Shadow banks on Bank Negara’s radar screen

PETALING JAYA: Bank Negara is closely monitoring the activities of non-bank institutions or shadow banks that are not regulated under the mainstream banking system, sources told StarBiz.

Source from (The Star Online): http://biz.thestar.com.my/news/story.asp?file=/2012/5/2/business/11206959&sec=business
Published: May 02, 2012

“The situation is not yet a cause for alarm but the authorities want to make sure that they do not pose a risk to the banking system and that their unregulated lending does not create a bubble like what happened in the US prior to the global financial crisis,'' a source said.

Concerns over non-bank lending have surfaced in the wake of the implementation of responsible lending guidelines in the regular banking system.

Bank Negara's financial stability report 2011 quotes a Federal Reserve Bank of New York staff report that the volume of credit intermediated by the shadow banking system in the United States was nearly twice (about 1.8 times) as large as the volume of credit intermediated by the traditional banking system prior to the global financial crisis.



In Malaysia, the nature and scale of the activities of these non-bank intermediaries are much less complex and account for a much smaller share of total credit intermediated by the banking system.

Moreover, the bulk of the activities and the non-bank entities themselves are subject to oversight of Bank Negara and the Securities Commission.

“The control over the mainstream banks will be less effective if the activity flows at the non-bank institutions are not under some form of control,'' said Pong Teng Siew, head of research at Interpac Securities. “In the process, banks may be asked to rein in their lending to these non-bank institutions.''

There are instances when banks, wanting to achieve a certain continuous pace of growth, will set up non-bank conduits and channel the lending to them.

“That is what happened in the United States but in Malaysia, the central bank is powerful. It will find out what they are doing,'' said Pong. “They ought to be monitored closely, especially if the holding company is also to get a piece of action.''

In monitoring these non-bank institutions, certain areas such as lending to civil servants, may be the focus. “Excessive lending may, at some point, lead to a credit trap where these civil servants use up all their money to service their loans via salary deductions.'' said Pong. “They may then turn to other sources of borrowing.''



In many instances, loose credit standards and lack of credit analysis can also lead to other problems.

Recently, the activities and size of assets of these non-bank lenders have expanded. “The growth in financing extended has been mainly focused on the household sector but continues to represent a small share (5.9%) of total financing to households,'' said Bank Negara in its financial stability report.

“To ensure that these developments do not, over time, contribute towards the imprudent build-up of leverage in the household sector, the central bank's surveillance of developments in the lending activities by non-bank lenders has been strengthened in close cooperation with the relevant supervisory authorities.

“Specific measures have also been implemented to ensure that credit co-operative societies and large building societies observe responsible financing practices that are consistent with regulations applied to the financial institutions under the bank's purview,'' said Bank Negara.

In March, Malaysian Rating Corp (MARC) expressed concern that the pace of lending by non-bank institutions, for example, development financial institutions such as Bank Pembangunan, Bank Kerjasama Rakyat and Bank Simpanan Nasional, had been relatively high in the past few years.

It has averaged 14.5% a year since 2005 and moderated to 7.2% in 2011.

In voicing its concerns over the quantity and quality of loans given out, MARC had pointed out that lending for “consumption credit” had grown at a compounded average growth rate (CAGR) of 20.3% a year in the past seven years with the pace of growth in the lending for the credit cards segment, which has seen a CAGR of 50.4% a year since 2005.

In its financial sector blueprint, Bank Negara spoke of the development of a framework for monitoring and managing risks arising from entities and activities taking place outside the directly supervised financial system.

The steps involve enhancing data collection and surveillance of such entities and activities particularly those of systemic importance and implementing appropriate regulatory responses to preemptively manage emerging risks.