The financial crisis which was burst out in September 2008 had generated the mobility of capitals problem and the issue of complicated interaction of appraisal in United State. This crisis was started influenced by the Bankruptcy of Lehman Brother which was fail in investment. This financial crisis was the greatest recession in 1930s where cause the global financial became worsen. Many countries were gone into depression during that period. It would cause a lot of firms shut down and the collapse of global stock market. In addition, many banks have been encounter bankruptcy during the financial crisis. Thus, it would cause the activity of consumer dropped quickly due to the banks would not provide loan for household and it may cause the unemployment rate increase (Admin, 2012). The main reason that causes the financial crisis occurs due to deteriorate in housing price bubble arisen in U.S which was peak in 2005-2006. The price for houses has dropped exactly 40%. Thus, it would raise the demand for housing (Chang, 2010).
The issue of housing bubble was occurs due to the laxity standard of supreme mortgage loan that offer to household who are not qualify to apply the prime loan that based on their credit history. It was begun in 2000s which was provided by US banks. The banks were suffered higher risk of loan due to bad credit history of borrowers. Sometimes, the borrowers have no ability to pay off their loan. Thus, it may cause the investors loss of confidence to invest due to suffer losses. This issue was rapidly influence the investment banks in Australia which has been suffer losses. It may impact the corporate abandon the sales of billions dollars of bonds. This issue was influence the global economic and it was cause the financial crisis arisen due to provides loan for household easily (News, 2009).
Besides, the saving rate in US was become lower, but they were offered low interest rate in mortgage loan to the household during that period. Therefore, it would cause the surplus of demand mortgage occurs which was pushing up the house price rapidly (Wing, The Impact of Financial Crisis on Higher Education, 2012).
During the great recession, the US government was recommended the $700 of rescue package which same with Home Owner's Loan Corporation that distribute in 1933. It was representing the degree of spoil that result the financial and banking sectors. The financial crisis would arise due to the extremely apply of leverage. Moreover, the adverse of lending strategy was released by banking sector. They were lower the standard of lending. Therefore, it would cause many borrowers cannot afford to repay the mortgage(Shubha Ganesh, 2008).
In a nutshell, the housing bubble that influenced by the relaxed standard of mortgage and sub-prime loan would shaken financial in US. Thus, it was causing many investorsloss confidence to invest in security mortgage.
b. How did the global financial crisis impact Malaysia?
(15 marks)
The global financial crisis in year 2008 had brought some impacts on Malaysia that much less than other foreign countries. However, the financial and economic environment become worsens after the second half of year 2008 up to the first quarter of year 2009 in Malaysia. The real GDP fell by 6.2% year over year and confirmed that Malaysia faces a full blown recession during this period. This crisis brings the impact on finance, trade and real economy in Malaysia.
In the view of finance in Malaysia, capital flows, portfolio flows, direct investment, foreign exchange rate and the banking system were affected by this global financial crisis. As other Asian countries, Malaysia also suffered from the capital flows. This is due to the bank and financial institutions in the United States and the Europe countries reduced their international businesses and only focused on their domestic market. Therefore, fund flows in Malaysia was decrease rapidly with the net financial and capital flows falling from -RM37.7 billion in 2007 to -RM118.5 billion in 2008. The most volatilization of the portfolio investments breaks the record of the largest net outflow of RM84.4 billion in 2008. Malaysia was one of the countries affected by portfolio investment outflows in 2008 (Khor, 2009). It show that Kuala Lumpur Composite Index (KLCI) falling from 1393 points in January 2008 to 876 points in December 2008. The stock market is falling significantly is because of the repatriation by foreign participants. Besides, foreign direct investment also fell 17% in year 2008 compare to year 2007 but direct investments abroad by Malaysian companies increased to RM50.2 billion in 2008 (Chew, 2010). Thus, the divestment by foreign financial institutions led to decline in reserves in year 2008. In addition, portfolio capital outflows result in decline in the value of the ringgit. The ringgit has lost nearly 6% of its value against the US dollar which from RM3.464 to RM3.693 in beginning of year 2009.
During the global financial crisis, Malaysia also suffered its biggest decline in exports which had dropped 28% in year on year terms. There is about 40% of Malaysia's exports fall in the manufactures exports that particularly electronics, electrical machinery and appliances. As the commodity prices plunged, the exportation of agricultural and natural resource also fell down. By the time, the palm oil and crude oil subsequence decline quarter by quarter (Wahid, 2009). On the other hand, most of Malaysia's exports are import component of intermediate goods. Therefore as the exports decrease, imports will also fell subsequently by a large amount. In other words, Malaysia able to maintain a positive trade balances during global financial crisis 2008.
