Are Banks in Malaysia required to hold Government Bonds by law?
Out of curiosity, we asked Google Gemini and below is the answer.
While there isn’t a specific law mandating that banks in Malaysia must hold a certain percentage of their assets in government bonds at all times, they are indirectly required to do so through the Statutory Reserve Requirement (SRR) framework managed by Bank Negara Malaysia (BNM), the central bank of Malaysia. Here’s a breakdown:
Statutory Reserve Requirement (SRR): The SRR is a tool used by BNM for liquidity management in the banking system. It requires banking institutions to maintain a specified proportion of their eligible liabilities in a Statutory Reserve Account (SRA) with BNM.
Flexibility with Government Securities: BNM provides flexibility to banking institutions in meeting their SRR obligations. Since March 2020, BNM has allowed Principal Dealers to recognize Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGII) of up to a certain limit as part of their SRR compliance. This measure was introduced to ensure sufficient liquidity in the banking system.
Purpose of Government Bond Holdings: While the primary purpose of holding MGS and MGII under the SRR framework is to meet the statutory reserve requirements, it also means that banks do hold a certain amount of government bonds as part of their liquid assets.
Liquidity Requirements: Beyond the SRR, banks in Malaysia are also subject to other liquidity requirements and prudential regulations set by BNM to ensure they have sufficient liquid assets to meet their obligations. Government bonds, being highly liquid and considered low-risk, often form a part of these liquid asset holdings.
In summary: There isn’t a direct law stating banks must hold a specific percentage of government bonds. However, the SRR framework in Malaysia allows banks to use government securities to meet their reserve requirements, effectively making them a component of banks’ mandatory holdings with the central bank. Additionally, for overall liquidity management, banks often choose to hold government bonds due to their liquid and low-risk nature, aligning with regulatory expectations.
It’s important to note that the specific regulations and the extent to which government bonds can be used for SRR compliance can be adjusted by Bank Negara Malaysia based on economic conditions and monetary policy objectives. As of February 2025, the Statutory Reserve Requirement (SRR) for commercial banks in Malaysia was 2.0%.
While there isn’t a specific law mandating that banks in Malaysia must hold a certain percentage of their assets in government bonds at all times, they are indirectly required to do so through the Statutory Reserve Requirement (SRR) framework managed by Bank Negara Malaysia (BNM), the central bank of Malaysia. Here’s a breakdown:
Statutory Reserve Requirement (SRR): The SRR is a tool used by BNM for liquidity management in the banking system. It requires banking institutions to maintain a specified proportion of their eligible liabilities in a Statutory Reserve Account (SRA) with BNM.
Flexibility with Government Securities: BNM provides flexibility to banking institutions in meeting their SRR obligations. Since March 2020, BNM has allowed Principal Dealers to recognize Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGII) of up to a certain limit as part of their SRR compliance. This measure was introduced to ensure sufficient liquidity in the banking system.
Purpose of Government Bond Holdings: While the primary purpose of holding MGS and MGII under the SRR framework is to meet the statutory reserve requirements, it also means that banks do hold a certain amount of government bonds as part of their liquid assets.
Liquidity Requirements: Beyond the SRR, banks in Malaysia are also subject to other liquidity requirements and prudential regulations set by BNM to ensure they have sufficient liquid assets to meet their obligations. Government bonds, being highly liquid and considered low-risk, often form a part of these liquid asset holdings.
In summary: There isn’t a direct law stating banks must hold a specific percentage of government bonds. However, the SRR framework in Malaysia allows banks to use government securities to meet their reserve requirements, effectively making them a component of banks’ mandatory holdings with the central bank. Additionally, for overall liquidity management, banks often choose to hold government bonds due to their liquid and low-risk nature, aligning with regulatory expectations.
It’s important to note that the specific regulations and the extent to which government bonds can be used for SRR compliance can be adjusted by Bank Negara Malaysia based on economic conditions and monetary policy objectives. As of February 2025, the Statutory Reserve Requirement (SRR) for commercial banks in Malaysia was 2.0%.