## _cr1496

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---

### Summary
- Monetary conditions in Malaysia remained relatively stable despite the global financial crisis; the Bank Negara Malaysia (BNM) actively ensured financial system resilience and preserved liquidity.
- The banking sector did not experience any major disruption during the crisis.

### Exchange rate and inflation dynamics
- Exchange rate policy and movements:
  - The exchange rate peg was abandoned in 2005.
  - Average yearly appreciation of the ringgit against the U.S. dollar since abandonment: about 3 percent.
  - Progressive appreciation reached an annual rate of 5 percent at the end of 2007.
  - 2009: sharp depreciation amid global risk aversion, moderated by BNM use of foreign reserves to smooth the exchange rate.
- Inflation:
  - Inflation returned to a more stable path at the long term average of about 2 percent.
  - Inflation history: spiked to 8 percent during 2008 and fell to -2 percent in 2009.
  - Volatility in 2008–2009 associated with international commodity price swings and the deflationary effect of the global financial crisis.

### Banking sector funding and deposit structure
- Depositor composition (shares of total deposits):
  - Non-financial enterprises: 37 percent
  - Households: 36 percent
  - Banks and financial institutions (including the BNM): 16 percent
  - Federal and local authorities: 6 percent
  - Other depositors: 5 percent
- Banks’ liabilities and deposit composition:
  - Deposits constitute 72 percent of commercial and Islamic banks’ liabilities.
  - Composition of deposits:
    - Demand, fixed and saving deposits (retail, individuals and SMEs): 68 percent
    - Short-term money market (STMM) deposits (wholesale, large non-financial enterprises): 22 percent
    - Certificates of Deposit: about 5 percent
    - Foreign currency deposits: about 5 percent
- Interbank market and deposit financing:
  - Interbank market predominantly unsecured.
  - Outstanding amount of deposits financed by financial institutions (excluding deposits held by BNM): 14 percent of total deposits.
  - Interbank market used primarily to fulfill reserve requirements; limited role in redistributing term liquidity in context of overall excess liquidity.

### Structural liquidity and reserves
- Excess liquidity and government securities:
  - Excess liquidity in the financial system: 350 billion ringgit.
  - Financial institutions hold about 40 billion in Treasury Bills and other government securities.
  - Combined, excess liquidity and government debt holdings represent 20 percent of total banking assets.
- Drivers of BNM balance sheet growth:
  - Increase in foreign reserves between 2000 and 2008 was a major driver of BNM balance sheet growth.
  - Net foreign exchange purchases no longer driving continued increase in structural Ringgit surplus since 2008 due to symmetric use of reserves to smooth exchange rate fluctuations.

### Wholesale deposit instruments and market developments
- Repo market history:
  - Repos emerged and reached a peak outstanding value of 75 billion ringgit before 2007.
  - Two thirds of repo market attributable to large non-financial corporations seeking short-term investment instruments.
  - 2007 legal strengthening via GMRA led to near disappearance of repo market; wholesale deposit flows shifted into STMM deposits.
- Certificates of Deposit now mainly traded by financial institutions.

### Monetary policy operational framework
- Corridor framework and policy rate:
  - Since 2004, BNM uses a corridor system targeting the overnight interbank interest rate (OPR).
  - Overnight deposit rate and lending rate on standing facilities set at -25 bps and +25 bps around the policy rate.
  - Prior to 2010 the framework functioned as a floor system; effective corridor width was 25bp.
  - In 2010 the overnight OMO auction was moved earlier in the day, effectively widening the corridor to 50bp.
- Market anchoring:
  - Overnight interbank rate well-anchored to the policy rate with average daily deviations of only 2–3 basis points, rarely traded beyond 10 basis points lower.
  - BNM removed stigma to accessing standing facility; actual use of credit standing facility is rare.
- Open Market Operations (OMOs):
  - In current excess liquidity context, only liquidity-draining OMOs employed.
  - Since 2012 issuance of central bank bills has become the major instrument for OMOs.
  - For uncollateralized instruments (deposits) average maturity of OMOs: two weeks.
  - For securities-based instruments average duration: three months.
  - Current frequency of OMOs: daily (both deposit taking and liquidity draining repos).

