Question

Question 2
(a) 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. [15 marks]
(b) Based on your answer above, select an economic problem where that impact would work and explain what could happen. [15 marks]

Answer 1

2 (a) Based on the BNM news or report, the statutory reserve requirement or SRR for Malaysia has basically remained unchanged at its previous level of 2%. This monetary policy or measure has been undertaken by the Bank Negara, the central banking or financial authority in Malaysia mainly in order to ensure sustainable financial stability or liquidity flow of the commercial banks or other financial institutions in the country at the onslaught of the economic downturn or slowdown following the outbreak of the COVID-19 pandemic worldwide. Bank Negara also intends to ensure an overall financial inflow of around RM16 billion into the national banking system of the country through a temporary restrictive or contractionary monetary policy mainly to strengthen the national banking system amidst tough economic times pertaining to both the domestic as well as the international economy. As the SRR remains unchanged the commercial banks and other financial institutions are required to hold the same amount of financial reserve as before meaning that the overall money supply in the domestic economy does not increase, holding everything else as constant. In this regard, the ability of commercial banks and other financial institutions to provide financial loans and the lending capacity of the banks and financial institutions also remain unchanged based on the total deposit received. This essentially implies that holding the overall financial deposit as constant or unchanged, the money supply would not increase in the domestic economy in Malaysia at least in the short-run.

(b) Now, in retrospection, based on the financial crisis and economic recession of 2008, such a tight and contractionary monetary stance can be effective considering that the source of any persistent and prolonged economic recession can evidently be lack of appropriate financial liquidity of the commercial banks and other financial institutions. The unrestrained and high lending capacity of the banks and financial institutions can lead to the financial bankruptcy of many of these institutions leading to a massive economic collapse at a broader level or magnitude. Hence, in such predicaments or circumstances, it is imperative to ensure sustainable financial liquidity of the banks and financial institutions and to prevent their over or excess lending activities which can subsequently lead to a comprehensive financial collapse as low financial liquidity of the commercial banks and financial institutions would eventually negatively affect their lending ability, commercial future, and the aggregate investment expenditure by the firms and business and the consumption expenditure by the domestic households and individual consumers thereby impacting overall economic growth of any country. Therefore, it is important for the central bank or the financial authority in any country to undertake necessary monetary policies or measures to ensure a consistent and sustainable financial liquidity of the commercial banks and other financial institutions which could prevent a potential economic downturn but also maintain their financial stability during any ongoing economic recession or slowdown which could consequently improve their financial conditions or leverage for future lending purposes and activities for firms/businesses and individual customers and households in the thereby ensuring potential economic recovery and stimulating long term economic growth and stability.