Malaysia Guidelines on Liquidity Framework – An Overview and Summary of Requirements (2024)

• By: Staff Editor
• Date:May 27, 2013

The Liquidity Framework was introduced in 1998 to enhance liquidity management in banking institutions. It replaced the liquid asset ratio requirement. The Framework sets out to:

• Create awareness among banking institutions of their funding structure and their ability to handle short to medium-term liquidity problems
• Adopt a more efficient and on-going liquidity measurement and management for banking institutions
• Provide the Bank Negara Malaysia (BNM) with a better means of assessing the present and future liquidity position of banking institutions.

The Liquidity Framework is applicable to all commercial banks, finance companies and investment banks/merchant banks.

BROAD CONCEPT

• The main thrust of the Liquidity Framework is the projection up to 1 year of the maturity profile of a banking institution’s assets, liabilities and off-balance sheet commitments from a given position.
• The focus is on the ability of a banking institution to match its short-term liquidity requirement, followed by a medium-term assessment of liquidity up to 1 year.
• Liquidity is assessed from three levels:
  • The first level assesses the sufficiency of a banking institution’s liquidity in the normal course of its business over the next few months.
  • The second level assesses whether or not a banking institution has the capacity to withstand liquidity withdrawal shocks.
  • The third level assesses a banking institution’s general funding structure, in particular, to assess the degree of dependency on certain known volatile markets.

LIQUIDITY MEASUREMENT

First Level Liquidity Measurement

• The Liquidity Measurement Framework provides a maturity ladder profile with five maturity bands beginning from “up to 1 week” (“up to 3 days” for investment banks) to a “6 to 12 month” band.

Table 1 Maturity buckets for commercial banks and investment banks

• The primary basis for determining the appropriate time bands is the contractual maturity, which is when the cash flows crystallize.
• As a guide to banking institutions, the BNM provides a list of recommended treatment to arrive at the behavioral maturity of loans, deposits and undrawn commitments.
• The objective of the assessment of liquidity at this level is to arrive at a projected net maturity mismatch profile of a banking institution stretching from 1 week (3 days for investment banks) to 1 year.

Second Level Liquidity Measurement

• At the second level, the focus of assessment is whether a banking institution has sufficient liquidity surplus and reserves to sustain a sudden liquidity withdrawal shock arising from a banking institution specific crisis.
• Liquidity measurement at this level takes into account the additional emergency funds that can be quickly realized from the sale of liquefiable assets (that is to bring forward their maturity date) or drawn upon from formally available credit lines.
• Banking institutions should be able to sustain heavy withdrawals up to a period of 1 month.
• To test the banking institution’s ability to withstand the crisis, the adjusted maturity profile is then compared with the potential amount of “heavy withdrawals” that can take place during a crisis.
• The actual quantum varies from banking institution to banking institution depending on their funding structure and will be a matter to be agreed between BNM and the banking institution on a case-by-case basis.

Third level Liquidity Measurement

• It consists of a series of broad ratios and supplementary information designed to indicate the extent of which a banking institution is dependent on a particular market for its funding sources.
• The coverage includes - large customer deposits, interbank market and offshore market
• This information will allow the banking institutions to assess its exposure to liquidity risk in the event of disruptions in the relevant markets.

LIQUEFIABLE ASSETS AND FORMALLY AVAILABLE CREDIT LINES

• The maintenance of liquefiable assets and formally available credit lines is important for coping with unexpected heavy withdrawals.
• Following “qualifying characteristics” for the recognition of liquefiable assets have been identified to ensure a more consistent and objective determination of liquefiable assets.
  • Assets easily convertible in large sums into cash at short notice
  • Low counter-party credit risks
  • Free from any encumbrances that restricts its sale or repo capability (for example, not pledged to third parties or under repo agreements)
  • Have sufficiently deep secondary market or repo market which continue to exist during tight liquidity situations, or which BNM is prepared to purchase, lend or allowed for repo in the course of its money market or liquidity support operation.
• Assets held under reverse repo are also eligible for liquefiable asset status for the period under the reverse repo. Assets sold under repo will not be eligible only for the period under repo.
• The value of liquefiable assets should be measured at a discount to its mark-to-market value to reflect a more conservative value of funds.
• Assets that fulfill the above-mentioned qualifying characteristics are known as Class-1 liquefiable assets.
• A number of other debt instruments which are subject to individual issuer credit consideration can assist in raising funds for banking institutions experiencing short-term liquidity problem either through outright sale or repo agreements. These assets can be considered as liquefiable assets although for valuation purposes, they are subject to higher discounts. These are known as Class-2 liquefiable assets.
• During liquidity crisis, banking institution can draw upon the undrawn portion of formally available credit lines. To qualify for this:
  • The facilities must be irrevocably available for at least the next 3 months
  • The funds must be available for immediate drawdown at any time
  • They must not be subject to availability of funds clause
  • The provider of the facility must be banking institutions that are normally capable of providing large volume of funds at short notice.
• To avoid over-reliance on Class-2 liquefiable assets and formally available credit lines as the primary source of reserve liquidity, the total amount allowable to be recognized should not comprise more than 50% of the Class-1 liquefiable assets
• Investment banks are allowed to classify KLSE Main Board equities held in their proprietary book as liquefiable assets subject to a forced sale discount or at the fair value of the equity, whichever is lower.

COMPLIANCE REQUIREMENTS

Standard setting and compliance requirement

• The current liquidity framework does not emphasize on rigid compliance with a particular ratio.
• Its flexible nature provides a platform where the liquidity profile of a banking institution can be systematically projected for analysis between BNM and the banking institution concerned.
• The discussion with the banking institution will assist the Bank in determining the appropriate compliance requirement to be observed by the individual banking institution.
• The Bank will look towards the banking institution’s ALCO as the body primarily responsible for the management of liquidity.
• As a minimum standard, banking institutions are required to maintain sufficient cash flows to cope with events of unusually heavy withdrawals.
• Banking institutions are required to maintain a specified minimum surplus in the cumulative net maturity mismatch of the “1 week” (“3 days” for investment banks) and “1 month” liquidity buckets as measured under the second level liquidity measurement.
• The available cumulative mismatch to accommodate liquidity shocks should be not less than the compliance requirement as agreed with the Bank.
• The net compliance surplus should be positive for the first two maturity buckets with the compliance requirement for specific banking institutions specified as follows:

For commercial banks:

For investment banks:

REPORTING REQUIREMENTS

• Under the Report on Liquidity Framework (RLFM), banking institutions should submit to BNM via the Financial Institutions Statistical System (FISS) the following information:
  • Maturity profile of all balance sheet items and off-balance sheet items denominated in Ringgit Malaysia (RM), reported according to behavioral adjustment maturity
  • Maturity profile of all balance sheet and off-balance sheet items denominated in foreign currency, reported according to behavioral adjustment maturity
  • Maturity profile of all balance sheet items and off-balance sheet items denominated in RM reported according to pure contractual maturity
  • Maturity profile of all balance sheet items and off-balance sheet items denominated in foreign currency, reported according to pure contractual maturity
  • Supplementary information on funding structure
  • Stock of liquefiable assets.

Additional Resources

Read the Malaysia Guidelines on Liquidity Framework in full here.