be satisfied that banks have a credit risk management process that accounts for the institution’s risk profile, with prudent policies/processes to identify, measure, monitor, and control credit risk (including counterparty risk) across lending and investment activities. - Board and senior management responsibilities (EC 1–EC 3 highlights): - Board: approve and periodically (at least annually) review credit risk strategy, significant credit and investment policies and processes; monitor senior management performance in implementation. Referenced materials: BNM/GP1 (paragraphs 2.1, 2.3), BPCR (Chapter 1 paragraphs 1.2–1.4 and specific requirements). - Senior management: implement Board-approved credit strategy and develop policies/processes (BNM/GP1 Principle 3; BPCR Chapter 1 paragraphs 2.1–2.3). - Credit culture, documented credit strategy, approval authorities, credit administration, monitoring, classification/impairment requirements referenced across BPCR chapters, Responsible Lending Financing Guidelines, and Classification and Impairment Provisions for Loans/Financing. - Conflict of interest controls: BAFIA section 62 (prohibit lending to directors); BAFIA section 64 (disclosure of interest by director); BPCR Chapter 3 specific requirements; GP6 Guidelines on section 26A of BAFIA. - Supervisory confirmation: assessors reviewed supervisory documentation and on-site review evidence and found supervisory procedures adequate to confirm compliance with the above requirements. *Source: IMF Financial Sector Assessment content unit _cr1356 (selected excerpts).* ### Section 21: Submissions of documents, etc.; ### Section 21: Submissions of documents, etc.; ### Statutory requirements for submission of financial statements - Section 41 (1) and (3): banks are required to submit their financial statements to BNM; ### BNM's authority to require information on credit policies and procedures - Section 65 (2) (a): BNM may by written notice direct a bank to submit any information relating to its policies and procedures for the giving of any credit facility; *Source: _cr1356 - Section 21: Submissions of documents, etc.;* ### Part X, Powers of supervision and control over licensed institutions section 69-71. ### _cr1356 - Part X, Powers of supervision and control over licensed institutions section 69-71. ### Credit reporting and exposure monitoring - BNM requires banks to report their customers‟ credit exposures and monthly conduct via BNM’s database on credit exposures (“the credit registry”). - Aggregated and individual credit information from the credit registry is used by BNM supervisors for off-site surveillance (e.g., monitor loan growth, asset quality trend analysis, etc). - AC 1: BNM does not have a specific legal requirement that requires banks’ senior management to decide on major credit risk exposures exceeding a certain amount or percentage of the bank’s capital. In practice, banks have credit policies that limit major credit risk exposures from exceeding a certain percentage of their capital. - AC 2: BNM accounts for potential future exposure by adopting the Current exposure method for the capital calculation of derivatives. - AC 3: The total indebtedness of borrowers is recorded in the credit registry (individuals and corporate customers). Banks: - Verify the credit registry during pre-approval to assess total indebtedness and repayment capability, including calculating the debt servicing ratio. - Assess customers' total indebtedness post-approval to determine new credit limits via behavioral scoring. - For corporate exposures, generally review borrower accounts at a minimum once a year, assess leverage level for credit rating determination, and require audited year-end financial accounts. - Monitoring and processes are guided by: - Responsible Financing guidelines (paragraphs 6.6, 6.7 and 6.8); - Classification and Impairment Provisions for Loans/Financing guidelines (paragraph 7.3). - Assessment: Compliant. Comments: BNM is compliant with CP8. The regulations and supervisory framework cover identification, management and mitigation of credit risk. ### Problem assets, provisions, and reserves (Principle 9) - Principle summary: Supervisors must be satisfied that banks establish and adhere to adequate policies and processes for managing problem assets and evaluating adequacy of provisions and reserves. - EC 1: BNM/GP3 “Classification and Impairment Provisions for Loans/Financing” paragraph 9.3 and “Best practices for the management of credit risk” require banks to formulate policies/processes for identifying and managing problem assets; periodic reviews are required. - EC 2: BNM reviews and assesses adequacy and appropriateness of institutions’ classification and provisioning policies as part of ongoing risk-based supervisory review across corporate/commercial, consumer, and treasury portfolios. BNM: - Discusses with relationship managers, independent credit review, risk management and finance officers and reviews documentary evidence during quarterly account reviews. - Communicates weaknesses for rectification and follows up with Board and senior management. - Following FRS139 implementation on 1 January 2010, all banking institutions must comply with provisioning requirements therein. - In confirming adequacy, BNM reviews areas including: - Threshold for Individual Impairment Provisioning (IIP) vs Collective Impairment Provisioning (CIP); - Check-and-balance processes and measurement techniques for impairment. - BNM specific IIP review points: - Examines adequacy of policies and understanding by credit/finance officers; reviews internal audit and control functions. - Assesses valuation bases of collaterals, insurance claims, or borrower cash flows; typically adopts Discounted Cash Flows (DCF) to measure impairment for each impaired exposure. - Where insufficient justification exists for short collateral realizable periods, BNM may require discounting cash flows, at a minimum, for a period of 5 years. - Reviews governance, documentation of assumptions, validation processes, and Board/management oversight. - BNM specific CIP review points: - Obtains justifications for loss rates (e.g., historical loss rates adjusted for environmental factors or migration analysis); common methodology measures Probability of Default (PD) and maximum Loss Given Default (LGD). - Assesses reasonableness of PD measurement techniques (roll-over rate, migration analysis) and requires independent validation of CIP models. - Reviews segmentation of credit portfolios for homogeneity and reasonableness of LGD assumptions (discounting period, hair-cut, recoverable value). - EC 3: Banks comply with accounting standards set by MASB covering onsite/offsite balance sheet and on-balance-sheet items. - EC 4: Paragraph 12.3 of BNM/GP3 requires IIP and CIP be based on reasonable and well documented estimates of net present value of future cash flows. For specialized collateral, valuation by a specialized valuer is required. - EC 5: BNM requires governance processes, measurement models and resources for early identification of deteriorating assets; oversight measures are included in BNM/GP3 and “Best practices for the management of credit risk”. - EC 6: BNM receives regular prudential returns enabling assessment of classification and provisions. On Monthly/Quarterly Basis BNM receives: - Statistical information on assets, liabilities and equities; - Loans/financing - arrears in repayment, classification and provisions; - Risk profile of treasury, corporate, commercial and consumer portfolio; - Ageing listing and roll-over analysis by asset portfolio; - Listing of exposures to large groups of borrowers (including exposures to each borrower within the group and repayment status); - Vintage analysis of the consumer and retail portfolio; - Movement of large individual credit exposures into and from the impaired and vulnerable/watch list categories; - Report on impaired assets (details of impairment provisions, progress of recovery, collaterals and other sources of cash flows); - Report on progress of collection and recovery and update on watch list exposures (repayment, signs of further deterioration, financial performance). - Additional quarterly information that BNM may obtain for quarterly financial account review includes: - Top 20 group customers and top 20 group impaired financing; - Listing of material impaired assets; - Movements in impaired financing; - List of restructured and rescheduled financing during the period; - Potential impaired financing and delinquent accounts; - Movements of impairment provision made, write-back and write-off for each financing portfolio; - List of large individual impairment provision made, write-back and written-off with justification; - List of written-back accounts; - Breakdown on available for sale (AFS), held to maturity (HTM) and held for trading (HFT); - Inter-bank lending and borrowing for the last 3 months; - List of large newly classified and reclassified unimpaired accounts. - EC 7: BNM has the power to require banks to make additional provisions if prudential impairment provisions are inadequate. Section 41 of BAFIA requires BNM to approve annual accounts and may object to accounts that do not adequately reflect loan impairments. Paragraph 13.1 of BNM/GP3 permits BNM to require higher provisions, reserves or remedial measures. Powers to require strengthened financial capacity include: - Section 37 BAFIA provisions on maintenance of capital funds unimpaired by losses as prescribed by BNM; - Risk Weighted Capital Adequacy Capital Framework - all banking institutions are required to maintain a minimum RWCR of 8% at all times at the entity, global and consolidated levels. - EC 8: BNM assesses compliance with minimum expectations on classification and provisioning, including: - Credit exposures classified as impaired when rules in EC 10 are met; - Reclassification of restructured and rescheduled loans only after the observation period; - For homogeneous loans, comprehensive CIP assessment is required. - If provisions are too low, BNM can require higher provisions (see EC 7). - EC 9: BNM requires institutions to implement systems to periodically assess value of risk mitigants and derive net realizable value. Collateral management system requirements: - Valuation of collaterals periodically or at minimum once in two years; - Collaterals for impaired assets revalued on an annual basis; - Valuation by independent and qualified valuers; - Collateral policy outlining parameters for appointment of panel valuers. - During onsite inspections, BNM reviews collateral values, rationale, and the capability of collateral management systems to maintain records and generate timely reports. - EC 10: Financial assets are identified as impaired when there is objective evidence of impairment impacting estimated future cash flows. BNM/GP3 classification rules based on repayment conduct: - The principal and/or interest is past due for more than 90 days. For revolving facilities, exposure classified as impaired where outstanding amount has remained in excess of the approved limit for a period of more than 90 days; - The exposure exhibits weaknesses that render adverse classification, although the past due is less than 90 days; - For repayments scheduled at intervals of 3 months or longer, loans/financing classified as impaired as soon as a default occurs unless it does not exhibit any weakness that would render adverse classification; - For restructured and rescheduled accounts where the amount is past due for 90 days or 3 months or less, classified as impaired if they exhibit weaknesses per the institution's credit risk grading framework; - For restructured and rescheduled accounts already classified as impaired, re-classification as unimpaired only after prompt repayment conduct during the observation period (as prescribed by the institution’s policy). - EC 11: Corporate governance guidelines (BNM/GP1, BNM/GP3 and BPCR) require institutions to supply broad information to the Board and Risk Committees. Senior Management must provide the Board with complete, focused and adequate information at least on a bi-monthly basis. BNM reviews Board reporting and minutes during onsite examinations. - EC 12: BNM requires assessment of small loans on a collective basis and larger loans on an individual basis. - AC1: For restructured and rescheduled accounts already classified as impaired, re-classification as unimpaired requires prompt repayment conduct during an observation period; BNM representatives indicated a rule of thumb minimum of 6 months observation is usual. - Assessment: Compliant. Comments: BNM has comprehensive guidelines and powers to require increases in provisions, reserves or capital where supervisory concerns exist. ### Large exposure limits (Principle 10) - Principle summary: Supervisors must be satisfied that banks have policies and processes to identify and manage concentrations and supervisors must set prudential limits to restrict exposures to single counterparties or groups. - EC 1: Section 61(4) of