Question

Based on BNM or news report, explain the latest changes in the statutory reserve requirement (SRR) for Malaysia. Your explanation should also include the changes to money supply and the possible impact of the change.

Answer 1

Statutory Reserve Requirement (SRR)

Statutory Reserve Requirement is an instrument to manage liquidity. Banking institutions are required to maintain balances in their Statutory Reserve Accounts (SRA). Equivalent to a certain proportion of their eligible liabilities this being the SRR rate.

The SRR may be raised to manage the significant buildup of liquidity, which may result in financial imbalances and create risk to financial stability.

Latest changes in SRR for Malaysia:

The SRR is a monetary policy instrument available to Bank Negara Malaysia. The role of Bank Negara Malaysia is to promote monetary and financial stability.

Bank Negara has announced that the SRR will be lowered by 100 basis points from 3% to 2% in an effort to shore up liquidity in the banking system.

Generally, a lower SRR indicates a lower amount to be set aside with the central bank, hence lenders will have more funds to lend out and earn an interest on these instead. The lower the ratio has been is at 1% on March 1 2009 which was during the global financial crisis.

SRR lowering of 100 basis points was more than expected suggesting that economic growth remained a concern and weak oil prices and covid-19 outbreak. Additional funds for lending by bank should stimulate economic activity but that remains to be seen.

The decision to reduce the SRR is undertaken to maintain sufficient liquidity in the domestic financial system. This will continue to support the efficient functioning of the domestic financial markets and effective liquidity management by the banking institutions.

Changes to Money Supply and the Possible Impact:

The total stock of money circulating in an economy is the money supply.

The increase the nation’s money supply expands the economy.

Increase the reserve requirement ratio reduce the volume of deposits that can be supported by a given level of reserves and in the absence of other actions, reduce the money stock and raise the cost of credit.