Prudential Regulation

As part of Bank Negara Malaysia's mandate for financial stability, the Bank is responsible for the prudential regulation of financial institutions under its purview. In recent years, there have been fundamental changes to the financial landscape with increased diversity of financial sector players; blurring of lines and increasing linkages between the banking, insurance and capital market sub-sector; greater financial innovation resulting in a proliferation of new products and services; growing importance of market-based finance; and growing global financial integration. A key priority for the Bank is maintaining a robust, effective and efficient regulatory framework which is responsive to changing economic conditions in maintaining the resilience of financial institutions, while providing an environment conducive for financial innovation and growth.

The prudential regulatory framework emphasises high level principles of sound financial and business practices, and the responsibility of the board and senior management of financial institutions to manage risks in line with individual business strategies and in a manner appropriate to the circumstances and exposures of the institution. This approach ensures a regulatory framework that is more robust against the vagaries of changing market conditions while providing financial institutions with sufficient flexibility to operate in a manner that is consistent with the institution's own strategic objectives, business models, size and risk profile.

Prescriptive rules and requirements are preserved in specific areas necessary to maintain stability in the financial system and to avoid materially distorting competitive effects in the system. These include minimum capital adequacy requirements, prudential limits on excessive risk-taking, specific guidance on minimum standards of sound management (e.g. for less developed sectors or new financial activities) and regulatory requirements to address present and emerging risks (e.g. imposed under conditions of distress).

The prudential framework is regularly reviewed and updated to adapt to changing market realities and takes into account developments in international standards and guidance issued by the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors and the Islamic Financial Services Board.