BAFIA defines "single person" for computing credit facility amounts to include: - An individual, his or her spouse, child or family corporation; - A corporation, its related or associate corporations; - Society registered under any written law relating to cooperative societies, its subsidiaries as defined in section 2 of the Cooperatives Societies Act 1948 and related or associate corporations of such subsidiaries; - Persons acting in concert with such single person (with Bank discretion to exclude certain persons/classes). - EC 2: Legal provisions and standards dealing with counterparty exposures include: - Section 61(1) of BAFIA; - Part A Paragraph 5 and 7 of BNM/GP5; - Revised Guideline for Investment in Private Debt Securities - Part B Paragraph 5, 6 and 7. - BNM/GP5 large exposure limits: - Loan to any customer is set at 25 percent of capital funds; - Overall limit for large loans is set at 50 percent of total credit facilities; - Large loan is defined as total credit facilities granted to any customer which exceeds 15 percent of capital funds. - Revised Guideline for Investment in Private Debt Securities (1994): - Limits holdings of corporate bonds by a single issuer to 10 percent of capital funds; - Banking institutions may increase holdings up to 35 percent of capital funds provided other credit facilities to that issuer within the 25 percent SCCL are reduced proportionately. - Scope of exposures in BNM/GP5 includes loans and advances, bills and exchange discounted or purchased and off-balance sheet exposure in the form of guarantees and forward foreign exchange transactions. Limits do not apply to government exposures. - Supervisory approach: - Supervisory assessment of large exposures and concentration risk is embedded in BNM’s supervisory framework and Best Practices for the Management of Credit Risk. - BNM supervisors perform assessments during onsite visits; supervisory documentation indicates procedures are adequate. - EC 3: MIS expectations for identifying and aggregating large exposures are embedded in: - Best Practices for the Management of Credit Risk - Chapter 2 Part 3; - Paragraph 3.1 and 3.3 and Chapter 3 Part 2 Paragraph 2.10; - Credit Risk Management Manual - Section: Introduction Part 2(c); - Manual for Examination of Banking Institutions - Topic D3: Concentration of Credits, Section D3.4. - EC 4: Requirements that material concentrations be reviewed and reported periodically to the Board are in: - Best Practices for the Management of Credit Risk - Chapter 3 Part 2 Paragraph 2.16; - Credit Risk Management Manual - section: Introduction Part 2(a). - Monitoring and reporting: - BNM supervises concentration risk quarterly based on banks' submission of top 20 credit exposures and top 20 depositors; results are escalated to BNM senior management. - BNM’s Credit Risk Specialist Unit (CRSU) provides horizontal assessment of credit concentration and risk management practices. - Supervisors update assessments and report risk profile monthly via the Monthly Progress Report. - Sectoral limits and concentration controls: - Property sector limits in “Guideline on Lending to Broad Property Sector (BPS) and Lending for the Purchase of Shares and Units of Unit Trust Funds”: - The average monthly outstanding loans and advances extended to the BPS in any calendar quarter shall not exceed 20% of the average monthly total outstanding loans in the previous quarter; - Guarantees issued to secure credit facilities to finance property development in any calendar quarter shall not exceed 20% of the total guarantees issued in the previous quarter; - Private debt securities (PDS) and commercial papers (CPs) issued to finance property development purchased by banking institutions in the primary market in any calendar quarter shall not exceed 20% of the total PDS and CPs purchased in the primary market in the previous quarter. - Share holdings limits in “Guidelines on Investment in Shares, Interest-in-Shares and Collective Investment Schemes (CIS)—Part C Paragraph 7.1”: - The aggregate book value of investments in shares, interest-in-shares, CIS and immovable properties shall not exceed 50% of the banking institution’s capital base; - The aggregate book value of the banking institution’s investments in shares and interest-in-shares shall not exceed 25% of the banking institution’s capital base. - EC 5: Reiteration that material concentrations be reviewed and reported periodically to the Board (see citations under EC 4). BNM’s requirements for risk management policies to establish thresholds for acceptable concentration are embedded in Best Practices for the Management of Credit Risk—Chapter 2 Part 4 Paragraph. *Source: _cr1356 - Part X, Powers of supervision and control over licensed institutions section 69-71.* ### 3.1 and Chapter 3 Part 2 Paragraph 2.15(i) and Paragraph 2.16; ### 3.1 and Chapter 3 Part 2 Paragraph 2.15(i) and Paragraph 2.16 ### Large exposures (Risk Weighted Capital Adequacy Framework / Manual for Examination — concentration of credits) - Frameworks cited: Risk Weighted Capital Adequacy Framework (Basel II) — Internal Capital Adequacy Assessment Process (ICAAP) (Pillar II); Manual for Examination of Banking Institutions - Topic D3: Concentration of Credits, Section D3.3 and Section D3.4. - BNM/GP5 prudential limits to manage large exposures: - Loan to any customer is set at 25 percent of capital funds; - Overall limit for large loans is set at 50 percent of total credit facilities; and - Large loan is defined as total credit facilities granted to any customer which exceeds 15% of capital funds. - Assessment: Largely Compliant. - Comments / supervisory enhancements planned: - Define “a group of connected counterparties” more comprehensively including economic dependency; - More active use of Pillar 2 to identify and assess credit concentrations; - Align large exposure limits with international best practice (example: 25 percent instead of 35 per cent). - BNM planned revised guideline for credit concentrations to address CP 10 requirements, including: - Clear and specific risk management expectations on compliance with the prudential limits; - Comprehensive guidance on determining interconnectedness of counterparties; - Review of prudential limits; - Guidance on measurement of exposures to properly reflect exposures and ensure consistency. - BNM confirmed that all banks are well below the current large exposure limits. ### Exposures to related parties (Principle 11) - Principle summary: supervisors must require exposures to related parties be on an arm’s length basis, effectively monitored, controlled/mitigated, and written-off per standard policies/processes. - Legal/definition context: - “Related parties” not defined in Malaysian banking law; explicit prohibitions on loans to officers and directors; strong restrictions on loans to “connected parties”. - BNM/GP6 Section 2.1 defines connected parties: spouses and defined close relatives of officers and directors; companies which control or are controlled by such connected parties; companies (and their subsidiaries) in which such connected parties are interested as a director, partner, executive officer, agent or guarantor; and subsidiaries of the licensed institution. - Beneficial ownership included via Section 6A of the Companies Act. - Regulatory change in 2008: corporate shareholders with interests between 20% and 50% of a bank or FHC were dropped from the definition of connected parties unless that shareholder also had a director on the bank/FHC board — resulting in exclusion of some substantial investors and their affiliates. - Supervisory controls and processes: - Loans to officers and directors absolutely prohibited; loans to connected parties required to be on terms no more favourable than similar exposures to non-related counterparties (Section 3.2 of BNM/GP6). - Board approval required for loans to connected parties (Section 63(d) of BAFIA and Paragraph 3.2(iv) of BNM/GP6). - Write-off of connected party exposures exceeding an amount specified by the bank subject to Board approval (Paragraph 4.5(iv) of BNM/GP6). - Board members with conflicts precluded from approval process (Paragraph 3.7 of BNM/GP6); Paragraph 4.5(vi)(b) prevents connected parties participating in deliberation/decision-making. - Limits on aggregate outstanding credit exposures to all connected parties: lower of 100 percent of capital base or 25 percent of outstanding credit exposures; these are lower than limits for single counterparty/groups (50 percent of total credit facilities). Requirement to deduct counterparty exposures from capital or require collateralization in Paragraph 10 of BNM/GP6. - Requirements for policies/procedures to identify and monitor connected exposures and independent on-going assessment detailed in Paragraph 4 of BNM/GP6. - BNM obtains regular reports (monthly, quarterly, and semi-annual) for compliance; results included in Monthly Progress Report to senior management. - Assessment: Largely Compliant. - Comments: Overall approach sound; gap exists due to exclusion of some significant minority shareholders — should be addressed. ### Country and transfer risks (Principle 12) - Principle summary: supervisors must ensure banks have policies/processes to identify, measure, monitor, control country and transfer risk and maintain adequate provisions/reserves. - Key facts and supervisory practice: - Bulk of country and transfer risk held by the top 3 banks in Malaysia. - Country risk mainly to Singapore, Indonesia and Hong Kong. - Approximately 15 percent of bank assets consist of cross border exposures. - No specific regulation dealing with country risk; assessed as part of overall credit risk in SuRF. - Supervisory assessments tailored to risk profile (see CP 19); RMCF components used for assessing effectiveness of information systems, risk management, internal controls. - Conglomerates department issues quarterly briefings on country risk. - BNM does not set fixed percentages for provisioning for each country; banks set provisioning levels; supervisors review provisions in on-site examinations. - Financial Surveillance, Economics department and Specialist risk unit monitor countries where Malaysian banks have exposures and provide early alerts (examples: crises in Europe and Middle East; catastrophe in Japan). - BNM receives periodic prudential returns on country risk in loans, investments and interbank exposures, including loans where proceeds finance projects/operations abroad; BNM has taken action based on increasing country risk in individual banks. - Assessment: Largely compliant. - Comments: Need for more explicit legal and regulatory requirements on country and transfer risk; BNM should expect country and transfer risk be managed as a separate risk category. BNM commended for comprehensive quarterly briefings. ### Market risk (Principle 13) - Principle summary: supervisors must ensure banks have policies/processes to identify, measure, monitor, control market risks; supervisors should have powers to impose limits or capital charge if warranted. - Key findings: - Market risk consists mainly of traded interest rate risk on government bonds and debt securities in banks’ trading books. - Market risk capital charge represents less than 10 percent of the regulatory capital charges for the eight large domestic banking groups; for some foreign banks market risk capital charges can account for about 80% of capital. - BNM detailed requirements for internal models approach exist but all banks remain on the standardized approach. - RWCAF (paragraphs 5.21 to 5.27) states qualitative requirements for market risk policies and procedures; banks must submit trading book policy statements for BNM review. - BNM has six risk specialists for market risk. - RWCAF (paragraphs 5.21 to 5.27) requires market risk limits commensurate with size/complexity; supervisors review MRCAF reports, ALCO and RMC minutes and monthly risk reports. - Systems and controls requirements (paragraphs 5.12–5.14, 5.17–5.20 of RWCAF and CAFIB) include valuation adjustments/reserves and independent price verification. - BNM conducts stress tests on trading book exposures for events (global financial crisis, European sovereign debt crisis, reversal of capital flows); compares bank-submitted stress tests with BNM’s results. - Model validation requirements: independent validation, frequent review, back testing; standards in Part D3.7 and 3.8 of MRCAF. - Assessment: Compliant. - Comments / recommendations: - BNM compliant with CP 13; regulatory guidelines comprehensive and clear. - Assessors recommend training more market risk specialists and that risk specialists accompany supervisors on on-site examinations for higher risk institutions. ### Liquidity risk (Principle 14) - Principle summary: supervisors must be satisfied banks have liquidity management strategy, prudent policies/processes, contingency plans. - Liquidity Framework (LF) requirements and structure: - All banks must maintain sufficient liquid assets to ensure a net liquidity surplus position for the next 30-day