Malaysian rates fall as bank funding rules seen easing squeeze

[KUALA LUMPUR] Malaysia's short-term interest rates fell the most since 2009 on Monday after the central bank developed rules governing the way local banks should account for certain deposits and other items on their balance sheets.

Deposits that are subject to an early-withdrawal penalty of at least 50 per cent of accrued interest can be treated as "qualifying term funding," or money that can be lent out, with effect from June 1, according to a central bank circular dated Jan 30 and obtained by Bloomberg News.

Unrestricted investment accounts, which hold assets such as securities and exchange-traded commodities, will be subject to a 10 per cent run-off rate from the same date, the circular showed. The run-off rate is the accounting treatment banks use to reflect the risk that the holders withdraw their funds.

The move helped to clarify how much cash banks need to set aside when making loans. The Kuala Lumpur interbank offered rate has been rising amid concern that stricter capital buffers to be introduced by 2019 will limit the flow of credit in the Southeast Asian nation.

"The relaxation of the liquidity coverage rules eased pressure on Klibor," Chua Hak Bin, an economist at Bank of America Corp.'s Merrill Lynch in Singapore, said by phone. "There may be room for the Klibor to fall further."

Three-month Klibor, a gauge of funding availability, fell two basis points, or 0.02 percentage point, to 3.82 per cent Monday. That's the biggest drop since February 2009. It reached 3.87 per cent on Dec 15, the highest since 2006.

"The changes are intended to facilitate a smooth transition to full implementation of the liquidity coverage ratio by 2019," the central bank said in the circular. The rule on deposits will be tightened from that date, with only those subject to early-withdrawal penalties of 100 per cent allowed as qualifying term funding in 2019, the circular said.

The Basel Committee on Banking Supervision issued rules in 2010 intended to boost banks' capital buffers against losses, following the global financial crisis that erupted in 2008. The so-called Basel III standards will be introduced in 2019.

According to the Malaysian central bank's circular, non- ringgit denominated corporate bonds that have been assigned an A rating will be recognized as high-quality liquid assets subject to losses of 50 per cent, effective from June 1.

BLOOMBERG