Malaysian economy is also increasingly being affected by global downturn in terms of loss in output, trade and jobs. According to the Malaysian Department of Statistics, it showed that Industrial Production Index (IPI) has fell 19.8% in January 2009. Indirectly, this impact bring high unemployment rate in Malaysia. In addition, the downturn of Malaysian economy is due to Malaysian Tourism industry had been affected by this financial crisis. Thus, Malaysia government has proposed a large amount of cash injection from the Government to stimulate local tourism business and relieve the economic recession. Other than that, as reduction in exports, foreign investment and employment rate, it affect the business and consumers confidence that influence the making decisions and response of the players involve in the property market. Eventually, the properties demand was reduced in Malaysia. Hence, all this aspects was causing the recession of Malaysian economic and experience the one of the worst economic in two decades.
c. What are the actions taken by BNM during the crisis? Was it effective?
(20 marks)
The central bank of Malaysia is known as Bank Negara Malaysia (BNM). As an overlooker of the banking system, BNM shows its role in guaranteeing the efficiency, reliability and security of payment systems infrastructure, and to defense the public's interest. Bank Negara Malaysia carries out monitoring and composes regulatory outline on the payment systems. Bank Negara Malaysia also facilitates improvements in payment services and market developments through fostering payment improvements and safeguarding public reliance in the trade payment structures and the practice of payment tools (Bank Negara Malaysia, 2012).
The first country in Asia to react to the crisis with monetary policy was Malaysia. The central bank of Malaysia, the Bank Negara Malaysia (BNM), has cut down the Overnight Policy Rate (OPR) from 3.5 percent to 3.25 percent in November 2008. In January 2009, the rate was then lowered to 2.5 percent. Again, in 24 February 2009, BNM has further reduced the rate to 2.0 percent, which was the lowest rate ever in the monetary policy history of Malaysia and this rate has been remained until January of 2010. The purpose in reducing the interest rate is to stimulate the economy of the country. The mitigate interest rate policy is to helps the capability of banking sector to loan money, boost up investment and economy activities (Athukorala, 2010).
Besides, Bank Negara Malaysia has lowered the Statutory Reserve Requirement (SRR) to enhance the liquidity in the market. Reducing the Overnight Policy Rate would cause the bank to have a lower interest earning as it is rate reduces to borrowers. In order to balance the reduce in earning of bank, Bank Negara Malaysia had declared to lower the Statutory Reserve Requirement for banks from 4 percent to 3.5 percent which taken into action from 1 December 2008. The aim of reduction in the Statutory Reserve Requirement is to expanse the reserves available for investment and lending purposes. Floating interest rate loans of monthly installment payments were instantly decreased to make sure that interest rate reduces result in a raise in disposable income of borrowers and higher domestic consumption (Ooi, 2010).
Table 1: Changes in Interest Rates
2007
Dec 2008
Jan 2009
Feb 2009
OPR
3.5
3.25
2.5
2
SRR
3.5
3.5
2
1
Source: Bank Negara Malaysia, 2009.
Both banks and borrowers can retain and increase their worsen profitability through reduction in OPR and SRR requirements which was influenced by the Global Financial Crisis. RM2.7 bullion is foreseen to send out into the banking system of Malaysia. Hence, extra money supply into the economy can facilitate the growth of the economy through auxiliary liquidity into the banking system (Abidin & Rasiah, 2009).
Bank Negara Malaysia's monetary policy aided weakens the outcome of the global financial crisis of 2008-2010. A much severe economic contraction in Malaysia from global financial crisis would have been taken place without the reduction in Overnight Policy Rate and Statutory Reserve Requirement. The output of Malaysia would have diminished to 3.4 percent than the practical 2.9 percent.
d. In your opinion, what are the possible other actions that BNM could have taken to resolve the crisis? Give your opinion on how this crisis could have been avoided?
