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1.

0 Bank capital requirement

Banks and investment banks must maintain a set minimum amount of capital funds at all
times. Minimum capital funds requirements are introduced as an important entry and
ongoing requirements to ensure a banking institution maintains a minimum size of capital
to operate and perform its intermediation function effectively, said Bank Negara
Malaysia (BNM) in its policy document on capital funds.

The Capital Adequacy Framework sets out the approach for computing regulatory capital
adequacy ratios, as well as the levels of those ratios at which a financial institution is
required to operate. The framework has been developed based on internationally-agreed
standards on capital adequacy promulgated by the Basel Committee on Banking
Supervision (BCBS)

Regulatory capital requirements seek to ensure that risk exposures of a financial


institution are backed by an adequate amount of high quality capital which absorbs losses
on a going concern basis. This ensures the continuing ability of a financial institution to
meet its obligations as they fall due while also maintaining the confidence of customers,
depositors, creditors and other stakeholders in their dealings with the institution. Capital
requirements also seek to further protect depositors and other senior creditors in a gone
concern situation by promoting an additional cushion of assets that may be used to meet
claims in liquidation.

Under the new requirements, a licensed locally incorporated foreign bank is required to
have a minimum of RM300 million in capital funds, which is the sum of paid-up ordinary
shares, preference shares, irredeemable convertible unsecured loan stock, retained
earnings and other disclosed reserves. Meanwhile, a licensed foreign bank which is not
locally incorporated must have at least RM2 billion in capital funds, either by the bank
itself or in aggregation with the capital funds of its related corporation that is a licensed
investment bank.
For licensed investment banks that are not related to any licensed bank, a minimum of
RM500 million is required in capital funds. In addition to the minimum capital funds
requirement, a banking institution must also comply with the minimum regulatory capital
requirement as set out in the Capital Adequacy Framework (Capital Components) and
Capital Adequacy Framework (Basel II Risk-Weighted Assets), said the central bank.

BNM said it expects banking institutions to exercise prudence before submitting an


application to distribute the reserves as dividends, adding that it will consider the
institutions ability to comply with the fully phased-in capital conservation buffer
requirement and any other buffers that it may specify.

2.0 Constitute bank capital

Capital Adequacy Framework

The Basel Accord issued by the Basel Committee on Banking Supervision (BCBS) and
subsequently the Basel II framework, which includes the Pillar 2 and Pillar 3 components
were adopted by BNM in phases though the issuance of various guidelines. Malaysia,
although not a member of BCBS or G20, continues to support the initiatives of BCBS to
promote a more resilient banking system with higher quality capital through the
introduction of Basel III. The increased presence of Malaysian banks in the global
market are compelling reasons for Malaysia to comply with international standards as the
country continues to develop the financial system and its economy. BNM has committed
to implementing the reform measures in respect of capital requirements proposed under
Basel III by bringing the existing capital and liquidity standards for banks in Malaysia in
line with the agreed timeline by BCBS, which provides for a gradual phase-in of the
standards beginning 2013 until 2019.

BNM revised and introduced the Capital Adequacy Framework (Capital


Components) and Capital Adequacy Framework for Islamic Banks (Capital
Components) which are to be read together with the Capital Adequacy Framework (Basel
II Risk Weighted Assets) and Capital Adequacy Framework for Islamic Banks (Risk
Weighted Assets) in line with the agreed standard on the minimum capital adequacy ratios
promulgated by BCBS. Under these requirements, all banks are required to hold and
maintain at all times the minimum Common Equity Tier 1 Capital Ratio of 4.5%,
minimum Tier 1 Capital Ratio of 6% and the minimum Total Capital Ratio of 8%. As at
February 2017, the banking system in Malaysia maintained strong capitalisation at
13.1%, 13.9% and 16.9% respectively.

