Banking Regulations and BNM Responsibilities

Laws and Regulations Governing Bank Credit in Malaysia

• Laws and regulations govern bank credit in Malaysia
• Bank Negara Malaysia (BNM) is the principle regulatory agency enforcing the Financial Services Act (FSA) 2013.
• BNM issues guidelines to banks and other financial institutions covered by the FSA 2013
• BNM fosters the safety and soundness of financial institutions
• BNM ensures proper functioning of the money market and foreign exchange market
• BNM upholds the reliability and efficiency of the payment system
• BNM ensures responsible and professional conduct of financial institutions
• BNM protects the interests of consumers of financial services and products.
• BNM sets restrictions on the amount of exposure a licensed institution can have to a single counterparty and connected persons.
• BNM aims to protect the stability of the banking system through various regulations

1.2.1 Roles and Responsibilities of BNM

• Bank Negara Malaysia (BNM) is the principle regulatory agency for enforcing the FSA 2013.
• BNM provides guidelines to all banks and financial institutions.
• BNM fosters the safety and soundness of financial institutions.
• BNM ensures orderly functioning of the money market and foreign exchange market
• BNM maintains a reliable and efficient payment system and
• BNM ensures responsible and professional conduct of financial institutions.
• BNM protects the interests of consumers of financial products and services

1.2.2 Financial Services Act (FSA) 2013

• The principle objective of FSA 2013 is to promote financial stability.
• The FSA 2013 regulates exposure to Single Counterparties.
• The FSA 2013 regulates the taking of shares of licensed persons as security.
• The FSA 2013 regulates banking secrecy
• Section 50(1) FSA: A banking institution's Single Counterparty Exposure Limit (SCEL) shall be 25% of the banking institution's Total Capital.
• A large exposure to a single counterparty is greater than or equal to 10% of the Banking Institution's Total Capital.
• SCEL aims to mitigate concentration risk for financial institutions.
• Loss from concentration risk threatens the financial condition of institutions.
• The FSA sets limits on the acquisition of interests in shares from licensed persons.
• The FSA prohibits a person from exercising control over a licensed person without approval from the appropriate authorities.

1.2.3 Regulations, Guidelines, Notes, and Directions Issued by BNM

• BNM provides regulations, guidelines, notices, and directions for credit transactions and exposures with connected parties.
• Credit Transactions and Exposures with Connected Parties are governed by Section 47 of the FSA 2013
• Related parties encompass directors and relatives of the licensed institution, controlling/influential shareholders and their relatives, executive officers, and relatives and entities under control etc.
• Connected parties should not exceed a total credit exposure of 100% of Total Capital or 25% of Total Outstanding Credit Exposure.
• Credit Transactions must be at arm's length, with credit-worthiness, terms and conditions consistent with other transaction conditions
• Credit Transactions must be approved by the Board of Directors.

1.2.3 Classification and Impairment Provision for Loans/Financing

• Financial institutions must classify a loan as impaired if the principal and interest are more than three months or 90 days in arrears
• Revolving facilities must fall in excess of the approved limit
• Weaknesses according to the institution's credit risk grading framework must be present
• Impaired loans can only be reclassified as non-impaired when they continuously perform according to the restructured terms
• For loans rescheduled or restructured, banks and customers must agree on new conditions

1.2.3 Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT)

• BNM is responsible for financial Intelligence and Enforcement in relation to AML/CFT
• Increases vigilance regarding illegally sourced money transfers.
• Includes illegally gained money from drug operations, tax evasion, human trafficking, or terrorism
• Financial Institutions are required to identify new customers, report suspicious transactions, keep records for future inquiries, and train employees on AML.

1.3.1 The roles of ethics and governance in bank credit decisions; compliance to laws

• Prudential matters for bank credit decisions (by BNM).
• Standards on prudential matters, institution, director and officer to comply with standards.
• Functions and duties of board of directors and duties of directors.
• Specific roles of Board and senior management in governance

1.3.1 Mitigating misbehaviors in credit decisions

• Conduct in credit decisions includes mis-selling, violations, and manipulation
• Issues of misconduct risk in recent years are a serious issue.
• Risk of losses due to negligence and cautious management practices
• Preventing a future crisis calls for a renewed sense of ethical importance.
• Moral deficiencies in the financial sector may include unrealistic and risky mortgage loans to poor residents, packaging for misleading risk presentation, and unreliable specialist ratings.

1.3.1 Strengthening Conduct and Culture in the Financial Industry

• Addressing misconduct requires a multifaceted approach
• Ethical and professional behaviours are crucial in the financial sector.

1.3.2 Corporate Governance for Financial Institutions

• Corporate governance guidelines provide broader principles and minimum standards
• The guidelines ensure sound corporate governance for Licensed Institutions and Bank Holding Companies.
• Sound corporate governance standards, practices, risk-taking activities, and business prudence ensure appropriate balancing for maximizing shareholder returns and protecting interests.
• Regular, effective, and fair communication with stakeholders
• Board members are accountable for disclosed material.
• Procedures for determining compensation
• Conflict-of-interest situations should be avoided
• Robust auditing requirements are vital
• Maintain good professional relationships between all involved
• Ensuring that there is complete and timely information readily available to the board
• Assessment of board and director effectiveness

1.3.3 Code of Ethics for Financial Institutions

• The Financial Services Professional Board (FSPB) launched the Code of Ethics

• Upholding and abiding by ethical standards is vital to achieving a high standard of professionalism and ethics across the financial services industry.

• Key principles of the code of ethics include competency, integrity, fairness, and confidentiality, and objectivity.