period from reporting date after prescribed liquidity shocks (prescribed percentage of outflows of total deposits). - Banks required to submit monthly liquidity positions to BNM. - LF requires determination of maturity profile up to 1 year for on-/off-balance sheet items. - Liquidity assessed from three levels: - First level: sufficiency in normal course, horizon from 1 week (3 days for investment banks) to 1 year; on-/off-balance items slotted into liquidity maturity buckets based on behavioral assumptions. - Second level: capacity to withstand prescribed liquidity shocks after considering stock of liquefiable assets adjusted with haircuts. - Third level: assessment of general funding structure to determine dependency on volatile funding sources. - Regulatory “net compliance surplus” defined: summation of liquidity gap positions under normal circumstances plus discounted value of high-quality liquefiable assets exceeds prescribed liquidity shocks for next 30-day period. - Supervisors require remedial plans with timelines for banks failing compliance. - Supervisory review scope: - Review Board minutes/papers to confirm Board approval/deliberation of liquidity strategy, policies, processes. - Review key areas including liquidity gap limits (local currency and FCY), diversity/stability of funding, liquidity stress tests, Contingency Funding Plan (CFP), roles responsible, escalation/corrective procedures. - For banking groups, assess monitoring of subsidiary liquidity profiles at group level; ALCO reports reviewed to ensure tabled at parent ALCO. No ongoing review of consolidated liquidity for FHCs. - For groups with overseas operations, assess reliance of foreign branches/subs on parent funding; review internal reports (liquidity gap, funding sources, stress tests). - Verify limits are incorporated into measurement systems; independent liquidity risk management and compliance units established; ALM operations audited at least annually. - Stress test review: institution-specific and market-wide disruptions, run-off rates, haircuts; ensure assumptions are not too bullish; review overseas branch/subsidiary stress tests with local conditions considered. - Contingency Funding Plan (CFP) review: commensurate with risk profile; clear escalation procedures; integration with stress test scenarios; specification of roles/authority; addresses contact with BNM supervisors; separate CFPs for overseas branches/subsidiaries required and approved. - Foreign currency (FCY) specifics: - BNM requires banks with material FCY operations to have separate liquidity gap analysis and limits for each significant FCY. - Malaysian banks’ FCY assets account for only about 10-15% of total banking assets; FCY maturity transformation small and mainly from short-term treasury activities. - ACs and supervisory requirements: - AC 1: For banks with material FCY operations supervisors review ALCO reports to ensure separate liquidity gap for each significant FCY; require proper liquidity risk management policies and stress test consideration in limit setting. - AC 2: Supervisors verify policies address diversification and concentration risks (limits/ratios to prevent concentration to top depositors, maturity, volatile sources) and that monitoring is by an independent unit reported to ALCO; LF specifies criteria and haircuts for liquefiable assets. - Assessment: Largely Compliant. - Comments: Regime sound; improvements needed in application to FHCs: - BNM supervisors need to conduct ongoing reviews of FHC consolidated liquidity. - BNM needs to require that an FHC conducts a consolidated liquidity stress test and table the stress test results at ALCO. ### Operational risk (Principle 15) - Principle summary: supervisors must be satisfied banks have risk management policies/processes to identify, assess, monitor, control/mitigate operational risk commensurate with size/complexity. - Regulatory framework and guidelines: - Paragraph 4.4 of RWCAF requires internal operational risk management framework commensurate with nature, complexity, sophistication. - Other relevant guidelines: Corporate Governance for Licensed Institutions; Guidelines on Introduction of New Products; Guidelines on Business Continuity Management; Guidelines on Management of IT Environment; Guidelines on Outsourcing of Banking Operations. - Supervisory assessment and reporting: - Operational risk supervisory assessments embedded in SuRF; Review Notes document assessments for significant activities and control functions. - All banks applying Basic Indicator Approach (BIA) for operational risk; two banks in process of applying for standardized approach. - BNM has 3 operational risk specialists; 17 supervisors with IT background in supervisory divisions. - Board responsibilities and expectations: - GP1 and RWCAF outline Board responsibilities: approve/periodically review firm-wide operational risk management framework, operational risk appetite/tolerance, ensure internal audit review, emphasize risk/control culture. - BNM engages formally with Boards at least annually to communicate supervisory concerns and regulatory expectations. - Monitoring tools and information: - Supervisors review operational risk dashboards, minutes of Operational Risk Committee/Executive Risk Committee/Management Committee, compliance/internal audit reports, and eFIDS loss event data. - BCM Guidelines require comprehensive BCM program, continuous review/update of BCP/DRP, Board information. - BCM MTD/RTO expectations: - RENTAS – MTD of 1.5 hours; - Cheque clearing operations and system – MTD of four (4) hours; - Retail branch operations – MTD of four (4) hours; - Card-based systems (credit and ATM) – RTO of four (4) hours. - GPIS1 (Guidelines on Management of IT Environment) sets minimum standards for governance/management of IT, mandates reporting of serious system security breaches/down times/performance degradation. - Reporting: banking institutions required to immediately report material operational risk events and losses; reporting of operational risk loss events in Basel II taxonomy mandated to TSA banks (Section 69, 71 and 79 of BAFIA); BIA banks encouraged to report. As at December 2011, 48% of banking institutions have been reporting operational risk loss events to BNM. - Electronic Fraud Information Database System (eFIDS) mandatory for all institutions except investment banks; BNM developing Operational Risk Reporting System to upgrade eFIDS into full operational risk event/loss reporting system expected operational in the first quarter of 2013. - Outsourcing controls: - Outsourcing Guidelines require due diligence, Board approval, written undertakings on secrecy, service agreements with conduct clauses, right to terminate, monitoring/reporting, testing/review, right to inspect vendor books/control environment, contingency plans; off-shoring requires prior BNM approval. - AC 1: Supervision conducted on a consolidated basis, including subsidiaries & branches; supervisors assess oversight/monitoring by group Board and senior management and validate via separate assessments at subsidiaries. - Assessment: Largely compliant. - Comments / recommendations: - Release more detailed supervisory expectations; - Train more supervisors in the operational risk specialist stream; - Operational risk specialists should attend on-site examinations for higher risk institutions. - BNM drafting Operational Risk Management Guidelines which will mandate reporting of all operational risk loss events. ### Interest rate risk in the banking book (IRRBB) (Principle 16) - Principle summary: supervisors must be satisfied banks have systems to identify/measure/monitor/control IRRBB with board-approved strategy appropriate to size/complexity. - Regulatory and supervisory context: - No specific regulation on IRRBB yet; risk category to be covered by Pillar II / ICAAP. First ICAAPs due March 2013. - Supervisors verify Board reviews/approves significant risk management policies at least annually via interviews and review of Board/BRMC/ALCO minutes and papers; deficiencies raised as supervisory concerns. - Supervisory processes: - Review ALCO minutes, internal management reports, independent risk unit reports for limits monitoring and stress testing, interest rate exposure escalation to ALCO, internal audit reports on ALM. - Off-site surveillance reviews internal reports, ALCO minutes, quarterly interest rate duration weighted gap (DWG) reports and risk management reports. - Supervisors satisfied with depth/completeness of supervisory procedures for IRRBB based on reviewed risk assessments. - Model and validation expectations: - Banks expected to employ measurement models/systems commensurate with size/complexity. - Internal models require annual validation/review by independent party; supervisors review validation reports for adequacy of controls, coverage of exposures, appropriate assumptions, and Board/senior management deliberation/approval. - Stress testing: - Banks required to perform internal stress tests (Guideline on Stress Test–2007); internal stress tests monthly or at least quarterly for escalation to Board Risk Committee and ALCO. - Banks in Malaysia stress positions mainly using instantaneous parallel shifts and yield curve steepening ranging from 50bps to 300bps. - Supervisors compare bank stress test results with quarterly DWG regulatory reports and use results in on-site planning and supervisory engagement. - ACs: - AC1: Monthly submission of internal management reports to supervisors including IRRBB measurement and internal stress tests; quarterly DWG regulatory reports submitted for monitoring using standardized shock to determine EVE impact. - AC2: Following ICAAP issuance (December 2011), banks required to allocate internal capital for Pillar 2 risks; supervisors review ICAAP annually to ensure IRRBB captured. - AC3: Regulatory stress test results must be communicated to board/senior management and extracts of minutes deliberating stress tests submitted for off-site review. - AC4: Independence of risk management function assessed under SuRF; risk units for IRRBB typically report to Board Risk Committee. - Assessment: Largely compliant. - Comments: - No specific regulation addressing IRRBB; - Banks seek clarification of supervisory expectations in this area; - Need to train more IRRBB specialists and have them attend on-site inspections for higher risk institutions. ### Internal control and audit (Principle 17) - Principle summary: supervisors must be satisfied banks have adequate internal controls commensurate with size/complexity, including separation of duties, reconciliations, safeguarding assets, independent internal audit and compliance. - Governance and supervisory framework: - BNM/GP1 establishes governance and control expectations: Board must ensure effective internal control and risk management with independent internal audit and compliance; establish Audit Committee; policies on conflicts of interest/related party transactions. - Senior management responsibilities include overseeing operations, implementing Board policies, ensuring appropriate staffing and training. - Under SuRF, internal controls assessed on a business-by-business basis with strongest controls expected in complex trading activities. - Board culture and fit & proper: - GP1 requires Board to set corporate values, clear lines of responsibility/accountability, and ensure appropriate mix of skills; BNM provides director training programs. - BNM has power to reject/restrict appointments and re-designate directors; examples: rejected 9 candidates in 2010-2011; approved with shortened tenor on 24 occasions; re-designated independent director as non-independent twice; specified higher proportion of independent directors or required Board composition reviews (done 6 and 8 times respectively). - Assessment of control functions and internal audit: - BNM evaluates back-office, risk management, compliance, and internal audit resourcing via budgets, qualifications, engagements; uses Risk Specialists for technical review. - Supervisory assessment of compliance function includes organization, reporting independence, framework robustness, scope/mandate, effectiveness over group entities, and sampling to test implementation. - BNM/GP10 expectations for internal audit: evaluate compliance with internal policies and effectiveness of risk management/internal controls; supervisors review Audit Charter, audit programs, sample reports. - BNM reviews internal audit headcount, qualifications, training; ensures internal audit reports to Audit Committee with free Board access; assesses whether internal audit independence is preserved where administrative reporting to CEO exists. - BNM assesses internal audit authority/status and ability to challenge management; reviews Audit Committee minutes for evidence of effective audit challenge. - BNM assesses whether internal audit reviews outsourced functions and inspections of major outsource providers conducted. - ACs: - AC 1: BNM/GP1 requires Board to possess mixture of core competencies (finance, accounting, legal, business