The fiscal crisis which was burst out in September 2008 had generated the mobility of capitals job and the issue of complicated interaction of assessment in United State. This crisis was started influenced by the Bankruptcy of Lehman Brother which was fail in investing. This fiscal crisis was the greatest recession in 1930s where cause the planetary fiscal became worsen. Many states were gone into depression during that period. It would do a batch of houses shut down and the prostration of planetary stock market. In add-on, many Bankss have been encounter bankruptcy during the fiscal crisis. Therefore, it would do the activity of consumer dropped rapidly due to the Bankss would non supply loan for family and it may do the unemployment rate addition ( Admin, 2012 ) . The chief ground that causes the fiscal crisis occurs due to deteriorate in lodging monetary value bubble arisen in U.S which was peak in 2005-2006. The monetary value for houses has dropped precisely 40 % . Therefore, it would raise the demand for lodging ( Chang, 2010 ) .
The issue of lodging bubble was occurs due to the laxness criterion of supreme mortgage loan that offer to household who are non measure up to use the premier loan that based on their recognition history. It was begun in 2000s which was provided by US Bankss. The Bankss were suffered higher hazard of loan due to bad recognition history of borrowers. Sometimes, the borrowers have no ability to pay off their loan. Therefore, it may do the investors loss of assurance to put due to endure losingss. This issue was quickly act upon the investing Bankss in Australia which has been suffer losingss. It may impact the corporate wantonness the gross revenues of one million millions dollars of bonds. This issue was influence the planetary economic and it was doing the fiscal crisis arisen due to provides loan for family easy ( News, 2009 ) .
Besides, the salvaging rate in US was become lower, but they were offered low involvement rate in mortgage loan to the family during that period. Therefore, it would do the excess of demand mortgage occurs which was forcing up the house monetary value quickly ( Wing, The Impact of Financial Crisis on Higher Education, 2012 ) .
During the great recession, the US authorities was recommended the $ 700 of deliverance bundle which same with Home Owner ‘s Loan Corporation that distribute in 1933. It was stand foring the grade of spoil that result the fiscal and banking sectors. The fiscal crisis would originate due to the highly apply of purchase. Furthermore, the adverse of loaning scheme was released by banking sector. They were lower the criterion of loaning. Therefore, it would do many borrowers can non afford to refund the mortgage ( Shubha Ganesh, 2008 ) .
In a nutshell, the lodging bubble that influenced by the relaxed criterion of mortgage and sub-prime loan would agitate fiscal in US. Therefore, it was doing many investorsloss assurance to put in security mortgage.
B. How did the planetary fiscal crisis impact Malaysia?
( 15 Markss )
The planetary fiscal crisis in twelvemonth 2008 had brought some impacts on Malaysia that much less than other foreign states. However, the fiscal and economic environment become worsens after the 2nd half of twelvemonth 2008 up to the first one-fourth of twelvemonth 2009 in Malaysia. The existent GDP fell by 6.2 % twelvemonth over twelvemonth and confirmed that Malaysia faces a full blown recession during this period. This crisis brings the impact on finance, trade and existent economic system in Malaysia.
In the position of finance in Malaysia, capital flows, portfolio flows, direct investing, foreign exchange rate and the banking system were affected by this planetary fiscal crisis. As other Asiatic states, Malaysia besides suffered from the capital flows. This is due to the bank and fiscal establishments in the United States and the Europe states reduced their international concerns and merely focused on their domestic market. Therefore, fund flows in Malaysia was decrease quickly with the net fiscal and capital flows falling from -RM37.7 billion in 2007 to -RM118.5 billion in 2008. The most volatilization of the portfolio investings breaks the record of the largest net escape of RM84.4 billion in 2008. Malaysia was one of the states affected by portfolio investing escapes 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 investing besides fell 17 % in twelvemonth 2008 comparison to twelvemonth 2007 but direct investings abroad by Malayan companies increased to RM50.2 billion in 2008 ( Chew, 2010 ) . Therefore, the divestment by foreign fiscal establishments led to worsen in militias in twelvemonth 2008. In add-on, portfolio capital escapes result in diminution in the value of the ringgit. The ringgit has lost about 6 % of its value against the US dollar which from RM3.464 to RM3.693 in beginning of twelvemonth 2009.
During the planetary fiscal crisis, Malaysia besides suffered its biggest diminution in exports which had dropped 28 % in twelvemonth on twelvemonth footings. There is about 40 % of Malaysia ‘s exports autumn in the industries exports that peculiarly electronics, electrical machinery and contraptions. As the trade good monetary values plunged, the exportation of agricultural and natural resource besides fell down. By the clip, the thenar oil and petroleum oil sequel diminution one-fourth by one-fourth ( Wahid, 2009 ) . On the other manus, most of Malaysia ‘s exports are import constituent of intermediate goods. Therefore as the exports lessening, imports will besides fell later by a big sum. In other words, Malaysia able to keep a positive trade balances during planetary fiscal crisis 2008.
