IMF tells how Malaysia escaped worst effects of global crisis

By Rupa Damodaran

Published: 2012/09/27

KUALA LUMPUR: Malaysia's low foreign bank presence and the "very" low level of foreign assets in its banks' balance sheets may have helped the country avert the worst effects of the global financial crisis, says the International Monetary Fund (IMF).

Malaysia has low reliance on foreign liabilities compared with its peers, the fund said in is latest Global Financial Stability Report.

The report highlighted Australia, Canada, India and Malaysia as having a relatively low degree of exposure to international banking and avoided the worst effects of the worldwide crisis.

"India and Malaysia appear insulated from foreign banks by almost all indicators when compared with all peer groups except developing Asia and the economies (besides India) that make up the BRIC group (Brazil, Russia and China)."

Besides examining whether the regulatory reforms designed to make the financial system safer are moving in the correct direction, the report looked at banking system "openness" and regulatory frameworks.

It described Australia, Canada, India and Malaysia as less globally integrated, all of which fared relatively well in the financial crisis.
Australia and Canada have limited foreign bank presence and low foreign claims when compared with the euro area and advanced Asia, the IMF said.

However, when the international positions of their banks are used, international integration becomes more evident.

One policy they have in common is the de facto prohibition of mergers among the major domestic banks which may have been a factor limiting their banks' international activities.
Both economies also impose restrictions on shareholder ownership, which limits acquisition of domestic banks by either other domestic banks or foreign ones.

Both India and Malaysia have low foreign bank presence, and banks there have a very low level of foreign assets in their balance sheet.

Although India and Malaysia explicitly restrict entry by foreign banks, both economies have relaxed the policy somewhat.

In Malaysia, branches of foreign banks are prohibited, and approvals for establishing banking subsidiaries are rare with no new entry having been approved until recently.

The number of branches a subsidiary can set up had also been restricted, while the maximum foreign ownership stake in a domestic bank is 30 per cent.
The IMF also said the data suggested that prudential regulatory requirements placed on entry of foreign banks may be less important for financial stability than the funding structure of domestic banks.

All four economies reviewed here follow the pattern of other peer groups on average, especially Australia and Malaysia.

"The positive experience of these four economies could be attributable not only to their regulatory approaches but also to the funding structure of the banks," the fund said.

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