The transitional arrangements for banks in respect of the capital conservation buffer will
be phased-in as follows:

Calendar Year Capital Conservation Buffer

2016 0.625%

2017 1.25%

2018 1.875%

2019 onwards 2.5%

The Capital Adequacy Framework (Basel II Risk Weighted Assets) and Capital
Adequacy Framework for Islamic Banks (Risk Weighted Assets) specifies the approach
for quantifying the Risk-Weighted Assets for credit risk, market risk and operational risk,
as follows:

Risk Type Available Approach

Standardised Approach
1. Credit
Internal Ratings Based Approach

Standardised Approach
2. Market
Internal Models Approach

3. Operational Basic Indicator Approach


Risk Type Available Approach

Standardised Approach

Alternative Standardised Approach

The Risk Weighted Capital Adequacy Framework (Basel II) Disclosure Requirements
(Pillar 3) and the Capital Adequacy Framework for Islamic Banks (CAFIB) Disclosure
Requirements (Pillar 3) issued by BNM also seek to improve transparency in the
financial markets which will enhance market discipline, market efficiency and
confidence. In this respect, the Pillar 3 disclosure requirements set the minimum
requirements for market disclosures of information on the risk management practices and
capital adequacy of banks to enable market participants to obtain key information on risk
exposures, risk assessment processes, the capital structure and capital adequacy of the
banks.

BNM, under its Capital Funds framework, has put in place minimum capital funds
requirements that are required to be maintained by commercial banks and investment
banks, such as RM300 million for a locally incorporated foreign bank, RM2 billion for a
bank which is not a locally incorporated foreign bank by itself or in aggregation with its
related corporation that is a licensed investment bank, and RM500 million for an
investment bank which is not related to any commercial bank.

Liquidity Framework

Under the Statutory Reserve Requirement (SRR), banks in Malaysia are required to
maintain balances in their statutory reserve accounts equivalent to a certain proportion of
their eligible liabilities, this proportion being the SRR rate. SRR is available to BNM in
order to manage liquidity and the credit creation in the banking system. When BNM
perceives the excess or lack of liquidity in the banking system to be large and long-term
in nature, this monetary policy instrument will be used to withdraw or inject liquidity.
The SRR rate is set at 3.5% of total eligible liabilities, effective from 1 February 2016.
BNM implements and adopts the Basel III Liquidity Coverage Ratio in Malaysia through
the issuance of the Liquidity Coverage Ratio (LCR) framework as the standard for
ensuring that banks hold sufficient high-quality liquid assets to withstand an acute
liquidity stress over a 30-day horizon at both entity and consolidated level.

The LCR framework prescribes the following minimum LCR levels that must be
maintained by a bank at all times:

With effect 1 June1 January1 January1 January1 January 2019 and


from 2015 2016 2017 2018 thereafter

Minimum
60% 70% 80% 90% 100%
LCR

According to RAM Rating Services Bhd, since the implementation of the Basel III LCR
framework, the Malaysian banking systems LCR had averaged at 125% and stood at
128% as at the end of January 2017, exceeding the minimum requirement of 100%.

The liquidity parameters under the LCR framework set out for the computation of the
LCR assume a scenario which entails a combined institution-specific and market-wide
shock that would result in the run-off of a proportion of retail deposits and investment
accounts, a partial loss of unsecured wholesale funding capacity and/or secured short-
term financing with certain collateral and counterparties, increases in market volatilities
and others.

A bank must comply with any requirement to hold additional liquidity buffers as may be
specified by BNM after having regard to the liquidity risk profile of the bank and the
adequacy of the risk mitigation measures put in place by the bank. Each bank is required
to submit the requisite liquidity reports based on end-of-month positions according to the
specified parameters in the LCR framework.

BNM issued a Stress Testing-Concept Paper policy document which comes into effect on
1 June 2017. This document sets out BNMs supervisory expectations and requirements
with regards to the governance, coverage of risks, design and implementation of banks
stress testing programme as well as the reporting requirements on stress testing results to
BNM. Stress testing forms an integral part of a banks internal capital adequacy
assessment and risk management process which would cover major risk categories such
as credit risk, market risk and liquidity risk.

k Negara Malaysia (the Central Bank of Malaysia), is a statutory body which started
operations on 26 January 1959. Bank Negara Malaysia is governed by the Central
Bank of Malaysia Act 2009 . The role of Bank Negara Malaysia is to promote
monetary and financial stability. This is aimed at providing a conducive environment
for the sustainable growth of the Malaysian economy.
Bank Negara Malaysias monetary policy stance is to maintain price stability while
remaining supportive of growth. Bank Negara Malaysia is also responsible for
financial system stability. This is achieved by developing a sound, resilient,
progressive and diversified financial sector which serves to support the sectors of the
real economy. It also plays an important function in implementing initiatives to
deepen and strengthen the financial markets, including the foreign exchange market.