Malayan economic system is besides progressively being affected by planetary downswing in footings of loss in end product, trade and occupations. Harmonizing to the Malaysian Department of Statistics, it showed that Industrial Production Index ( IPI ) has fell 19.8 % in January 2009. Indirectly, this impact convey high unemployment rate in Malaysia. In add-on, the downswing of Malayan economic system is due to Malayan Tourism industry had been affected by this fiscal crisis. Therefore, Malaysia authorities has proposed a big sum of hard currency injection from the Government to excite local touristry concern and alleviate the economic recession. Other than that, as decrease in exports, foreign investing and employment rate, it affect the concern and consumers confidence that influence the devising determinations and response of the participants involve in the belongings market. Finally, the belongingss demand was reduced in Malaysia. Hence, all this facets was doing the recession of Malayan economic and see the one of the worst economic in two decennaries.
c. What are the actions taken by BNM during the crisis? Was it effectual?
( 20 Markss )
The cardinal bank of Malaysia is known as Bank Negara Malaysia ( BNM ) . As an overlooker of the banking system, BNM shows its function in vouching the efficiency, dependability and security of payment systems substructure, and to defence the populace ‘s involvement. Bank Negara Malaysia carries out monitoring and composes regulative lineation on the payment systems. Bank Negara Malaysia besides facilitates betterments in payment services and market developments through fostering payment betterments and safeguarding public trust in the trade payment constructions and the pattern of payment tools ( Bank Negara Malaysia, 2012 ) .
The first state in Asia to respond to the crisis with pecuniary policy was Malaysia. The cardinal bank of Malaysia, the Bank Negara Malaysia ( BNM ) , has cut down the Nightlong Policy Rate ( OPR ) from 3.5 per centum to 3.25 per centum in November 2008. In January 2009, the rate was so lowered to 2.5 per centum. Again, in 24 February 2009, BNM has farther reduced the rate to 2.0 per centum, which was the lowest rate of all time in the pecuniary policy history of Malaysia and this rate has been remained until January of 2010. The intent in cut downing the involvement rate is to excite the economic system of the state. The mitigate involvement rate policy is to assist the capableness of banking sector to loan money, hike up investing and economic system activities ( Athukorala, 2010 ) .
Besides, Bank Negara Malaysia has lowered the Statutory Reserve Requirement ( SRR ) to heighten the liquidness in the market. Reducing the Nightlong Policy Rate would do the bank to hold a lower involvement earning as it is rate reduces to borrowers. In order to equilibrate the cut down in earning of bank, Bank Negara Malaysia had declared to take down the Statutory Reserve Requirement for Bankss from 4 per centum to 3.5 per centum which taken into action from 1 December 2008. The purpose of decrease in the Statutory Reserve Requirement is to expanse the militias available for investing and loaning intents. Floating involvement rate loans of monthly installment payments were immediately decreased to do certain that involvement rate reduces result in a rise in disposable income of borrowers and higher domestic ingestion ( Ooi, 2010 ) .
Table 1: Changes in Interest Ratess
Beginning: Bank Negara Malaysia, 2009.
Both Bankss and borrowers can retain and increase their worsen profitableness through decrease in OPR and SRR demands which was influenced by the Global Financial Crisis. RM2.7 bullion is foreseen to direct out into the banking system of Malaysia. Hence, excess money supply into the economic system can ease the growing of the economic system through subsidiary liquidness into the banking system ( Abidin & A ; Rasiah, 2009 ) .
Bank Negara Malaysia ‘s pecuniary policy aided weakens the result of the planetary fiscal crisis of 2008-2010. A much terrible economic contraction in Malaya from planetary fiscal crisis would hold been taken topographic point without the decrease in Nightlong Policy Rate and Statutory Reserve Requirement. The end product of Malaysia would hold diminished to 3.4 per centum than the practical 2.9 per centum.
d. In your sentiment, what are the possible other actions that BNM could hold taken to decide the crisis? Give your sentiment on how this crisis could hold been avoided?