(20 marks)
BNM could have other policy options instead of SRR and OPR to resolve the crisis yet remain trade-offs. One possible action is by open market operation (OMO) to achieve expansionary monetary purposes. Malaysia has well-developed money market and securities such as BNM notes, Malaysian Treasury Bills (MTB) and Malaysian Islamic Treasury Bills (MITB). Through buying of securities, BNM able to inject money into the system, achieving interest rate target by affect banks' reserves and further encourage business activities to prevent economic slump. Nevertheless, by implementing so the other monetary instruments should be adjusted or no sufficient control can be exerted to carry out the effects. (Axilrod, 1997)
Confronting huge capital outflow upon the crisis, BNM could impose capital outflow restriction to maintain the balance of payment. This enables to limit the negative impacts from deteriorated conditions by the outflow as it buy time for country to recover and respond to the losses. However, some argued that this should be the last resort to the crisis due to the long-term costs. Once imposed, investors would have negative insight that the policy might be introduced in the future and discourage investment into the country. (Goh, 2010)
Besides, BNM has the option to allow depreciated exchange rate to improve the economic growth. In theory, the depreciated currency able to trim down deï¬cits in balance of payment and help countries with deficits account and large capital outflow. As export become cheaper, it appears more competitive to foreign buyers and enable to push up domestic demand. Since Ringgit has no longer internationalized, the devaluation of exchange rate has no fundamental negative impacts to the economy. Still, in long term perspective, it may results in inflation due to reducing purchasing power and expensive import. (Pettinger, 2009)
Meanwhile, many studies suggest that the root of this crisis is due to excessive risk-taking concerns. The collapse of financial system could have been avoided if there are sufficient supervisions or controls to put off excessive risk in financial speculation.
First of all, the financial crisis could be said initiated by the lack of creditability of credit-rating agencies. The inappropriate credit-ratings had misled investors for incorrect decision, unaware excessive risk as well as further market fraud as in the Bear Stearns lawsuit (Dennis & Horwitz, 2012). However, the agencies are much subjected to self-regulation and there are no other regulators to oversee the quality of their works. The agencies formed an oligopoly and collude by lowering the requirement of the ratings for profit maximization. (The New York Times, 2011) Thus, in my opinion, the financial destruction could be prevented by regulate the credit-rating agencies. Authorities should have established further guidelines, enforce monitoring and reviewing of the ratings, sufficient transparency and public disclosure of the agencies to ensure the reliability of ratings. (ADBInstitute, 2012) With true reflect of the ratings, it is obvious the investors would be well-prepared with better management to cushion any default.
Furthermore, the banks were working on excessive risk beyond their affordability when they subjected to excessive predatory lending. As a result to deregulation, banks are enabled to change the underwriting standard by own while many have made easier terms for unqualified borrowers to obtain the loans. This subsequently cause high debt burden and liquidity problem of the banks when the loan default increase afterwards. (Lorette, 2012) By this, the watchdogs -Treasury Department, Federal Reserve Board and the Federal Reserve Bank of New York are to be blamed as failed to sense the dangers of the industry practices. (Rooney, 2011) The financial crisis could have been avoided if the authorities intervene to fix the fraudulent underwriting process in early of signs to revert the shadow banking system. The extending regulations on underwriting standards enable to help curb the low quality loans to reduce default that trigger the crisis. Only if there are early recognition and proper actions to the unhealthy institutions' behavior, the failure of the banking system is likely to be prevented. (Amadeo, 2012)
The risk-taking actions by nonbank financial institutions is yet another concern that fueling the financial defaults. As nonbank financial institutions are not subjected to similar monitoring and restrictions of commercial banks, they able to engage in riskier behavior. Prior to the crisis, many investment banks such as Lehman Brother and Bear Sterns were highly leveraged and held large amount of high risk mortgage-backed securities. This had contributed to their collapses as they have no margin for any default after the housing bubble burst. (Cohan, 2012) In this case, the problems could have been avoided if the authorities take better oversight to the institutions' risk-taking. A leverage cap should be imposed to cut excessive debt. (Onaran, 2012) Yet, the institutions should be subjected to capital requirement increase and restriction on risky assets to cushion for stability. (Mankiw & Ball, 2011)
Question 2 (30 marks)
Critically evaluate the role played by Securities commission and Bursa Malaysia as the 'watch dog' of capital market. You are to include in your discussion the latest findings on how securities commission and Bursa in Malaysia plays their role as the "watch dog"?
Capital market is a market which organizations and individuals trade financial securities. In order to raise fund, institutions from private and public sectors will often sell the securities through capital market. The capital market consists of primary and secondary market. Capital in Malaysia is largely managed by regulatory body, securities commission Malaysia that act as body to ensure fair markets and increase the level of market confidence. The primary market is usually consists of issuers for generating fresh fund from investors through Initial Public Offers (IPO). On the other hands, the secondary market is where these securities instruments are traded in the stock exchange. Fund is generated in the primary market by issuing bonds and shares to buyers who are then trade the shares and bonds in the secondary market (Ranjit Ajit Singh, 2005).