management, information management, information technology) per Section 2.61. - AC 2: Internal auditors under direct supervision/authority of Audit Committee with full access; Chief Internal Auditor authority to communicate directly with Board/Chairman/regulators per BNM/GP10. - AC 3: BNM/GP10 requires Audit Committee to include only non-executive directors with majority independent directors; BNM can determine non-independence. - AC 4: Fit and Proper guidelines (issued March 10, 2011) require Nominating Committee to remove a key responsible person if judged no longer fit and proper; Board to inform BNM. - Assessment: Compliant. - Comments: BNM has a strong program ensuring effective governance, staffing, and processes for control functions; emphasis on director training programs effective. ### Abuse of financial services / AML-CFT (Principle 18) - Principle summary: supervisors must be satisfied banks have adequate policies/processes, including strict KYC rules, to prevent misuse for criminal activities. - AML institutional framework: - BNM is the only competent authority appointed by the MOF since 2002 under the AMLTFA. - Section 7 of the AMLTFA explains functions of competent authority; Section 8 explains powers in receiving/analyzing/disseminating information to law enforcement. - BNM issued AML/CFT Standard Guidelines (AML GP1) for all reporting institutions under AMLTFA; supplemented by AML/CFT Sectoral Guidelines 1 specifically for Banking and Financial Institutions (AML GP1(1)) to align with FATF Recommendations. - Legal obligations: - Section 19 (1) of the AMLTFA requires financial institutions to implement internal programs, policies, procedures and controls to detect suspected ML/TF activities. *Italic: Source — _cr1356 - 3.1 and Chapter 3 Part 2 Paragraph 2.15(i) and Paragraph 2.16;* ### Section 19(2)(a) further requires the establishment of internal procedures in financial ### _cr1356 - Section 19(2)(a) further requires the establishment of internal procedures in financial ### Internal procedures, policies and compliance (Sections 19(1), 19(2)(a), 19(2)(b), 16, 17(1)) - Section 19(2)(a) requires establishment of internal procedures in financial institutions to ensure high standards of integrity of their employees. - Policies and procedures must be: - Aligned with the risk profile and business activities of the banking institutions. - In compliance with the AMLTFA, AML GP1 and AML GP1(1). - Approved by the Board. - Effective implementation is verified through on-site reviews. - Section 19(1) requires financial institutions to adopt, develop and implement internal programs, policies, procedures and controls to detect suspected ML/TF activities. - Section 19(2)(b) obliges banks to conduct on-going employee training programs, such as “know-your-customer” programs. - Section 16 requires reporting institutions to conduct CDD including to verify, by reliable means, the identity, representative capacity, domicile, legal capacity, business purpose of any person as well as other information on that person. - Paragraph 5.3.3 of AML GP1 requires institutions to "know the beneficial owners and control structure of the corporate customers". - Paragraph 5.6 of AML GP1 obliges CDD on "any natural person who ultimately owns or controls the customer's transaction if it suspects a transaction is conducted on behalf of a beneficial owner and not the customer who is conducting such transaction". - Paragraphs 5.9 and 5.10 of AML GP1 require enhanced CDD and senior management approval before establishing business relationships with higher risk customers. - Paragraphs 4.1 and 4.2 of AML GP1(1) provide guidelines for banks to conduct their CDD. - Section 17(1) of AMLATFA requires reporting institutions to maintain any record for a period of not less than 6 years from the date an account has been closed or the transaction has been completed or terminated. - Paragraph 6.1.1 of AML GP1 requires reporting institutions to keep relevant records, including material business correspondences and documents relating to customers due diligence procedure, for at least 6 years after the transaction has been completed or after the business relations with the customer have ended. ### Reporting obligations, databases and filings (EC 3, EC 9, EC 11) - Obligation to report CTRs and STRs to the competent authority is provided under section 14 of AMLTFA. - Section 20 of AMLTFA overrides banking secrecy insofar as it relates to mandatory reporting obligations by relevant financial and non-financial institutions on cash and suspicious transactions, and for the purpose of financial investigations. - The framework encompasses: - Implementation of a risk-based compliance framework. - Application of customer due diligence (CDD) measures. - Requirements for a database of “red flags”. - Electronic filing system for submission of cash transaction report (CTR) and suspicious transaction report (STR). - The submission of STRs by banks averages 52 percent of all submissions annually. - As at 31 July 2011, the banking institutions contributed the second highest number of STRs which is 26.5 percent of total STRs received. - Banks are required to report any incidences of fraud, including attempted fraud, even where no loss was incurred, via the electronic Fraud Database (e-FIDS). - BNM supervisors determine banks have policies/processes for employees to report potential frauds or abuse, including: - Assigning a dedicated officer/unit to whom the report could be made; - Mechanism to ensure the confidentiality of the employee making the report; - Processes to assess/verify the report; - Escalation process to the appropriate senior authority within the banking institution. - Para 7.2 of AML GP1 requires banks to have adequate management information systems as a complement to CDD to enable timely detection of suspicious activity. - Section 21(3) of the AMLATFA requires supervisory authorities to report promptly to the FIU any information from reporting institutions relating to transactions or activities that could be related to an unlawful activity or offence under the Act. - As at 12 August 2011 (2008–2011), BNM has disclosed 4,821 STRs as financial intelligence to domestic law enforcement agencies and foreign enforcement agencies. ### Supervisory framework and approach (Principle 19; SuRF, EC 1–6) - SuRF framework: supervisors identify significant activities, inherent risks, and adequacy of mitigants; earnings and capital strength are assessed for residual risk cushion. - A Relationship Manager (RM) is appointed for each banking institution as focal point for continuous surveillance and supervisory activities; RMs are assisted by Special Risk Units (SRUs). - Supervisory plans include on-going monitoring and on-site review; reviewed plans provided a good mix of actions reflecting the range of risks. - Micro and macro stability monitoring and risk analysis are undertaken; macro-prudential assessment by Financial Surveillance Department and horizontal assessments by SRUs feed micro-surveillance. - Regular discussions are held between micro and macro surveillance functions to gather information and formulate policy responses. - BNM interacts with other regulators: no MOU with SKM; MOU with SC (limitations discussed elsewhere); close collaboration with PIDM guided by amended SAA. - The risk-based approach in SuRF enables: - A consistent methodology for assessing and assigning ratings across different financial institutions with separate assessment of inherent risks and risk management functions; - Quantitative and qualitative comparisons between peer institutions taking into account supervisory expectations, institution-specific risk exposures and management practices. - SuRF is applied on a consolidated basis for material activities/entities within a banking group (subsidiaries & branches) both in Malaysia and cross border; application to FHCs is not fully applied on a consolidated basis. - The risk assessment is updated regularly based on monitoring and on-site review; risk assessment and placement into Intervention categories under the Supervisory Intervention Guide (SIG) are core to BNM supervision. - Six supervisory steps driving supervisory products and interventions: 1. Preparing a Knowledge of Business (KoB) analysis to understand the institution’s activities and operations, including its business objectives, strategy, key risk drivers including exposure to external developments, and Significant Activities (SAs); 2. Developing annual supervisory plans, using the results of the KoB analysis to prioritize supervisory work/resources toward institutions and areas of higher risk; 3. Monitoring the risk profile of banking institutions and developments that may affect the risk profile through off-site and on-site review; 4. Performing a risk assessment on the SAs identified and preparing a Risk Assessment Summary (RAS) and assigning a CRR. Seven risk categories are assessed under SuRF: credit risk, market risk, liquidity risk, operational risk, legal & regulatory risk, strategic risk and insurance risk --- each covers operational, governance, and risk control issues; 5. Preparing a supervisory letter to highlight issues and requirements/recommendations to the banking institution. All institutions are assigned an intervention stage rating which is linked to their respective CRR as well as their responsiveness to supervisory requirements and recommendations. Supervisory letters are addressed to the Chairman of the institution’s Board and copied to the Chief Executive Officer, PIDM, SC and other relevant parties. Results are also communicated via bilateral engagements between BNM supervisors and the institutions’ Board and senior management; 6. Following-up on the actions or measures prescribed on banking institutions. BNM supervisors track issues and remedial measures regularly and report status and progress in monthly progress reports, RAS and ‘Follow-up’ review notes. Intensity of oversight and severity of supervisory actions increase when an institution fails to implement appropriate and effective remedial and corrective actions. - BNM supervisors assess compliance with laws and prudential requirements through on-going monitoring and on-site reviews; external auditors are required by law to inform BNM of any non-compliance (BAFIA Section 40 (15)). ### Supervisory powers, enforcement and protection (EC 7, EC 8, EC 10, EC 12) - Section 73 of BAFIA enables BNM to exercise intervention powers, including issuing directions and removal of directors in certain circumstances where the bank has contravened a provision of the law. - The Governor of BNM may, with concurrence of MOF, compound any person for breach of any provisions of BAFIA. Criminal prosecution may be instituted with approval of the Public Prosecutor. - In 2011, BNM issued directives to two licensed banks under section 22(3) of the AMLATFA for non-compliance with Part IV obligations. - In 2011, two licensed banks were compounded pursuant to section 92(1) of the AMLATFA for failure to comply with reporting obligations under Part IV. - Reporting institutions under AMLATFA are required to develop and implement a compliance program to guard against and detect any offence pursuant to section 19 of the Act. - BNM supervisors review banks’ audit plan, audit scope and audit programs to assess whether relevant areas are assessed; they review reports of compliance officers and review screening processes prior to employment of staff. - Section 24 of the AMLATFA provides protection against civil, criminal or disciplinary proceedings for persons who disclose or supply information in relation to a suspicious report under Part IV so long as the information was disclosed and supplied in good faith. - Secrecy obligations or other restrictions on disclosure are overridden by section 20 of the AMLATFA. - The Whistleblowing Protection Act 2010 aims to protect individuals who disclose information on corrupt practices or improper conduct to enforcement agencies based on belief of improper conduct, provided such disclosure is not specifically prohibited by any written law. - Section 40 of CBA sets out cooperation arrangements; “supervisory authority” includes a foreign supervisory authority (section 2), but sharing is subject to an undertaking on confidentiality and purpose limits. - Section 88 of CBA allows BNM, in exercising its powers, to give information related to offences under CBA or other Acts to the Police, affected financial institutions or persons, or to authorities/persons with investigative/enforcement powers. - No information related to suspected or actual criminal activities has been shared so far between BNM and other foreign supervisory authorities because no such request has been made. - Domestic coordination: National Co-ordination Committee to Counter Money Laundering (NCC) established in April 2000 to enhance cooperation among 15 Ministries and government agencies; BNM is NCC Secretariat. ### Institutional capacity and staffing (FIU, SIU, BNM specialists) - The FIU employs 25 AML/CFT specialists: - 10 of whom are involved in the analysis of reports; - 8 of whom are involved in policy; - 7 deal with institutions that are not subject to other supervision. - Within BNM, the Special Investigations Unit (SIU) investigates criminal activities under Acts administered by BNM (BAFIA, IA and CBA). If the criminal activity is listed as a serious offence under the Second Schedule of the AMLTFA, BNM as a law enforcement agency may take action including freezing and seizing property. - There are currently 50 staff in the SIU. - Assessment: Compliant. - Comment/recommendation from assessors: The BNM has 25 specialists in AML/CFT issues, none of whom attends on site examinations. The assessors recommend AML/CTF Specialists join onsite BNM supervisors for the examination of higher risk banks. ### AML/CFT integration into risk management and supervisory assessment - AML/CFT measures are integrated into banking institutions’ overall risk management control functions and are assessed as part of BNM supervisors’ overall prudential assessment. - BNM supervisors’ assessment includes: - Board and senior management oversight, including on AML/CFT matters; - Operational management such as self assessment on key control standards which include controls for KYC; - Compliance and risk management functions to mitigate ML/TF risks; - Internal audit program and manual, including for AML/CFT and the quality of audit conducted. - Paragraph 4.13 of GP1(1) requires banks to take measures to avoid exposure to ML/TF through accounts of respondent institutions or being used by shell banks; correspondent banking relationships require capturing and assessing essential/key information on the respondent bank to determine reputation and quality of supervision. *Content adapted from the supplied IMF PDF chapter/section.