### Reserve requirements and standing facilities
- Statutory Reserve Requirement:
  - Reserve ratio: 4 percent of total eligible liabilities.
  - Maintenance: two maintenance periods every month.
  - Reserve averaging allowed but balances must be within a 20 percent variation band around the prevailing target level on a daily basis.
  - Balances below the band not permitted; excess above the band’s ceiling not recognized for meeting average reserve requirement.
  - When reserve ratio was reduced to 1 percent (2009–2011), the band became +/-0.2 percent of eligible liabilities rather than +/-0.8 percent, limiting effectiveness of averaging.
- Standing facilities:
  - Deposit facility (liquidity withdrawal): Overnight, bilateral.
  - Lending facility (liquidity injection): Overnight, bilateral.

### Collateral and Islamic operations
- Collateral eligibility for standing facilities and OMOs:
  - Ringgit-denominated: Malaysian government debt or other EMEAP government debt always eligible; non-EMEAP governments or non-residents eligible if minimum international rating of Baa3 or BBB-; domestic private debt eligible if AAA domestic rating as defined by RAM and MARC.
  - Some non-ringgit securities accepted, including EMEAP-member securities.
  - Securities to be issued by the International Islamic Liquidity Management Corporation (IILMC) recently added to eligible list.
  - Reciprocal cross-border collateral MOUs with Thailand and Singapore provide reciprocity on acceptance of non-domestic collateral.
  - Non-ringgit denominated eligible securities are subject to an additional 2 percent margin.
- Monetary operations with Islamic banks:
  - Statutory reserve and outright purchase/sale frameworks identical to conventional banks.
  - Specific Shariah-compliant instruments used: Wadiah Acceptance, Commodity Murabahah, BNM Monetary Islamic Notes, and BNM Notes-Istithmar.
  - BNM manages separately pools of instruments and operations for Islamic and conventional banks; interaction occurs through payment system and conventional banks lending to Islamic banks.

### Supervisory liquidity framework and liquid assets
- Objectives of the liquidity framework (monthly reporting):
  - Assess sufficiency of banks’ liquidity at various maturities (1 week to 1 year for commercial banks; 3 days to 1 year for investment banks).
  - Assess capacity to withstand liquidity withdrawal shocks: banks required to maintain a net liquidity surplus position for next 30 days from reporting date after prescribed deposit outflow shocks.
  - Assess dependence on known volatile funding markets; framework uses contractual and behavioral maturities and discounts assets’ “liquefiable” value for tight market conditions.
- Assessment basis:
  - Banks’ compliance assessed on a ringgit basis; no explicit limits on net foreign exchange liquidity, but separate reporting required for major foreign currencies.
- Liquid assets:
  - Liquid assets (excess reserves and other amounts due from BNM, government securities, cash and other securities) amount to about 22 percent of commercial and Islamic banks’ total assets.
  - Range: maximum 26 percent in 2009 to minimum 22 percent in 2011.

### Emergency Liquidity Assistance (ELA) and resolution powers
- ELA authority and practice:
  - BNM has power to extend ELA.
  - If financial institution is supervised by BNM, BNM can unilaterally activate ELA.
  - If not supervised by BNM, lending operation must be approved by the Financial Stability Executive Committee.
  - ELA can be extended on both collateralized and uncollateralized basis.
  - ELA has not been used since the Asian financial crisis of the 1990s.
  - BNM is reviewing and aiming to strengthen its ELA guidelines.
- Resolution powers in case of a non-viable institution:
  - purchase or subscribe to the shares or other capital instruments issued by such financial institution;
  - provide financing to any other financial institution or a body corporate established by the Bank to purchase the whole or part of the business, assets, liabilities, shares or other capital instruments of an insolvent financial institution;
  - vest in the Bank, another financial institution or any other person the whole or part of the business, assets or liabilities of, or all or any of the shares or other capital instruments issued by an insolvent financial institution.
- Cross-border liquidity arrangements:
  - The BNM can enter into arrangements with other central banks to provide liquidity assistance to subsidiaries or branches outside Malaysia of any financial institution established in Malaysia.