( 20 Markss )
BNM could hold other policy options alternatively of SRR and OPR to decide the crisis yet remain tradeoffs. One possible action is by unfastened market operation ( OMO ) to accomplish expansionary pecuniary intents. Malaysia has well-developed money market and securities such as BNM notes, Malayan Treasury Bills ( MTB ) and Malayan Islamic Treasury Bills ( MITB ) . Through purchasing of securities, BNM able to shoot money into the system, accomplishing involvement rate mark by affect Bankss ‘ militias and farther encourage concern activities to forestall economic slack. Nevertheless, by implementing so the other pecuniary instruments should be adjusted or no sufficient control can be exerted to transport out the effects. ( Axilrod, 1997 )
Confronting immense capital outflow upon the crisis, BNM could enforce capital outflow limitation to keep the balance of payment. This enables to restrict the negative impacts from deteriorated conditions by the escape as it buy clip for state to retrieve and react to the losingss. However, some argued that this should be the last resort to the crisis due to the long-run costs. Once imposed, investors would hold negative penetration that the policy might be introduced in the hereafter and deter investing into the state. ( Goh, 2010 )
Besides, BNM has the option to let depreciated exchange rate to better the economic growing. In theory, the depreciated currency able to pare down dei¬?cits in balance of payment and aid states with shortages account and big capital escape. As export become cheaper, it appears more competitory to foreign purchasers and enable to force up domestic demand. Since Ringgit has no longer internationalized, the devaluation of exchange rate has no cardinal negative impacts to the economic system. Still, in long term position, it may consequences in rising prices due to cut downing buying power and expensive import. ( Pettinger, 2009 )
Meanwhile, many surveies suggest that the root of this crisis is due to inordinate risk-taking concerns. The prostration of fiscal system could hold been avoided if there are sufficient supervisings or controls to set off inordinate hazard in fiscal guess.
First of wholly, the fiscal crisis could be said initiated by the deficiency of creditability of credit-rating bureaus. The inappropriate credit-ratings had misled investors for wrong determination, incognizant inordinate hazard every bit good as farther market fraud as in the Bear Stearns case ( Dennis & A ; Horwitz, 2012 ) . However, the bureaus are much subjected to self-regulation and there are no other regulators to supervise the quality of their plants. The bureaus formed an oligopoly and collude by take downing the demand of the evaluations for net income maximization. ( The New York Times, 2011 ) Therefore, in my sentiment, the fiscal devastation could be prevented by modulate the credit-rating bureaus. Governments should hold established farther guidelines, enforce monitoring and reviewing of the evaluations, sufficient transparence and public revelation of the bureaus to guarantee the dependability of evaluations. ( ADBInstitute, 2012 ) With true reflect of the evaluations, it is obvious the investors would be well-prepared with better direction to buffer any default.
Furthermore, the Bankss were working on inordinate hazard beyond their affordability when they subjected to inordinate predatory loaning. As a consequence to deregulating, Bankss are enabled to alter the underwriting criterion by ain while many have made easier footings for unqualified borrowers to obtain the loans. This later cause high debt load and liquidness job of the Bankss when the loan default addition 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 feel the dangers of the industry patterns. ( Rooney, 2011 ) The fiscal crisis could hold been avoided if the governments intervene to repair the deceitful underwriting procedure in early of marks to return the shadow banking system. The extending ordinances on underwriting criterions enable to assist control the low quality loans to cut down default that trigger the crisis. Merely if there are early acknowledgment and proper actions to the unhealthy establishments ‘ behaviour, the failure of the banking system is likely to be prevented. ( Amadeo, 2012 )
The risk-taking actions by nonbank fiscal establishments is yet another concern that fueling the fiscal defaults. As nonbank fiscal establishments are non subjected to similar monitoring and limitations of commercial Bankss, they able to prosecute in riskier behaviour. Prior to the crisis, many investing Bankss such as Lehman Brother and Bear Sterns were extremely leveraged and held big sum of high hazard mortgage-backed securities. This had contributed to their prostrations as they have no border for any default after the lodging bubble explosion. ( Cohan, 2012 ) In this instance, the jobs could hold been avoided if the governments take better inadvertence to the establishments ‘ risk-taking. A purchase cap should be imposed to cut inordinate debt. ( Onaran, 2012 ) Yet, the establishments should be subjected to capital requirement addition and limitation on hazardous assets to shock absorber for stableness. ( Mankiw & A ; Ball, 2011 )
Question 2 ( 30 Markss )
Critically measure the function played by Securities committee and Bursa Malaysia as the ‘watch Canis familiaris ‘ of capital market. You are to include in your treatment the latest findings on how securities committee and Bursa in Malaysia plays their function as the “ ticker Canis familiaris ” ?
