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MANAGEMENT
CHAPTER 2
BANK REGULATIONS
AND COMPLIANCE
Bank Characteristics
Highly leveraged
Debt account for 90% of bank funding
Main source of funds - deposits
Opaque
Bank Functions
Objectives of Banks
Regulation
1.
2.
3.
Prevention of Economic
Disruption
Cont
Bank debtors
Creditors depositors and shareholders
The largest number of creditors are
small depositors
Not capable of evaluating the financial
condition of banks or monitoring their
actions
Thus, it is in the public interest to
protect small depositors by having
their deposits insured by a government
agency
8
Cont
The
Social Goals
Cont
Borrowers
Cont
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1. Chartering
2. Regulate
3. Supervise
In 1997, there was a shift towards a riskbased supervision whereby more focus were
given to areas of high risk which threatened
the soundness of the banking institutions.
The risk-based supervision places emphasis
on two main elements;
a dynamic off-site surveillance for early
detection of problems in the banking
institutions
an effective planning to customize onsite examinations to suit the size,
activities and risk profiles of the
banking institutions (Bank Negara
Malaysia, 1999).
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4. Examination
Cont
Capital Adequacy
Asset Quality
Management
Cont
Earnings
Liquidity
20
Cont
2.
21
FSA 2013
Cont..
25
Cont
Cont
28
Cont
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Ultimately:
Cont..
Cont..
Requirements or restrictions in
repealed laws which remain applicable:
33
Cont
Cont
Cont
36
Cont
37
38
Cont
Cont
41
Cont
42
Instruments of Monetary
Control
1.
Cont
Cont
2.
Cont
SRR continues to remain an effective
monetary policy instrument in Malaysia
This is attributed to several factors:
Disintermediation of funds away from the
banking system is not pervasive
Total deposits placed with the banking
system accounted for about 87% of
deposits placed with the financial system
High share of bank loans (82%) of the
total financial system
SRR is imposed solely for monetary
purposes, and not for income to either the
Government or BNM
46
Cont
3.
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4.
Limitations of
Regulations
Moral hazard
the safety net arrangements provided by the
central banks creates moral hazard behavior
among banking institutions
The safety net arrangements such as deposit
insurance systems and lender-of-last-resort
facilities which was intended to protect the
interests of banks customers, banking
system and the economy as a whole cause
the banks customers to take for granted on
the safety of their money in the banks.
the safety net arrangements induce
opportunistic and self-serving behavior
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Agency capture
Costs of compliance
as banking institutions have to comply with
all rules and regulations imposed on them, it
would create an additional cost for the
banks.
however, banks would not bear the cost of
compliance alone but would pass on to bank
customers which would result in higher costs
of banking services and possibly less
intermediation business.
the costs of compliance to the regulations
may act as a barrier to entry to the market
and this may create a monopoly position in
the banking industry.
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