### The challenge of capital flows and use of reserves
- Capital flow drivers and volatility:
  - Changes in global risk sentiments have been major drivers in the pattern of capital flows to Malaysia.
  - Capital flow reversals and capital flow volatility have been important challenges to financial stability in Malaysia.
  - As global risk aversion increased in 2008, private capital flowed out of Malaysia; when global risk aversion improved during 2010, Malaysia experienced a wave of capital inflows.
  - Global risk aversion peaked in 2008, dropped sharply during 2010, and rose again in the second half of 2011.
- Portfolio and bank flows:
  - Portfolio and bank flows are the most volatile components of the financial account.
  - The correlation between the VIX and the standard deviation of portfolio flows and of “other investment flows” is about 65 percent.
- Volatility of equity and bond flows:
  - In late 2011 the estimated standard deviation of equity and bond flows were, respectively, two and nine times larger than their level in early 2004.
  - Volatility of bond flows started increasing only after the 2008 Lehmann event.
  - Equity flows’ volatility began increasing in late 2006.
- Foreign holdings of government debt and domestic buffers:
  - Foreign holdings of government securities increased from 10 to 29 percent between 2007 and 2012.
  - Holdings of the EPF decreased from 50 to 31 percent over the same period.
  - Domestic investor core (unit trust, insurance companies and pension funds) acts as buffer against fluctuations in non-resident demand.
  - During the global financial crisis, there was virtually no increase in interest of government securities despite large non-resident sell-offs.
- Use of official reserves and exchange rate stabilization:
  - The correlation between the outflow of private capital and the stock of official reserves was 95 percent.
  - The draw-down in reserves during 2008 and 2009 amounted to U.S. $ 50 billion (27 percent of total reserves).
  - The current stock of foreign exchange reserves is equivalent to over 8 months of imports.
  - Between June 2008 and June 2009, the dollar value of the reserves dropped by about a quarter.
  - Between June 2008 through June 2009, currency depreciations:
    - ringgit depreciated by 7.3 percent;
    - Korean won depreciated by 18.4 percent;
    - Indian rupee depreciated by 9.8 percent;
    - Thai baht depreciated by 1.5 percent.
  - The year-on-year devaluation peak of the ringgit reached only 15 percent during 2009, compared with devaluation peaks of over 25 percent for the currencies of Korea, Thailand and Indonesia.
- BNM domestic policy actions during June 2008–June 2009:
  - BNM sold about 150 billion ringgit in foreign exchange.
  - To avoid a liquidity squeeze, the BNM compensated its foreign exchange injection with an immediate drop in liquidity absorbing OMOs, such as a 60 billion ringgit reduction in foreign exchange swaps.
  - An additional 60 billion ringgit was released through reduced issuance of BNM paper.
  - The reserve requirement was reduced from 4 to 1 percent.
  - In correspondence of the RM 150 billion liquidity released by the BNM:
    - increase in holdings of government securities and of other domestic securities by domestic banks: 50 billion;
    - increase in holdings by the EPF: 30 billion.

### Balance sheet indicators (end of year, billion RM)
- Liabilities (selected years):
  - TOTAL 2007: 425
  - TOTAL 2008: 345
  - TOTAL 2009: 363
  - TOTAL 2010: 390
  - TOTAL 2011: 473
- Assets (selected years):
  - TOTAL 2007: 425
  - TOTAL 2008: 345
  - TOTAL 2009: 363
  - TOTAL 2010: 390
  - TOTAL 2011: 473

### Evolution of liquidity operations and lending spreads
- Evolution of liquidity operations:
  - BNM reduced the maturity of its liquidity-draining OMOs during the global financial crisis.
  - The BNM released ringgit liquidity by not renewing some maturing liquidity-absorbing OMOs.
- Evolution of lending rates and spreads:
  - The spread between the average lending rate to customers and the policy rate is now about 2 percent.
  - The spread with the lending rate on new residential loans is 1.3 percent.
  - The average lending rate and the lending rate on new loans have responded only partially to the increase in the policy rate started in 2010.

### Conclusions and policy considerations
- Main conclusion:
  - The Malaysian financial system weathered the global financial crisis with no major shortfall of liquidity in either domestic or foreign currency, and no banks went under severe stress.
- Areas warranting attention:
  - The stable liquidity position and low exposure to foreign exchange funding have shielded the system, but the recent global financial crisis was not an extreme test for monetary operations and ELA frameworks in situations of severe stress.
  - The BNM’s strong ability to influence the banking system contributes to stability, but as the financial market develops this should be complemented by fostering a more self-reliant banking and financial system. Possible considerations include:
    - widening the oscillation band for the purpose of statutory reserves averaging;
    - changing the maintenance period from bi-monthly to two weeks.
  - Lending rates at historical lows (spread of 2 percent between average lending and policy) may lead to unsound lending practices and asset bubbles; authorities should remain vigilant and investigate drivers of reductions in spreads.

*Source: IMF staff report excerpt — “Inflation and the Exchange Rate” (BNM/financial sector operational context).*

### 1. Inflation and the Exchange Rate .....................................................................................