Capital market is a market which organisations and persons trade fiscal securities. In order to raise fund, establishments from private and public sectors will frequently sell the securities through capital market. The capital market consists of primary and secondary market. Capital in Malaysia is mostly managed by regulative organic structure, securities committee Malaysia that act as organic structure to guarantee just markets and increase the degree of market assurance. The primary market is normally consists of issuers for bring forthing fresh fund from investors through Initial Public Offers ( IPO ) . On the other custodies, the secondary market is where these securities instruments are traded in the stock exchange. Fund is generated in the primary market by publishing bonds and portions to purchasers who are so merchandise the portions 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 modulate and develop the capital market and studies to Minister of Finance, Malaysia. The SC has played the function of oversing and supervising the activities of market establishments such as exchanges and uncluttering houses every bit good as the individuals who licensed under Capital Market and Services Act 2007.The purpose of these maps is to protect investors. Besides, the SC is besides responsible to advance and develop the securities and hereafters markets in Malaysia. On top of that, the SC has been developed merchandise invention in the Islamic equity and sukuk ( Islamic bond ) sectors by advancing instruction, preparation, consultancy and research for the Islamic capital market ( ICM ) . In add-on, SC besides regulates the take-over and amalgamations of companies and approves authorization for corporate bond issues.
The front-line regulator of the capital market of Malaysia is Bursa Malaysia. Bursa Malaysia plays an of import function to retain a well-ordered and just market in the securities and derived functions that are purchasing and selling through its installations. Besides, Bursa Malaysia, as a fully-integrated exchange, has the duty to vouch well-ordered minutess within the securities which deposited with Bursa Malaysia and colony agreements and uncluttering for traffics solved, settled and cleared through its installations. Furthermore, Bursa Malaysia has the responsibility to supervise the market and its participants through an effectual and comprehensive government and regulative lineation in which comprises of the securities issuers, presidents ‘s and advisers. Not to advert other than to guarantee orderly statutory duty, the purposes of Bursa Malaysia are investor protection, transparence, high standards of behaviour and regulative, market honestness and that participants can take portion in the dealing with assurance ( Bursa Malaysia, 2012 )
The web site of Swisscash had already marked up by Securities Commission ( SC ) because it is an illegal investing web site due to without license. During 2007, SC and Bursa were unite together antagonize Swisscash which is the investing plan that offer investing in ware, equities and foreign exchange where can obtain their returns within 15 months and the return can be attain about 300 % . It is a fast one investing which had been offered to rip off investors. The two suspect of Malaysia which provides Swisscash investing were willing to pay US $ 83 mil for the punishment, but it was rejected by SC. In 2009, this issue has been settle through use the making and the standards of payment was approved by High Court in Kuala Lumpur ( Errol, 2012 )
LFE Corporation Berhad has accused by SC Malaysia due to supply practical statement to Bursa Malaysia who was wittingly this statement is false. The Kuala Lumpur Session Court was imposed a gaol for former manager around one twelvemonth and punishment RM1.2 million ( Malaysia, 2012 ) .
Datuk Sreesanthan Eliathamby who is a senior corporate attorney has been accused by SC Malaysia due to carry on seven counts of insider trading in portion. From 2006 until 2008, he has behavior 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 offense would under the Securities Industry Act 1983 and Capital Markets and Services Act 2007 which have been all right RM1 million or above and imposed a gaol for maximal 10 old ages ( Natalie, 2012 ) .
Still, there is much capacity for SC and Bursa to widen their functions particularly in shooting market moral force. The current Malayan capital market is normally seen with the drawbacks from hapless structural issues. ( Toy, 2007 ) The market is strongly dominated by government-linked financess such as Permodalan Nasional Bhd, Khazanah Nasional Bhd and the Employees Provident Fund, lending to more than half of entire day-to-day trading volume. This indicates deficient liquidness, which is disincentive to organize an efficient securities market. ( Kang, 2012 ) An ideal market should hold equally participated by retail investors, local establishments and foreign investing.
To better plangency, SC and Bursa have functions to educate investors to engraft their investing involvement. In fact, many aliens have no consciousness on the relaxed footings in policies after they lost path of Malaysia ‘s market environment since the rigorous enforcement of capital controls and exchange rate pegging in early of Asiatic fiscal crisis. ( Kok, 2010 ) Meanwhile, the retail investors are loath to come in equity market instead than puting unit trust due to deficient exposure. They are farther deterred as there are limited public tranche for them in IPOs. There should be more to done to expose them for cardinal information in advancing the stock market. ( Sidhu & A ; Loh, 2012 )
Besides, the market regulators should play more parts to supply contributing environment to pull new participants. The current stock market has been complained to be over-regulated as SC and Bursa are tough in oversing and taking action against the leery trading activities in attempt to forestall guess and use. It has been argued that guess in just sum is healthy to force the market for better liquidness and plangency. ( Kok, 2010 ) The tight regulations like an unusual market activity ( UMA ) question have discouraged the market development as it prompts negative penetration to the investors. By this, more deregulating should be practiced if SC and Bursa wish to heighten the market efficiency. It is suggested to lax the ratio bound for an UMA question every bit good as to supply sufficient infinite for market activities to reconstruct the impulse. ( Kang, 2012 )