* ### Section 29 ### Section 29 ### Mandatory consents, notifications, and reporting obligations - Statutory and regulatory provisions require licensed institutions to obtain BNM consent or approval for a range of actions, including: - Section 29 — Consent for establishing or acquiring any subsidiary. - Section 30 — Consent for opening any offices of licensed institutions. - Section 49 — Approval for change in the control of a licensed institution or its holding company, for the sale, disposal or transfer of business, or for amalgamation/merger or for the reconstruction of the licensed institution. - Section 51 — Reporting any agreement/arrangement for the acquisition or disposal of more than 5 percent of the institution’s shares. - Sections 55(1), 57(2) — Consent for appointment of directors and CEO. - Section 72 — Advice of inability to meet any of its obligations. - Section 40(15) — Requires the external auditor to report immediately matters that posed threat to the safety of the institution, such as contravention of BAFIA, fraud, irregularity and inability to maintain minimum capital funds. - Additional supervisory requirements under guidance and provisions: - Section 2.28 (GP1) — Required resignation and removal of independent directors from the Board can only take effect until cleared with BNM. - Section 2.41 (GP1) — Approval required for appointment of Chairman of the Board. - Section 2.44 (GP1) — In the absence of its CEO, a licensed institution is required to inform the BNM of the person who will be directly responsible for the overall running of the licensed institution. - Ongoing expectations: - Banking institutions are expected to inform BNM supervisors of any material change in business operations and/or any adverse development in their risk position. - Banking institutions are expected to immediately notify BNM supervisors of any breach of legal and prudential requirements. - These expectations are enforced by BNM supervisors during on-going supervisory monitoring and surveillance. ### Information systems and risk assessment (EC 6; AC 1) - EC 6: BNM maintains numerous internal and external information systems to support micro and macro surveillance functions. - BNM subscribes to external information databases such as Bloomberg and Moody’s Credit Edge. - Referenced: CP 21 for details on means used to collect, review and analyze prudential reports and statistical returns. - AC 1: The SuRF provides a comprehensive and forward-looking assessment of a banking institution’s risk profile and direction of risk. - Direction of risk is assessed based on potential changes in business and economic climate, business focus and risk management strategy. - Scenario-based stress tests on credit, market and liquidity risks are conducted at both macro and micro levels to assess capacity to withstand potential significant adverse macro-financial shocks and implications to earnings and capital. ### Assessment, findings and recommendations - Assessment: Compliant. - Summary finding: - BNM has a well developed framework of supervision with a strong mechanism to ensure effective and consistent analysis of risks, with access to a variety of information sources to keep assessments current. - Recommendations: - Increase the number and experience level of risk specialists and provide for their spending more time in the field. - Revisit methodology for assigning ratings to banks to provide capacity to factor in more explicitly adverse effects from affiliates. ### Supervisory techniques (Principle 20) — on-site and off-site supervision - EC 1: Supervisory assessment entails on-site reviews and off-site surveillance. - The RM, in consultation with the Director, decides on mix of on-site and off-site supervision based on the CRR and Intervention category, emerging macro concerns, new business activities, and significant developments (e.g., merger, change of management and new regulations). - Frequency and depth of reviews depend on risk profile, adequacy of risk control functions, strength of management and Board, complexity, ratings and size. - For complex or technical issues, BNM supervisors seek assistance of a (limited) number of risk specialists. - EC 2: RM responsible for coordination of on-site and off-site surveillance. - On-site and off-site strategies developed annually based on bank risk profile. - Supervisory assessments and CRR are presented to a rating panel for independent peer review within the Department. - Any intended changes in CRR require presentation to a second panel chaired at minimum by the Assistant Governor of the Supervision Sector. - EC 3: On-site review activities include: - Observing corporate governance practices and compliance with approved policies and procedures. - Reviewing minutes of Board and management committee meetings; inspecting relevant books and records. - Conducting walk-through tests on identified business operations, processes or systems. - Validating financial information in periodic submissions via FISS and other reports (for example, validating outstanding balances of impaired loans and collateral values to determine adequacy of loan impairment allowances reported monthly). - Engaging with model developers and users to validate reliability of models used for capital or other purposes. - Seeking clarification from Board members, senior management, and selected staff. - EC 4: Off-site surveillance activities include: - Reviewing regulatory reports and requesting supporting information (monthly management accounts, risk management reports, schedules on large borrowers/depositors). - Reviewing publicly available information such as rating agency reports and information from other regulators. - Engaging with Board, senior management and staff responsible for internal audit, risk management, compliance and management information support. - Analyzing submissions to identify salient problem areas and compliance with prudential requirements such as capital adequacy and single customer limits. - Performing scenario-based stress tests on credit, market and liquidity positions and identifying vulnerabilities. - Integrating macro surveillance assessments with micro surveillance results. - Monitoring progress of remedial actions with reports typically requested within six weeks from the date of the supervisory letter; unresolved concerns require quarterly submissions on status of corrective actions. - Off-site surveillance inputs update the RAS and Review Notes. - Implementation of the Micro Surveillance System in 2012 expected to improve efficiency in identifying potential financial distress and follow-up. - EC 5: RM and supervisory team are focal points of contact maintaining regular communication throughout supervisory process. - Communication is routine or event-triggered. - On-site reviews include meetings with CEO, heads of departments/business units (including CRO, CIA, COO, Financial Controller, Head of Compliance) to discuss supervisory concerns and remedial recommendations. - Exit meetings at conclusion of on-site reviews obtain commitments to rectify weaknesses and, where necessary, engagement with Board members. - EC 6: Assessment of Board and management quality guided by SuRF and criteria producing ratings of ‘Strong’, ‘Acceptable’, ‘Marginal’ or ‘Weak’. - Relevant statutory and guideline references: - Sections 55, 56 and 57 of BAFIA on appointment/disqualification of directors/officers and appointment of a CEO. - Guidelines on Corporate Governance for Licensed Institutions (BMN/GP1). - Guidelines on Fit and Proper for Key Responsible Persons. - Supervisors request and review Board records (terms of reference, agenda, minutes) and engage with Board members. - Board assessment includes structure, selection and appointment processes, mix of skills, depth of deliberations, and effectiveness of oversight. - Management assessment includes capability (skills, competence, experience, character, knowledge and leadership), and effectiveness in executing strategies while maintaining governance and control culture. - CEO suitability assessed per “Guidelines on Fit and Proper for Key Responsible Persons”. - EC 7: Assessment of internal audit under SuRF: - Track 1: horizontal basis for each significant activity. - Track 2: vertical analysis for overall internal audit function. - On-site and off-site assessment practices include examining audit policies and procedures, independence mandates, audit methodology and practices, CIA skills and experience, staffing adequacy, performance versus audit plan, and review of internal audit reports (including subsidiaries and cross-border operations). - EC 8: Communication of supervisory results: - Formal exit discussions with senior management to share findings, concerns and recommendations. - Sessions chaired by Director or Deputy Director with senior management and Board members to inform them of CRR and supervisory concerns; serious issues may be chaired by Assistant Governor or Deputy Governor. - Issuance of supervisory letters addressed to the Chairman, copied to CEO and Chairman of BAC, detailing CRR, concerns and corrective recommendations. - Follow-up letters to Chairman and CEO on inadequacies or failure to meet timelines after review of corrective actions. ### Supervisory engagement and use of external auditors (AC 1) - Ongoing results of on-site and off-site surveillance are discussed with management and the Board. - Bilateral or tripartite meetings with external auditors are held at least annually to discuss audit findings and financial accounts. - Where necessary, supervisors engage with Chairman of BAC to address external auditor issues. - Supervisors hold separate meetings with independent directors and Board Committees (Audit, Nomination, Remuneration, Risk Management) when concerns exist over Board effectiveness or dominance by certain directors. ### Assessment and comments on supervisory techniques - Assessment: Compliant. - Comment: BNM has a strong and well structured supervisory program, using appropriate supervisory techniques. ### Supervisory reporting (Principle 21) - EC 1: Section 43 of BAFIA empowers BNM to request prudential returns from banks on a solo and consolidated basis. - BNM uses an online reporting system FISS (Financial Institutions Statistical System). - FISS comprises banking statistics in terms of income, expenses, assets, liabilities as well as contingent liabilities. - The FISS system comprises automatic checks on the accuracy and comprehensiveness of data. - Since submission of prudential returns went online, the physical sign off of the accuracy and comprehensiveness of the prudential returns was abolished. - EC 2: Various sections of BAFIA provide legal powers to BNM to require banks to submit information. *Source: _cr1356 - Section 29* ### Section 41: Financial statements to be submitted to Bank ### Section 41: Financial statements to be submitted to Bank ### Covered statutory provisions - Section 41: Financial statements to be submitted to Bank - Section 43: Statistics and information to be submitted - Section 69: Examination of licensed institutions - Section 70: Power to direct investigation - Section 71: Production of licensed institution’s books - Section 79: Extension of power to