Financial Liberalization, Innovation and the Response of Malaysian Commercial Banks' Portfolios to Monetary Shocks

Abstract

Several recent theoretical papers have shown that banking institutions posses a special role in the transmission mechanism of monetary policy. The reactions of banks toward changes in monetary conditions, particularly their portfolio allocations, determine the ultimate impact of monetary policy on real activities. In addition, several findings also indicate the changing behaviour of commercial banks in recent years due to the development of financial markets and liberalization process which begin since early eighties. This paper examines this issue for the Malaysian banking industry. Without exception, liberalization and innovation that occur in the Malaysian financial industry since early eigties also affect the way banks respond to changes in monetary policy. It is shown that banks resort to competitive funds and securities liquidation in their attempt to shield the lending capacity. It is argued that the central market loses to some extent, its direct influence on banks portfolio allocations, thus, reducing the effectiveness of monetary policy. Studying the transmission mechanism of monetary policy, therefore requires special attention to the behaviour of banking firms. ABSTRAK Sebilangan kajian teoritikal kebelakangan ini menunjukkan bahawa institusi perbankan memainkan peranan yang penting di dalam transmisi polisi meoetari. Tindakbalas bank terhadap perubahan di dalam polisi monetari, terutamanya perletakan portfolio mereka mempengaruhi kesan muktamad polisi monetari ke atas aktiviti benar. Di samping itu beberapa kajian menunjukkan perubahan tingkahlaku bank akibat dari pembangunan di dalam pasran kewangan dan juga proses liberalisasi yang bermula sejak awal lapan puluhan. Kajian ini meneliti perihal berkaitan bagi industri perbankan di malaysia. Keputusan menunjukkan bahawa sistem perbankan di Malaysia juga tidak terkecuali dari kesan yang sama. Proses liberalisasi dan inovasi kewangan mempengaruhi tindakbalas bank terhadap perubahan di dalam polisi monetaru. bank didapati cuba melindung portfolio pinjamna mereka dengan cara mencairkan portfolio pelaburan ataupunb mempertingkatkan pinjaman luar. Kesemuanya ini berkemungkinan hasil dari pembangunan sistem keangan sejak awal lapan puluhan yang berlaku di Malaysia. Oleh yang demikian, keupayaan bank pusat untuk mempengaruhi perletakan portfolio institusi bank adadlah berkurangan dan ini seterusnya mengurangkan keberkesanan polisi monetari. Penentuan saluran transmisi polisi monetari seharusnya memberi perhatian yang khusus ke atas tingkahlaku firma perbankan.