Securities Commission Malaysia (SC) is established under the Securities Commission Act 1993 which it was formed to regulate and develop the capital market and reports to Minister of Finance, Malaysia. The SC has played the role of supervising and monitoring the activities of market institutions such as exchanges and clearing houses as well as the persons who licensed under Capital Market and Services Act 2007.The aim of these functions is to protect investors. Besides, the SC is also responsible to promote and develop the securities and futures markets in Malaysia. On top of that, the SC has been developed product innovation in the Islamic equity and sukuk (Islamic bond) sectors by promoting education, training, consultancy and research for the Islamic capital market (ICM). In addition, SC also regulates the take-over and mergers of companies and approves authority for corporate bond issues.
The front-line regulator of the capital market of Malaysia is Bursa Malaysia. Bursa Malaysia plays an important role to retain a well-ordered and fair market in the securities and derivatives that are buying and selling through its facilities. Besides, Bursa Malaysia, as a fully-integrated exchange, has the obligation to guarantee well-ordered transactions within the securities which deposited with Bursa Malaysia and settlement arrangements and clearing for dealings solved, settled and cleared through its facilities. Furthermore, Bursa Malaysia has the duty to monitor the market and its participants through an effective and comprehensive governing and regulatory outline in which comprises of the securities issuers, chairmen's and consultants. Not to mention other than to ensure orderly statutory obligation, the aims of Bursa Malaysia are investor protection, transparency, high criterions of behavior and regulatory, market honesty and that participants can take part in the dealing with confidence (Bursa Malaysia, 2012)
The website of Swisscash had already marked up by Securities Commission (SC) because it is an illegal investment website due to without licence. During 2007, SC and Bursa were unite together antagonize Swisscash which is the investment program that offer investment in merchandise, equities and foreign exchange where can obtain their returns within 15 months and the return can be attain about 300%. It is a trick investment which had been offered to cheat investors. The two defendant of Malaysia which provides Swisscash investment were willing to pay US$83 mil for the penalty, but it was rejected by SC. In 2009, this issue has been settle through apply the qualification and the criteria of payment was approved by High Court in Kuala Lumpur (Errol, 2012)
LFE Corporation Berhad has accused by SC Malaysia due to provide virtual statement to Bursa Malaysia who was knowingly this statement is false. The Kuala Lumpur Session Court was imposed a jail for former director around one year and penalty RM1.2 million (Malaysia, 2012).
Datuk Sreesanthan Eliathamby who is a senior corporate lawyer has been accused by SC Malaysia due to conduct seven counts of insider trading in share. From 2006 until 2008, he has conduct five counts of insider trading that include three counts in the Sam Darby Berhad, two counts are in the Maxis Communications Berhad and the remain of two counts are VADS Berhad and UEM World Berhad. These crime would under the Securities Industry Act 1983 and Capital Markets and Services Act 2007 which have been fine RM1 million or above and imposed a jail for maximum 10 years (Natalie, 2012).
Still, there is much capacity for SC and Bursa to extend their roles especially in injecting market dynamic. The current Malaysian capital market is usually seen with the drawbacks from poor structural issues. (Toy, 2007) The market is strongly dominated by government-linked funds such as Permodalan Nasional Bhd, Khazanah Nasional Bhd and the Employees Provident Fund, contributing to more than half of total daily trading volume. This indicates insufficient liquidity, which is disincentive to form an efficient securities market. (Kang, 2012) An ideal market should have evenly participated by retail investors, local institutions and foreign investment.
To improve vibrancy, SC and Bursa have roles to educate investors to implant their investing interest. In fact, many foreigners have no awareness on the relaxed terms in policies after they lost track of Malaysia's market environment since the stringent enforcement of capital controls and exchange rate pegging in early of Asian financial crisis. (Kok, 2010) Meanwhile, the retail investors are reluctant to enter equity market rather than investing unit trust due to insufficient exposure. They are further deterred as there are limited public tranche for them in IPOs. There should be more to done to expose them for fundamental information in promoting the stock market. (Sidhu & Loh, 2012)
Besides, the market regulators should play more parts to provide conducive environment to attract new players. The current stock market has been complained to be over-regulated as SC and Bursa are tough in supervising and taking action against the suspicious trading activities in effort to prevent speculation and manipulation. It has been argued that speculation in fair amount is healthy to push the market for better liquidity and vibrancy. (Kok, 2010) The tight rules like an unusual market activity (UMA) query have discouraged the market development as it prompts negative insight to the investors. By this, more deregulation should be practiced if SC and Bursa wish to enhance the market efficiency. It is suggested to lax the ratio limit for an UMA query as well as to provide sufficient space for market activities to restore the momentum. (Kang, 2012)