Bank Negara Malaysia has played a significant developmental role in developing the
financial system infrastructure in advancing the financial inclusion agenda. This is to
ensure all economic sectors and segments of the society have access to financial
services. In addition, Bank Negara Malaysia also oversees the nations payment
systems infrastructure which emphasize on the efficiency and security of the financial
systems.

As the banker and adviser to the Government, Bank Negara Malaysia provides advice
on macroeconomic policies and the management of public debt. Bank Negara
Malaysia is also the sole authority in issuing the national currency and in managing
the country's international reserves.

Roles and Functions


Among the major role of the Bank is the prudent conduct of monetary policy, which
has seen generally low and stable inflation for decades and thereby, preserving the
purchasing power of the ringgit. The Bank is also responsible for bringing about
financial system stability and fostering a sound and progressive financial sector. There
is now in place a well diversified, comprehensive and resilient financial sector, that is
able to meet the increasingly sophisticated needs of consumers and businesses, and
which has become a growth driver in the economy.

The Bank also plays a significant developmental role, including development of


financial system infrastructure with major emphasis placed on building the nation's
efficient and secured payment systems as well as the necessary institutions (including
Securities Commission, KLSE, now known as Bursa Malaysia and Credit Guarantee
Corporation) which are important towards building a comprehensive, robust and
resilient financial system.

The Bank actively promotes financial inclusion, which has led to improved access to
financial services for all economic sectors and segments of society, thereby
supporting balanced economic growth.

Other important roles of the Bank are being a banker and adviser to the Government,
playing an active role in advising on macroeconomic policies and managing the
public debt. It is also the sole authority in issuing currency as well as managing the
country's international reserves.

The roles of the Bank are supported by 39 departments/units covering the following
seven functional areas.

Greater engagement with the public

As part of the Bank's emphasis on efficient work culture, effective and efficient
delivery of services to stakeholders, including the public, has always been a top
priority for the Bank. To promote the public better understanding of their rights,
responsibilities, the opportunities and the associated risks and costs as a result of
participation in the financial system, the Bank's efforts has been directed towards the
following areas:

Financial Advice and Counselling


The Bank has also established the Agensi Kaunseling Dan Pengurusan Kredit
(AKPK), with branches located across Malaysia to help consumers manage their debts
and become more self-reliant in their financial affairs and thereby preserve the
resiliency of the household sector in the economic growth process. Apart from that,
the Bank was also instrumental in the setting up of the Ombudsman for Financial
Services (OFS), an independent body providing consumers with objective and timely
solutions to disputes, claims and complaints arising from services provided by
financial institutions.

Educate the Public


As the financial system becomes more developed, the Bank has taken measures to
raise the level of financial literacy among consumers. Given today's sophisticated
financial markets, products and services, the Bank has initiated its Consumer
Education Programme nationwide to reach out to the masses. This comprises,
namely,bankinginfo and insuranceinfo initiatives; inclusion of targeted school
children in the Bank's outreach programme to enhance their financial education; and
financial education roadshows to reach out to members of the public, including those
in the rural areas.

Regulation

Promote financial sector stability through the progressive development of sustainable,


robust and sound financial institutions and financial infrastructure, thus enabling a
competitive local financial industry to be resilient against the changing future
environment as well as leads initiatives to enhance access to financing. It also formulates
and implements policies and strategies towards building and positioning Malaysia as a
premier integrated Islamic Financial Centre and enhance the financial capability of
consumers.
Payment Systems

Develop policies and strategies to promote reliable, secure and efficient clearing,
settlement and payment systems in the country.

Supervision

Develop, enhance and implement an effective surveillance framework to ensure safety


and soundness of financial institutions and to enforce sound practices in them.

Organisational Development

Spearhead the Bank's strategic management, organisational-performance management


and programme management functions to drive its performance-improvement processes
and strengthening the capacity building of the Bank. It also leads and drives human
resources initiatives and other strategic activities to ensure that the overall Human Capital
Management framework is implemented effectively.