related company - Section 98: Disclosure for facilitating performance of functions by Bank - Section 99: Other permitted disclosures - Section 113: Submission to Bank of information required by it - Section 126: Power to issue guidelines, etc ### Scope of reporting - The reports submitted by the banks are on a stand alone as well as a consolidated basis - Reports contain information on such matters as: - on and off balance sheet exposures - profit and loss - capital adequacy - liquidity - large exposures - assets concentration, (by economic sector , geography and currency) - asset quality - loan loss provisioning - related party transactions - interest rate risk - market risk ### Additional information sources and legal basis - BNM also obtains information from the banks’ financial holding companies as well as subsidiaries and other related companies - The legal power supporting this is stipulated in section 79 of BAFIA and *Source: _cr1356 - Section 41: Financial statements to be submitted to Bank* ### Section 113. ### _cr1356 - Section 113. ### Financial reporting requirements and valuation rules - BNM has issued GP8/GP8i — Guidelines on Financial Reporting, requiring banks to submit their financial statements on a quarterly basis, prepared in accordance with the financial reporting standards approved by the Malaysian Accounting Standards Board (MASB), which is fully in compliance with IFRS. - Primary objective: ensure consistency in disclosure by specifying the minimum reporting format to be observed by the banks. - Banks must ensure financial statements are prepared in accordance with valuation principles authorized under the FRSs issued by MASB, including specific requirements on the use of Fair Value Option. - Required compliance with valuation rules under relevant FRSs such as FRS139 for financial instruments and FRS140 for investment properties to promote standard and consistent practice across the industry. ### Supervisory risk assessment, intervention stages, and data collection - Assessment of banks’ overall risk profile determines the CRR, which is mapped to a supervisory intervention stage; this stage determines oversight level and frequency/intensity of supervisory monitoring actions. - Intensity and severity of supervisory oversight are consistent among banks within each stage and proportionately intense across inferior stages. - Frequency of data collection/analysis is determined by supervisory stage and by event triggers (e.g., fraud reported or sudden business expansion requires more frequent reporting). ### Industry data systems and analytical uses (FISS / BFAS) - Availability of the “FISS” data allows consolidation of industry flow data (time series) and stock data (all banks at same reference date) for comparison. - FISS evolved to Banking Financial Analysis System (BFAS) with Excel linkage for detailed analysis. - Quarterly comparative analyses include: - banking industry’s top 10 depositors for all types of banks (to identify concentration risk and major liquidity providers); - stress test analysis (quarterly) to highlight sources of vulnerabilities and scenarios needing supervisory action; - credit portfolio comparisons for top 20 loans and Private Debt Securities (PDS) exposures to identify total large exposures and contributing banks/borrowers. ### Legal powers to obtain information and access records - Section 113 of BAFIA requires licensed/scheduled/foreign institutions, persons engaged in provision of finance, or related corporations to submit any information relating to their affairs or business to BNM when directed for exercising BNM’s powers, functions, or duties under the Act or any other written law. - Section 71 of BAFIA empowers BNM to request and examine documents/other information of any bank if needed; read together with section 79 which extends reporting requirements to related corporations and director-controlled institutions. - BNM currently receives consolidated financial information including the financial holding company for the six domestic banking groups headed by a financial holding company. - Section 71 provides that directors and officers under examination shall afford BNM supervisors access to all books/documents and produce required information; section 71(3) provides that no directors or officers shall fail to give information as required. - BNM supervisors may review Board and management committee minutes and relevant documents (policies, strategy, operational manuals). ### Ensuring accuracy, timeliness, and validation of submissions - BAFIA provisions: section 2(4)(a) empowers BNM to require timely submission of information; section 2(4)(b) prohibits submission of false or misleading information; breaches can result in penalties under section 104 and daily fines for continuing offences. - FISS (maintained by Statistical Services Department) has in-built logic checks to detect outliers monthly; supervisors alerted on movements exceeding variance thresholds (thresholds reviewed timely). Banks must analyze variances to ensure consistency and credibility. - BNM meets supervisory data/information expectations via: - ongoing assessment of bank communication and information guided by SuRF to evaluate data governance and control environment; - validation via approval of financial statements (quarterly, half-yearly, annual) with supporting documents and potential on-site validations, including review of impairment methodology and adequacy of impairment provisions; - thematic reviews upon implementation of new prudential standards to review governance processes and promote consistency. ### Use of external experts and external auditors - BNM generally uses an internal dedicated supervisory team but may appoint external experts under section 3(3) of BAFIA if needed. - BNM leverages external auditors’ work for verification of financial statements under section 40 (Appointment and Duties of Auditor), with the power to require auditors to submit reports, enlarge audit scope, or carry out specific examinations. - Section 40(15) requires external auditors to alert BNM on material shortcomings identified during audits; when external experts are appointed, similar reporting obligations must be included in appointment terms. - Assessors recommend discontinuing BAFIA Section 41(4) (which requires BNM to inform the institution in writing that financial statements and supporting documents are satisfactory in form and content) because it may interfere with auditor independence and expose BNM to reputational risk; proposed removal in the FSA as currently drafted. - BNM organizes periodic sessions and tripartite meetings (BNM, external auditor, banking institution) to clarify supervisory expectations and align procedures; external auditors confirm these meetings take place. ### Audit oversight, independence, and reporting obligations - Malaysian Approved Standards on Auditing effective 1 January 2010 align with IFAC standards; Audit Oversight Board informs BNM on inspection results for audit firms auditing banking institutions. - Section 40(1) requires BNM prior approval annually for appointment of an external auditor; section 40(4) and Guidelines set criteria for auditors before and during engagement. - Considerations in auditor appointment/reappointment include: - Quality of past audit and performance; - Feedback from BNM supervisors of other financial institutions using the same engagement partner; - Materiality of non-audit services provided; - For investment banks, views of the Securities Commission (SC); - Results from Audit Oversight Board assessments. - Appointments of auditors are for one year. Section 41(1) requires submission of audited financial statements and auditor’s report within 3 months after financial year close; unless notified by BNM, institutions shall not publish audited financial statements at the annual general meeting. - Section 42 requires publication of annual financial statements within 14 days after presentation at the general meeting in at least two local daily newspapers; interim financial reports must be disclosed on websites not later than 8 weeks after the interim period close. - Bursa Malaysia listing rules: announce interim quarterly financial results within 2 months after quarter end and within 4 months from financial year close for audited annual financial statements. - Pillar 3 disclosure requirements: additional disclosure of risk management policies and capital adequacy on bank websites; corporate governance disclosure minima required in annual reports (paragraph 2.108 of the Guidelines on Corporate governance for licensed institutions). - External auditors must report immediately to BNM under section 40(15) if: - contravention of any provision of BAFIA or an offence of dishonesty/fraud under any law has been committed; - losses reduce capital funds so institution no longer complies with minimum regulatory capital under section 37(1); - any irregularity jeopardizes interests of depositors or creditors or any other serious irregularity has occurred; - auditor is unable to confirm that claims of depositors or creditors are covered by assets of the institution. - There is currently no provision in BAFIA to provide protection to external auditors making such reports in good faith for breach of confidentiality. No reports have been made under this provision. - Paragraphs 4.2(v) of the Guidelines prohibit an audit partner from serving as engagement partner for more than 5 years with the same banking institution; rotation of audit firms is not required. ### Publications and public disclosures - BNM publishes: - Monthly and quarterly statistical reports with monetary and banking developments, economic reviews, and statistical data (e.g., statement of assets and liabilities, information on loans); - Financial Stability and Payment Systems Report on an annual basis with detailed assessment of key risks and key financial statistics (sources and uses of funds, capital ratios, income and expenditure) provided as annexure. - Publications are available on BNM’s website. ### Assessments, compliance ratings, and key supervisory recommendations - Assessment: Compliant for the section covering information access, oversight, and auditor interaction (explicitly stated as "Assessment Compliant" in source). - Specific assessor recommendations and comments: - Require at least annual physical sign off of prudential returns by Senior Management; BNM is enhancing ISS Project to incorporate a digital signatory requirement. - Discontinue use of Section 41(4) of BAFIA (interferes with auditor independence); proposed removal in the FSA as currently drafted. - Principle 23 (Corrective and remedial powers) Assessment: Largely Compliant. - BNM issues at least one supervisory letter per year to each institution; response timelines typically six weeks; pending corrective actions require quarterly (or more frequent) progress reports. - SIG intervention stages described: Stage 2 “Early Intervention”; Stage 3 “Advanced Intervention”; Stage 4 “Restructuring”; Stage 5 “Resolution”. BNM can direct actions corresponding to stages including business restrictions, removal of officers/directors, directing restructuring/merger, and making non-viability determinations under criteria agreed with PIDM. - Legal powers include Sections 103, 106 (criminal penalties), Section 7 (MOF can revoke licenses on BNM recommendation), Section 37 (capital maintenance), and Section 73 (enforcement powers including directing capital increases). - Comments/Recommendations: - Strengthen legislative basis for determination of non-viability for troubled banks. - Determine resolution approach for FHCs. - Revise MOU with SC to strengthen notification of actions applied to bank affiliates; BNM and SC are enhancing the MOU. - Expand penalties that can be imposed on individuals under Civil Law. - Principle 24 (Consolidated supervision) Assessment: Largely Compliant. - Of eight local banking groups, six are FHCs; most assets of FHCs are in bank subsidiaries and non-bank subsidiaries generally account for less than 5% of assets. - BNM collects information on group organizational structure, governance, material entities’ business activities and financials, inter-company transactions, and group risk/audit/performance/compliance reports. - Legal reach achieved via conditions on BNM approvals and BAFIA Sections 113(1) and 79; explicit powers to supervise FHCs and related entities do not currently exist but prospective law change would provide such authority. - Limitations noted: - No specific power to issue prudential regulations over FHCs or specific regulatory capital requirements over FHCs (some requirements accepted as conditions of designation). - Limited formal information exchange with SC domestically; more comprehensive exchange with foreign supervisors for host country operations. - BNM cannot require closing of foreign offices or impose conditions on their activities under current law. - Comments/Recommendations: - Move quickly to enact explicit legislative authorities for oversight/supervision of FHCs. - Formalize prudential regulatory provisions for the consolidated organization. - Strengthen guidance for parent company assessments. - Broaden MOU with SC to include sharing of information on asset management companies and other affiliates. - Grant BNM authority to require closing of foreign offices or impose conditions on their activities. - Principle 25 (Home-host relationships) Assessment: Compliant. - BNM has strong information-sharing arrangements and a "Home-Host Supervisory Cooperation Framework" SOP. - MOUs in place with Indonesia, Cambodia, Vietnam, and China; well-functioning relationships with Singapore, Hong Kong, UK, and Canada; hosted and participated in supervisory colleges. - Locally incorporated subsidiaries of foreign banks are subject to same regulations and supervisory processes as local banks (branching distribution ratio requirement on opening new branches). - BNM solicits information from home supervisors during licensing about supervisory approach and legal impediments to parental financial support; BNM reviews FSAP assessments but does not perform formal independent assessments. - BNM allows home supervisors access to carry out intended reviews of Malaysian bank subsidiaries with prior notice and protocol. - Shell banks are not allowed; BNM has measures to prevent indirect access through correspondent banking. - Recommendations: - In licensing foreign bank subsidiaries, perform formal independent assessment of consolidated home country supervision. - Enter into MOUs with countries where there are significant new entrants. *Source: _cr1356 - Section 113.