### 1. Inflation and the Exchange Rate

### Summary
- Monetary conditions in Malaysia remained relatively stable despite the global financial crisis; the Bank Negara Malaysia (BNM) actively ensured financial system resilience and preserved liquidity.
- The banking sector did not experience any major disruption during the crisis.

### Exchange rate and inflation dynamics
- Exchange rate policy:
  - The exchange rate peg was abandoned in 2005.
  - Average yearly appreciation of the ringgit against the U.S. dollar since abandonment: about 3 percent.
  - Progressive appreciation reached an annual rate of 5 percent at the end of 2007.
  - 2009: sharp depreciation amid global risk aversion, moderated by BNM use of foreign reserves to smooth the exchange rate.
- Inflation:
  - Inflation returned to a more stable path at the long term average of about 2 percent.
  - Inflation history: spiked to 8 percent during 2008 and fell to -2 percent in 2009.
  - Volatility in 2008–2009 associated with international commodity price swings and the deflationary effect of the global financial crisis.

### Banking sector funding and deposit structure
- Depositor composition (shares of total deposits):
  - Non-financial enterprises: 37 percent
  - Households: 36 percent
  - Banks and financial institutions (including the BNM): 16 percent
  - Federal and local authorities: 6 percent
  - Other depositors: 5 percent
- Banks’ liabilities:
  - Deposits constitute 72 percent of commercial and Islamic banks’ liabilities.
  - Composition of deposits:
    - Demand, fixed and saving deposits (retail, individuals and SMEs): 68 percent
    - Short-term money market (STMM) deposits (wholesale, large non-financial enterprises): 22 percent
    - Certificates of Deposit: about 5 percent
    - Foreign currency deposits: about 5 percent
- Interbank market and deposit financing:
  - Interbank market predominantly unsecured.
  - Outstanding amount of deposits financed by financial institutions (excluding deposits held by BNM): 14 percent of total deposits.
  - Interbank market used primarily to fulfill reserve requirements; limited role in redistributing term liquidity in context of overall excess liquidity.

### Structural liquidity and reserves
- Excess liquidity and government securities:
  - Excess liquidity in the financial system: 350 billion ringgit.
  - Financial institutions hold about 40 billion in Treasury Bills and other government securities.
  - Combined, excess liquidity and government debt holdings represent 20 percent of total banking assets.
- Drivers of BNM balance sheet growth:
  - Increase in foreign reserves between 2000 and 2008 was a major driver of BNM balance sheet growth.
  - Net foreign exchange purchases no longer driving continued increase in structural Ringgit surplus since 2008 due to symmetric use of reserves to smooth exchange rate fluctuations.

### Wholesale deposit instruments and market developments
- Repo market history:
  - Repos emerged and reached a peak outstanding value of 75 billion ringgit before 2007.
  - Two thirds of repo market attributable to large non-financial corporations seeking short-term investment instruments.
  - 2007 legal strengthening via GMRA led to near disappearance of repo market; wholesale deposit flows shifted into STMM deposits.
- Certificates of Deposit now mainly traded by financial institutions.

### Monetary policy operational framework
- Corridor framework and policy rate:
  - Since 2004, BNM uses a corridor system targeting the overnight interbank interest rate (OPR).
  - Overnight deposit rate and lending rate on standing facilities set at -25 bps and +25 bps around the policy rate.
  - Prior to 2010 the framework functioned as a floor system; effective corridor width was 25bp.
  - In 2010 the overnight OMO auction was moved earlier in the day, effectively widening the corridor to 50bp.
- Market anchoring:
  - Overnight interbank rate well-anchored to the policy rate with average daily deviations of only 2–3 basis points, rarely traded beyond 10 basis points lower.
  - BNM removed stigma to accessing standing facility; actual use of credit standing facility is rare.
- Open Market Operations (OMOs):
  - In current excess liquidity context, only liquidity-draining OMOs employed.
  - Since 2012 issuance of central bank bills has become the major instrument for OMOs.
  - For uncollateralized instruments (deposits) average maturity of OMOs: two weeks.
  - For securities-based instruments average duration: three months.
  - Current frequency of OMOs: daily (both deposit taking and liquidity draining repos).

### Reserve requirements and standing facilities
- Statutory Reserve Requirement:
  - Reserve ratio: 4 percent of total eligible liabilities.
  - Maintenance: two maintenance periods every month.
  - Reserve averaging allowed but balances must be within a 20 percent variation band around the prevailing target level on a daily basis.
  - Balances below the band not permitted; excess above the band’s ceiling not recognized for meeting average reserve requirement.
  - When reserve ratio was reduced to 1 percent (2009–2011), the band became +/-0.2 percent of eligible liabilities rather than +/-0.8 percent, limiting effectiveness of averaging.
- Standing facilities:
  - Deposit facility (liquidity withdrawal): Overnight, bilateral.
  - Lending facility (liquidity injection): Overnight, bilateral.