Communications

The communications function has assumed increasing importance in response to the


heightened demands of the various stakeholders, seeking greater transparency and
disclosure.
What Is Primary and Secondary Market?

The financial market is a world where new securities are issued to the public regularly. It
is a world full of varied financial products and services, tailored to the need of every
individual from all income brackets. These financial products are bought and sold on
the capital market, which is divided into primary market and secondary market.

This post will be a detailed explanation of primary market and secondary market, and
will draw the distinction of primary market vs. secondary market.

What Is Primary Market?

The primary market is also known as new issues market. Here, the transaction is
conducted between the issuer and the buyer. In short, the primary market creates new
securities and offers them to the public.

For instance, Initial Public Offering (IPO) is an offering of the primary market where a
private company decides to sell stocks to the public for the first time. An important point
to remember here is that in the primary market, securities are directly purchased from the
issuer.
Capital or equity can be raised in primary market by any of the following four ways:

1. Public Issue

As the name suggests, public issue means selling securities to public at large, such as
IPO. It is the most vital method to sell financial securities.

2. Rights Issue

Whenever a company needs to raise supplementary equity capital, the shares have to be
offered to present shareholders on a pro-rata basis, which is known as theRights Issue.

3. Private Placement

This is about selling securities to restricted number of classy investors like frequent
investors, venture capital funds, mutual funds and banks comes under Private Placement.

4. Preferential Allotment

When a listed company issues equity shares to a selected number of investors at a price
that may or may not be pertaining to the market price is known asPreferential Allotment.

The primary market is also known as the New Issue Market (NIM) as it is the market for
issuing long-term equity capital. Since the companies issue securities directly to the
investors, it is responsible to issue the security certificates too. The creation of new
securities facilitates growth within the economy.

What Is Secondary Market?


In secondary market, the securities issued in the primary market are bought and sold.
Here, you can buy a share directly from a seller and the stock exchange or broker acts as
an intermediary between two parties.

The secondary market is actually formed by another layer of investors who deal with
primary market investor to buy and sell financial securities such as bonds, futures
and stocks. These dealings happen in the proverbial stock exchange.

National Stock Exchange (NSE) and New York Stock Exchange (NYSE) are some
popular stock exchanges. Majorly, the trade happens between investors without any
involvement with the company that issued the securities in the primary market.

The secondary market is further divided into two kinds of market.

1. Auction Market

The auction market is a place where buyers and sellers convene at a place and announce
the rate at which they are willing to sell or buy securities. They offer either the bid or
ask prices, publicly. Since all buyers and sellers are convening at the same place, there
is no need for investors to seek out profitable options. Everything is announced publicly
and interested investors can make their choice easily.

2. Dealer Market

In a dealer market, none of the parties convene at a common location. Instead, buying and
selling of securities happen through electronic networks which are usually fax machines,
telephones or custom order-matching machines.
Interested sellers deliver their offer through these mediums, which are then relayed over
to the buyers through the medium of dealers. The dealers possess an inventory of
securities and earn their profit through the selling. A lot of dealers operate within this
market and therefore, a competition exists between them to deliver the best offer to their
investors. This makes them deliver the best price to the investors. An example of a dealer
market is the NASDAQ.

The secondary markets are important for price discovery. The market operations are
carried out on stock exchanges.

A variation to the dealer market is the OTC market. OTC stands for Over the Counter
market. The concept came into existence during the early 1920s period through Wall
Street trading, which implied the prevalence of an unorganized system of dealers who
conducted trades via networks. Stock shops existed to buy and sell shares over-the-
counter. In other words, these were unlisted stocks which were sold privately.

Over time, the notion of OTC underwent a change. These days the over-the-counter
denotes those stocks which are not traded over NYSE, NASDAQ or American Stock
Exchange (AMEX). The over-the-counter implies those stocks which are traded on
the pink sheets or on over-the-counter bulletin boards (OTCBB). Pink sheets are a name
given to the daily list of stocks published with ask and bid prices by the National
Quotation Bureau. The OTCBB service is offered by the National Association of
Securities Dealers (NASD) which accurately displays the last sale prices, real time
quotations and other volume information of over-the-counter securities.

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