* ### 1. Objectives, independence, ### 1. Objectives, independence, powers, transparency, and cooperation ### 1.1 Responsibilities and objectives - Laws are in place for banking and the role of BNM is clearly defined. Clear responsibilities and objectives for other authorities are also in place. - The BNM has issued the “Financial Sector Blueprint 2011-2020”, a strategic plan that lays out the future direction of the Malaysian financial system. - Assessors recommend BNM use stronger language in its guidelines and recommendations, clearly stating that banks “must” observe the regulatory requirements instead of “shall” observe the regulatory requirements. - This will be addressed by the BNM’s Policy Development Framework which was rolled out for implementation on 17 May 2012. ### 1.2 Independence, accountability and transparency - Transparency in the policy activities of the BNM could be increased. This will be achieved by the adoption of the new Policy Framework. - Governance arrangements (including operational procedures) and the roles/responsibilities of various functions within the BNM have yet to be disclosed to the public for clarity and accountability. - Some legal provisions allow Ministerial interference with BNM’s independence, for example: - Section 70 in BAFIA allows the Minister at any time to direct the Bank to make an examination of the books or other documents, accounts and transactions of any licensed institution if he has certain suspicions with regard to a banking institution. - Section 15 of BAFIA allows companies to use the word “bank”, “banking” (...) or any derivatives of this word with the explicit approval of the Minister. - Section 73 of BAFIA authorizes BNM to direct institutions to take corrective actions, with the concurrence of the Minister remove and/or appoint new officers and directors; the BNM can also recommend to the Minister the revocation of a banking license and approval of transfer of significant ownership. - In practice, assessors have not come across evidence of Government interference which would seriously compromise the independence of the BNM. - Recommendation: remove such provisions and formally ground the independence of the BNM in the law to provide greater certainty. ### 1.3 Legal framework - The BNM will further enhance transparency by wider public consultation on proposed policy measures in accordance with the Policy Development Framework. - For the sake of transparency, the BNM should align the terminology used in its regulations. Circulars, guidelines and best practices are generally considered binding for banks and there may not be any need to distinguish between them. ### 1.4 Legal powers - BNM has the authority to address compliance with laws and safety and soundness concerns through a broad grant of legislative authority. ### 1.5 Legal protection - Staff and persons appointed by the BNM are covered by the statutory immunity clause for any action taken in good faith in pursuance of their duties. - The assumption of the legal cost for defending against lawsuits faced by individual supervisor could be anchored in the law. - Legal coverage should not depend on the person’s employment status at the time of the lawsuit; former employees should be explicitly included. - Consideration should be given to include a provision permitting the BNM to indemnify these persons for their legal costs in the event they are sued. ### 1.6 Cooperation - BNM has a good framework for information sharing with foreign supervisors, but information sharing arrangements could be improved through: - expanding the MOU with the SC to cover more than the investment banks that the SC and BNM co-regulate (i.e. to include asset management companies), and provide for the SC to share information with BNM and for BNM to alert the SC of supervisory developments in the broader banking group that could affect those institutions within the group regulated by the SC. - more formalized information sharing with the SKM. - the BNM entering into MOUs with countries (e.g., Japan) of major new entrants. --- ### 2. Permissible activities - The existing legal and regulatory provisions appropriately define and control the business of banking, including, in particular, deposit-taking. - There are some deposit-taking companies not regulated by BNM. ### 3. Licensing criteria - BNM has a conservative program for the granting of new licenses; except for the explicit inviting of companies to apply for a stipulated set of new licenses (as occurred in 2009), no applications for conventional commercial banks have been considered in forty years. - New legislation (FSA), when enacted, would deal with many limitations in the current approach. - Going forward BNM should address: - Improve transparency in the criteria to be applied, reflecting the infrequency of applications. - Explicitly include assessment of the nature and sufficiency of financial resources and the integrity of the shareholder; focus has been most heavily on the immediate applicant though some review is done of ultimate shareholders. - For foreign banks, include an explicit independent evaluation of the nature and degree of consolidated regulation and supervision applied by the home country supervisor (review is currently focused essentially on available FSAPs). - Make criteria on the suitability of officers (covering more of the senior team than the CEO) and the achievability of business plans more explicit. ### 4. Transfer of significant ownership - Framework for controlling ownership of banks is good but should be refined: - BNM must have capacity to address directly unauthorized acquisitions of shares, or control, of a banking institution, such as requiring divestitures and/or cessation of control. - BNM should have an ability to learn about and deal with changes in the suitability of major shareholders. ### 5. Major acquisitions - Overall approach is effective but improvements include: - Codify criteria more explicitly for major acquisitions. - More explicit authority to take corrective action against non-banking companies that could be acquired if they subsequently prove to be detrimental to the interests of the bank affiliate. ### 6. Capital adequacy - Banks remain well capitalized with system-wide risk-weighted capital ratio and core capital ratios at 14.9 percent and 12.9 percent respectively in 2011. - The scope of application of the capital framework should be widened to include financial holding companies, as outlined in the Basel II scope of application. - Some other, but minor, amendments to fully align the capital framework with the BCBS standards should also be made; assessors believe the impact not to be material, particularly as BNM is stricter than the Basel minimum in other areas. - Basel II consists of three mutually reinforcing pillars; the BNM should therefore also fully implement Pillar 2 as soon as possible. - Having a Pillar 1 and Pillar 3 in place without a fully fledged Pillar 2 process is, strictly speaking, not in line with the sound Basel II implementation. - Moving forward, BNM will have enhanced legal powers under the new financial services legislation to enable the application of capital framework on financial holding companies and is in the process of fully aligning the definition of capital with the implementation of Basel III in Malaysia. ### 7. Risk management process - BNM has a good framework for risk management, but improvement opportunities include: - Increase the number and experience level of risk specialists and ensure they spend more time in the field (currently, other than model validation reviews, such specialists only occasionally do on-site reviews). - Ensure that under the current law prudential risk management policies are explicitly and consistently applied to consolidated FHCs. - Ensure relevant stress tests are applied to consolidated FHCs. - Issue a guideline that specifically requires banks to have a dedicated unit responsible for the risk management process. ### 8. Credit risk - Regulations and supervisory framework cover the overall credit risk process in terms of identification, management and mitigation. ### 9. Problem assets, provisions, and reserves - BNM is in compliant with Principle 9. - BNM issued comprehensive guidelines specifying requirements and regulatory expectations for banking institutions to have an effective system for management of problematic assets and processes to ensure adequacy of provisions and reserves. - If BNM has supervisory concerns over a banking institution’s asset quality and adequacy of provisions, BNM has the power to require banks to increase provisions and reserves and to strengthen banking institutions’ financial strength via higher minimum capital requirements. ### 10. Large exposure limits - Laws, guidelines and supervisory practices are in place to ensure banking institutions’ large exposures are prudently managed. - Enhancements recommended: - A more comprehensive definition of “a group of connected counterparties” including the notion of economic dependency. - A more active use of Pillar 2 to identify and assess credit concentrations. - Alignment of the large exposure limits with international best practice. - BNM is planning to issue a revised guideline for credit concentrations expected to comprehensively address all requirements of Principle 10, including: - Clear and specific risk management expectations on compliance with prudential limits; - Comprehensive guidance on determining interconnectedness of counterparties; - Review of prudential limits; - Guidance on measurement of exposures to properly reflect exposures and ensure consistency. ### 11. Exposure to related parties - Overall approach to connected lending is generally sound, but the exclusion of some significant minority shareholders is a gap that should be addressed. ### 12. Country and transfer risks - Assessors are broadly satisfied that country risk is identified and assessed on a timely basis as part of the supervisory framework. - Need for more explicit legal and regulatory requirements on banks in the area of country and transfer risk. - With growing internationalization of the Malaysian banking system, BNM should expect country and transfer risk be managed as a separate risk category. - BNM is commended for periodic internal reporting on country risk. ### 13. Market risks - Regulatory guidelines are comprehensive and clear with regard to the trading book. - Recommendations: - Train more market risk specialists. - Risk specialists should accompany supervisors on onsite examinations for higher risk institutions. ### 14. Liquidity risk - Regime for bank liquidity risk management is sound, but improvements in application to FHCs are needed: - BNM supervisors need to conduct ongoing reviews of FHC consolidated liquidity. - BNM needs to require that an FHC conducts a consolidated liquidity stress test and table the stress test results at ALCO. ### 15. Operational risk - High level operational risk management requirements are generally in place and adhered to. - Recommendations: - Release more detailed regulation. - Train more supervisors in the operational risk specialist risk stream. - Operational risk specialists should attend on site examinations for higher risk institutions. - BNM is developing an Operational Risk Reporting System to upgrade eFIDS into a full-fledged operational risk event and loss reporting system for increased surveillance capability and information sharing with