BNM Monetary InstrumentsSRRMinimum liquidity requirementOpen market operationInterestLending policyMoral suasionDiscount house
SRR
Variation or adjustment will immediately affect the deposits and loans level
If increases SRR – restrictive, would reduce deposits and loans level
If decreases SRR – expansionary, would increase deposits and loans level
First introduced in Jan. 1959 and since then the ratio has ranged from 2% to 14%.
Minimum liquidity requirement
Effective from Feb. 1987, commercial banks are required to keep 17% of its eligible liabilities in liquid assets and 8% in primary liquid assets
Primary liquid assets includes RM notes, coins, balances with BNM, overnight money, money at call with discount houses, Malaysian Govt securities and Cagamas bonds (< 1 year maturity)
Liquidity ratios work in the same way as the SRR. The only difference is , unlike required bank reserves which are immobilised in BNM , statutory liquid assets do yield a return
Open market operation
Involves buying and selling of Govt sec by BNM in open organised markets to control the flow of bank credit and banks reserves
If BNM buys Govt sec – expansionary policy – pumping money into the banking system and vise versa
Interest rate regulation
BNM can influence the availability and cost of bank credits as well as the interest charged for bank deposits
Variations in bank interest rate will induce or discourage suppliers of fund (depositors) and the seekers of these funds (borrowers)
Prior 1978 use ‘administered’ interest rate regime to:
i. Influence level of savings Ii. Influence maturity structure of savings Iii.promote growth of local banks by limiting rate
competition with foreign banks Iv. Protect balance of payments – capital inflows
and outflows depends on return on capital invested
Interest rate regulation In Oct 1978, BNM introduced a new interest rate
regime to foster greater competitionCommercial banks were allowed to determine
their own interest rates for deposits as well as prime lending rate
Recent years, use Base lending rate (BLR):BLR is the lending rate applicable to the bank
best customers –excellent credit standing. Other customers will have to borrow at a margin above BLR
BLR introduced on Nov 1983 is based on:a bank’s cost of funds ( after provisions for the
cost of holding cash, SRR and liquid asset requirements),
Overhead costs, plus profit margin
Interest rate regulationBLR= Bank’s cost of fund +overheads +
Profit MarginProfit margin is based on:Customer’s credit standingNature of projectRepayment schedulecollateral
Moral suasion
Refers to a traditional BNM technique of informally inducing a positive voluntary response from the financial system to its policy initiatives
Particularly to change attitudes and approaches in banking techniques
Discount house
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