### Collateral and Islamic operations
- Collateral eligibility for standing facilities and OMOs:
  - Ringgit-denominated: Malaysian government debt or other EMEAP government debt always eligible; non-EMEAP governments or non-residents eligible if minimum international rating of Baa3 or BBB-; domestic private debt eligible if AAA domestic rating as defined by RAM and MARC.
  - Some non-ringgit securities accepted, including EMEAP-member securities.
  - Securities to be issued by the International Islamic Liquidity Management Corporation (IILMC) recently added to eligible list.
  - Reciprocal cross-border collateral MOUs with Thailand and Singapore provide reciprocity on acceptance of non-domestic collateral.
  - Non-ringgit denominated eligible securities are subject to an additional 2 percent margin.
- Monetary operations with Islamic banks:
  - Statutory reserve and outright purchase/sale frameworks identical to conventional banks.
  - Specific Shariah-compliant instruments used: Wadiah Acceptance, Commodity Murabahah, BNM Monetary Islamic Notes, and BNM Notes-Istithmar.
  - BNM manages separately pools of instruments and operations for Islamic and conventional banks; interaction occurs through payment system and conventional banks lending to Islamic banks.

### Supervisory liquidity framework and liquid assets
- Liquidity framework objectives (monthly reporting):
  - Assess sufficiency of banks’ liquidity at various maturities (1 week to 1 year for commercial banks; 3 days to 1 year for investment banks).
  - Assess capacity to withstand liquidity withdrawal shocks: banks required to maintain a net liquidity surplus position for next 30 days from reporting date after prescribed deposit outflow shocks.
  - Assess dependence on known volatile funding markets; framework uses contractual and behavioral maturities and discounts assets’ “liquefiable” value for tight market conditions.
- Assessment basis:
  - Banks’ compliance assessed on a ringgit basis; no explicit limits on net foreign exchange liquidity, but separate reporting required for major foreign currencies.
- Liquid assets:
  - Liquid assets (excess reserves and other amounts due from BNM, government securities, cash and other securities) amount to about 22 percent of commercial and Islamic banks’ total assets.
  - Range: maximum 26 percent in 2009 to minimum 22 percent in 2011.

### Emergency Lending Assistance (ELA)
- BNM has power to extend ELA.
  - If financial institution is supervised by BNM, BNM can unilaterally activate ELA.
  - If not supervised by BNM, lending operation must be approved by the Financial Stability Executive Committee.
  - ELA can be extended on both collateralized and uncollateralized basis.
  - ELA has not been used since the Asian financial crisis of the 1990s.
  - BNM is reviewing and aiming to strengthen its ELA guidelines.

*Source: IMF staff report excerpt — “Inflation and the Exchange Rate” (BNM/financial sector operational context).*

### 19. The tools for extending ELA are quite broad, and potentially include

### 19. The tools for extending ELA are quite broad, and potentially include

### Emergency Liquidity Assistance and Resolution Powers
- The BNM can enter into arrangements with other central banks to provide liquidity assistance to subsidiaries or branches outside Malaysia of any financial institution established in Malaysia.
- In the case of an institution deemed non-viable or likely to become so, the BNM may, for resolution purposes:
  - purchase or subscribe to the shares or other capital instruments issued by such financial institution;
  - provide financing to any other financial institution or a body corporate established by the Bank to purchase the whole or part of the business, assets, liabilities, shares or other capital instruments of an insolvent financial institution;
  - vest in the Bank, another financial institution or any other person the whole or part of the business, assets or liabilities of, or all or any of the shares or other capital instruments issued by an insolvent financial institution.

### The Challenge of Capital Flows
- Changes in global risk sentiments have been major drivers in the pattern of capital flows to Malaysia.
- Capital flow reversals and capital flow volatility have been important challenges to financial stability in Malaysia.
- Examples of global risk sentiment effects:
  - As global risk aversion increased in 2008, private capital flowed out of Malaysia.
  - When global risk aversion improved during 2010, Malaysia experienced a wave of capital inflows.
  - Global risk aversion peaked in 2008, dropped sharply during 2010, and rose again in the second half of 2011.