the industry; this will include revision to the fraud taxonomy to cater for fraud events inherent in investment banking activities. - The system is expected to be operational in the first quarter of 2013. - BNM is drafting the Operational Risk Management Guidelines, which will mandate reporting of all operational risk loss events. ### 16. Interest rate risk in the banking book - Assessors were satisfied with the depth and scope of assessments of IRRBB in supervisory files. - Identified gaps: - There is currently no regulation addressing IRRBB. - Banks indicated supervisory expectations in this area need to be clarified. - More specialists need to be trained in IRRBB and they should attend onsite inspections for higher risk institutions. ### 17. Internal control and audit - BNM has a strong program for ensuring effective governance, staffing, and processes are in place for important control functions of a bank. - BNM focuses heavily and effectively on offering director training programs. ### 18. Abuse of financial services - Assessors recommend AML/CFT Specialists join onsite BNM supervisors for the examination of higher risk banks. ### 19. Supervisory approach - BNM has a well developed framework of supervision with a strong mechanism to ensure effective and consistent analysis of risks, with access to a variety of information sources to keep its assessments current. - Recommendations: - Increase the number and experience level of risk specialists and provide for their spending more time in the field. - Revisit methodology for assigning ratings to banks to provide capacity to factor in more explicitly adverse effects from affiliates. ### 20. Supervisory techniques - BNM has a strong and well structured supervisory program, using appropriate supervisory techniques. ### 21. Supervisory reporting - Assessors recommend BNM require at least annual physical sign off of the prudential returns by the Senior Management of the bank. - BNM is enhancing its on-line statistical reporting (the Integrated Statistical System (ISS) Project) to incorporate a digital signatory requirement by senior management for each submission by the banks. - Assessors recommend BNM discontinue the use of Section 41 (4) of BAFIA, which requires BNM to inform the banking institution in writing that the financial statements and supporting documents are satisfactory in terms of form and content, as it interferes with independence and responsibility of the external auditor and unduly exposes BNM to reputational risk. ### 22. Accounting and disclosure - Market participants reflected a need for clearer communication of auditors’ supervisory expectations to banks. - Assessors recommend BNM more clearly communicate to banks its supervisory expectations where additional procedures may be required on top of normal audit procedures. ### 23. Corrective and remedial powers of supervisors - Recommendations: - Strengthen the legislative basis for the determination of non-viability required to be made for troubled banks. - Determine the resolution approach for FHCs. - Revise MOU with the SC to strengthen requirement on BNM to notify the SC of actions being applied to the bank affiliate of an investment bank or asset management company; the MOU is in the process of being enhanced to provide for greater coordination and cooperation and to provide for examinations by BNM of entities within the financial group licensed by the SC. - Expand the penalties that can be imposed on individuals under Civil Law. ### 24. Consolidated supervision - BNM has been creative and largely effective in implementing a consolidated supervisory framework despite shortcomings in enabling legislation as it applies to FHCs. - BNM recognizes the need to address legislative shortcomings and should: - Move quickly to put in place explicit legislative authorities for oversight and supervision of FHCs. - Whether under current or new legislation, formalize application of prudential regulatory provisions to the consolidated organization. - Strengthen guidance for the assessment of parent companies. - Broaden the MOU with the SC to provide for SC sharing with BNM of information on asset management companies and other affiliates of a bank. - Have the authority to require the closing of foreign offices or to impose conditions on their activities. *Source: IMF staff assessment (content unit _cr1356 - 1. Objectives, independence, powers, transparency, and cooperation).* ### 25. Home-host relationships ### 25. Home-host relationships ### Assessment summary - Grading: C (Compliant) noted at the start of the section for home-host relationships. - BNM has a very well developed program of information exchange and supervisory cooperation with an appropriate set of foreign supervisors and has been active in offering training programs to other supervisors in the region. - Identified gaps: - In licensing foreign bank subsidiaries, there is no formal independent assessment of consolidated home country supervision. - MOUs with countries of major new entrants are recommended. ### Key recommended actions (by Basel Core Principle references) - CP1 (Objectives, Independence, Powers, Transparency and Cooperation) - Use stronger language in guidelines and recommendations, stating that banks “must” observe the regulatory requirements instead of “shall”. - Remove remaining provisions in law requiring consultation with the Minister for supervisory actions and formally ground BNM independence in law. - Expand the MOU with the SC to cover more than the investment banks co‑regulated, to include asset management companies and unit trusts; provide for SC to share information with BNM on entities it supervises within FHCs; and provide for BNM alerting the SC to supervisory developments in the broader banking group. - Enter into more formalized information sharing arrangements with the SKM. - Enter into MOUs with countries (e.g., Japan) of major new entrants. - Expand legal coverage so that former employees are explicitly included. Consider permitting BNM to indemnify these persons for legal costs in the event they are sued. - CP3 (Licensing criteria) - Improve transparency of licensing criteria. - Explicitly include assessment of the nature and sufficiency of financial resources and the integrity of shareholders. - For foreign banks, require an explicit independent evaluation of the nature and degree of consolidated home country supervision, rather than relying essentially on available FSAPs. - Make criteria on suitability of officers (covering more of the senior team than the CEO) and achievability of business plans more explicit. - CP4 (Transfer of Significant Ownership) - Ensure BNM has capacity to address unauthorized acquisitions of shares or control (e.g., require divestitures and/or cessation of control). - Ensure ability to learn about and deal with changes in suitability of major shareholders. - CP5 (Major Acquisitions) - Codify criteria for major acquisitions. - Grant BNM more explicit authority to take corrective action against non‑banking companies that could be acquired and later prove detrimental to bank affiliates. - CP6 (Capital adequacy) - Expand scope of capital framework to include financial holding companies per Basel II scope of application. - Amend to fully align the capital framework with BCBS standards. - Fully implement Pillar 2. - CP7 (Risk Management Process) - Increase number and experience level of risk specialists and ensure more field/on‑site review, especially at large and complex banks. - Ensure prudential risk management policies are explicitly and consistently applied to consolidated FHCs (as provided in draft FSA). - Ensure relevant stress tests apply to consolidated FHCs. - BNM needs to issue guidance on requirement for firms to have separate risk management units. - CP10 (Large Exposures) - Fully use Pillar 2 to identify and assess credit concentrations. - CP11 (Related Parties) - Reassess the 2008 change excluding significant (20%-50%) shareholders (unless they had a director) and their subsidiaries and associated companies from the definition of connected parties. - CP12 (Country Risks) - Introduce more explicit legal and regulatory requirements on banks for country and transfer risk. - CP13 (Market Risk) - Let market risk specialists participate in on‑site exams for higher risk institutions. - CP14 (Liquidity Risk) - Conduct ongoing reviews of FHC consolidated liquidity. - Require FHCs to conduct consolidated liquidity stress tests and table results at ALCO. - CP15 (Operational Risk) - Release more detailed regulation and supervisory expectations on operational risk. - Train more operational risk specialists to accompany supervisors on on‑site exams for higher risk institutions. - CP16 (Interest Rate Risk in the Banking Book) - Release more detailed regulation and supervisory expectations; implement Pillar 2 fully. - CP18 (Abuse of Financial Services) - Let AML/CFT specialists accompany supervisors during on‑site examinations, particularly for high risk institutions. - CP19 (Supervisory Approach) - Increase number and experience level of risk specialists and provide for more time in the field. - Revisit methodology for assigning ratings to more explicitly factor in adverse effects from affiliates. - CP21 (Supervisory Reporting) - Require at least annual physical sign off of prudential returns by Senior Management. - Continue enhancing the Integrated Statistical System (ISS) Project to incorporate a digital signatory requirement. - Discontinue use of Section 41 (4) of BAFIA, which requires BNM to inform banking institutions that financial statements and supporting documents are satisfactory in form and content. - CP22 (Accounting/Disclosure) - Ensure clear communication to banks when additional external audit procedures are required. - CP23 (Supervisors’ Corrective and Remedial Powers) - Strengthen legislative basis for determination of non-viability. - Determine the resolution approach for FHCs. - Revise MOU with the SC to strengthen requirement on BNM to notify the SC of actions applied to bank affiliates of investment banks or asset management companies. - Expand penalties that can be imposed on individuals under Civil Law. - CP24 (Consolidated Supervision) - Put in place explicit legislative authorities for oversight and supervision of FHCs. - Formalize application of prudential regulatory provisions to the consolidated organization. - Strengthen guidance for assessment of parent companies. - Broaden MOU with the SC to provide for sharing of information on asset management companies and other affiliates of a bank. - Grant BNM authority to require closing of foreign offices or to impose conditions on their activities. - CP25 (Home-Host relationships) - In licensing foreign bank subsidiaries, BNM should do a formal independent assessment of consolidated home country supervision. - BNM should enter into MOUs with countries (e.g., Japan) with major new entrants. ### Authorities’ response — summary of commitment and actions - The Malaysian authorities express appreciation for the assessment team and value the candour of interactions. - They consider the banking sector to be supervised under a well developed risk‑focused and comprehensive regime. - Many recommendations correspond with BNM priorities and are being addressed through: - Proposed financial services legislation to clarify licensing standards, suitability requirements for shareholders, powers to address unauthorized acquisition of shares, enforcement powers, and regulation and supervision of financial holding companies. - Revision of regulatory standards to enhance risk management, large exposures and corporate governance. - Issuance of Risk Governance guidelines in the second half of 2012 to set explicit expectations on dedicated risk management units. - Supervisory expectations for Pillar 2 already in place; full supervisory review and examination across all banks beginning 2013. - Organizational development initiatives to increase specialist risk resources and intensify participation of specialist risk units in on‑site examinations. - Clarification that legal protection for past employees applies to both current and former employees where suits relate to acts or statements made in their capacity as an employee and in good faith. - Implementation of a Home-Host Supervisory Cooperation framework to affirm arrangements with foreign supervisors for effective information sharing. - Revision of the Strategic Alliance Agreement with Malaysia Deposit Insurance Corporation to specify triggers for non-viability and enhancement of the MOU with the Securities Commission regarding group assessments. - Better documentation and sharing of bilateral and trilateral engagement practices with external auditors to set clear expectations. - For BCPs assessed as compliant, authorities will seek continuous improvements, particularly in light of the revised BCP to be introduced in the near future. *Source: _cr1356 - 25. Home-host relationships (IMF assessment chapter).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1356.pdf_