Muhammad bin Ibrahim: Malaysia’s experience in macroprudential policies and insights on financial inclusion Remarks by Mr Muhammad bin Ibrahim, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Meeting of Central Bank and Monetary Authorities of the Organisation of Islamic Cooperation Member Countries, Surabaya, Indonesia, 6 November 2014. *  *  *  Allow me to share the five broad principles which the design, deployment and calibration of macroprudential policies in Malaysia are premised upon: First, macroprudential policies introduced must be complementary to other microprudential, monetary and fiscal policies I will share on the measures we implemented since November 2010, where we introduced a series of macroprudential policies in concert with a package of monetary, fiscal, regulatory, supervisory and long-term structural measures (e.g. enhancing housing supply) to curb the excessive credit-fuelled speculation in the Malaysian housing market and to reign in the increasing level of household indebtedness. This required coordination with other part of the government. There was one particular measure that we introduced in November 2010, called a loan-tovalue (LTV) ratio where a maximum limit of 70% was imposed on the third and above outstanding house financing per individual. A cap of 10 years on the tenure of financing for personal use and 35 years on the tenure of house financing were also introduced in July 2013 together with gradual implementation of real property gain tax, consumer education and debt management measures.
In this case, we need to conduct a bit more research before we implement any macroprudential policies. The caps on financing tenure, together with requirements to comply with responsible financing practices (including adoption of prudent debt service ratio (DSR) threshold and  BIS central bankers’ speeches  1  definition of income and debt obligations for computation of DSR), were not limited only to banks. The caps were also imposed on non-regulated entities in order to avoid regulatory arbitrage or shifting of risks to these non-bank lenders. Third, preserving appropriate discretion for authorities to act is important, with respect to the timing, mix and calibration of measures. We do not adopt a rule-based approach to the implementation of macroprudential measures. The reason is that, it can avoid a “self-fulfilling prophecy” if the formula for determining the timing, quantum and criteria for the deployment of macroprudential policies are made public or applied in mechanistic way – unintended consequences could arise or systemic risk could suddenly build up right before the effective date as economic agents try to “beat the clock” by getting ahead of the implementation. This approach provides us with greater flexibility to use an optimal mix of macroprudential and other measures under varying circumstances – this is different from the UK where legal constraints limit the choice of macroprudential instruments that can be used, or compared to Turkey which uses quantitative triggers for the new reserve requirement framework.