### Portfolio and Bank Flows; Correlations with Global Risk Measures
- Portfolio and bank flows are the most volatile components of the financial account.
- The correlation between the VIX and the standard deviation of portfolio flows and of “other investment flows” is about 65 percent.

### Volatility of Equity and Bond Flows
- In late 2011 the estimated standard deviation of equity and bond flows were, respectively, two and nine times larger than their level in early 2004.
- Volatility of bond flows started increasing only after the 2008 Lehmann event.
- Equity flows’ volatility began increasing in late 2006.

### Foreign Holdings of Government Debt and Domestic Buffers
- Foreign holdings of government securities increased from 10 to 29 percent between 2007 and 2012.
- Holdings of the EPF decreased from 50 to 31 percent over the same period.
- Domestic investor core (unit trust, insurance companies and pension funds) acts as buffer against fluctuations in non-resident demand.
- During the global financial crisis, there was virtually no increase in interest of government securities despite large non-resident sell-offs.

### Use of Official Reserves and Exchange Rate Stabilization
- The correlation between the outflow of private capital and the stock of official reserves was 95 percent.
- The draw-down in reserves during 2008 and 2009 amounted to U.S. $ 50 billion (27 percent of total reserves).
- The current stock of foreign exchange reserves is equivalent to over 8 months of imports.
- Between June 2008 and June 2009, the dollar value of the reserves dropped by about a quarter.
- Over the period June 2008 through June 2009, currency depreciations:
  - ringgit depreciated by 7.3 percent;
  - Korean won depreciated by 18.4 percent;
  - Indian rupee depreciated by 9.8 percent;
  - Thai baht depreciated by 1.5 percent.
- The year-on-year devaluation peak of the ringgit reached only 15 percent during 2009, compared with devaluation peaks of over 25 percent for the currencies of Korea, Thailand and Indonesia.

### Domestic Monetary Policy in Tranquil and Crisis Times
- Between June 2008 and June 2009, the BNM sold about 150 billion ringgit in foreign exchange.
- To avoid a liquidity squeeze, the BNM compensated its foreign exchange injection with an immediate drop in liquidity absorbing OMOs, such as a 60 billion ringgit reduction in foreign exchange swaps.
- An additional 60 billion ringgit was released through reduced issuance of BNM paper.
- The reserve requirement was reduced from 4 to 1 percent.
- In correspondence of the RM 150 billion liquidity released by the BNM:
  - increase in holdings of government securities and of other domestic securities by domestic banks: 50 billion;
  - increase in holdings by the EPF: 30 billion.

### Balance Sheet Indicators (End of year figures, billion RM)
- Liabilities (selected years):
  - TOTAL 2007: 425
  - TOTAL 2008: 345
  - TOTAL 2009: 363
  - TOTAL 2010: 390
  - TOTAL 2011: 473
- Assets (selected years):
  - TOTAL 2007: 425
  - TOTAL 2008: 345
  - TOTAL 2009: 363
  - TOTAL 2010: 390
  - TOTAL 2011: 473

### Evolution of Liquidity Operations
- BNM reduced the maturity of its liquidity-draining OMOs during the global financial crisis.
- The BNM released ringgit liquidity by not renewing some maturing liquidity-absorbing OMOs.

### Evolution of Lending Rates and Spreads
- The spread between the average lending rate to customers and the policy rate is now about 2 percent.
- The spread with the lending rate on new residential loans is 1.3 percent.
- The average lending rate and the lending rate on new loans have responded only partially to the increase in the policy rate started in 2010.

### Conclusions and Policy Considerations
- The Malaysian financial system weathered the global financial crisis with no major shortfall of liquidity in either domestic or foreign currency, and no banks went under severe stress.
- Three aspects warrant attention:
  - The stable liquidity position and low exposure to foreign exchange funding have shielded the system, but the recent global financial crisis was not an extreme test for monetary operations and ELA frameworks in situations of severe stress.
  - The BNM’s strong ability to influence the banking system contributes to stability, but as the financial market develops this should be complemented by fostering a more self-reliant banking and financial system. Possible considerations include:
    - widening the oscillation band for the purpose of statutory reserves averaging;
    - changing the maintenance period from bi-monthly to two weeks.
  - Lending rates at historical lows (spread of 2 percent between average lending and policy) may lead to unsound lending practices and asset bubbles; authorities should remain vigilant and investigate drivers of reductions in spreads.

*Source: _cr1496 - 19. The tools for extending ELA are quite broad, and potentially include*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1496.pdf_