By Industry Consultative Paper on New Reference Rate Framework for Financial Industry
Bank Negara Malaysia is issuing an industry consultative paper to the financial industry on a new reference rate framework to replace the base lending rate (BLR) quoted by financial institutions in the pricing of retail loans.
In the recent period, retail lending rates on new loans offered by financial institutions have been at a substantial discount to the BLR. This has resulted in a divergence between changes in the retail lending rates on new loans and the BLR of financial institutions, suggesting that the BLR has become less relevant as a reference rate for the pricing of retail loans.
The new reference rate aims to improve the transmission of monetary policy to both new and existing borrowers, and promote a transparent pricing of floating rate retail loans that is more reflective of market conditions.
Key recommendations
Under the proposed reference rate framework, the new reference rate will be determined by the respective financial institution's funding costs which reflect its specific funding structure and strategy and the statutory reserve requirement.Other components of pricing such as borrower credit risk, liquidity risk premiums, operating costs and profit margins are proposed to be reflected in the spread to the reference rate. Currently, there is insufficient transparency in the basis adopted by individual financial institutions for setting the BLR which reduces the sensitivity of the BLR to changes in an institution's funding costs and comparability across institutions.
The proposed basis for setting reference rates will eliminate negative spreads to the reference rate going forward. Future changes to the reference rate will directly reflect changes to a financial institution's funding costs due specifically to monetary policy changes, regulatory changes and market funding conditions. This is also important for effective monetary policy transmission. In addition, borrowers will be better able to compare lending rates between financial institutions for better informed decision making.
The proposed changes in the reference rate framework will have not have an impact on effective lending rates charged to retail borrowers which are determined by a range of factors, including the financial institution's assessment of a borrower's credit standing. These changes mainly serve to strengthen the link between retail lending rates and the reference rates that financial institutions use to manage the risk of future changes in the funding costs incurred by the financial institutions in providing the loans. It is important to note that the changes in the reference rate framework do not represent a change in the monetary policy stance.
The new reference rate will be used for the pricing of new retail loans and the refinancing of existing loans after the effective date of the new framework. Existing loans will continue to be referenced against the BLR. However, when a financial institution makes any adjustments to the new reference rate, a corresponding adjustment will also be made to the BLR.
Financial institutions are given until 14 February 2014 to provide feedback to Bank Negara Malaysia on the proposed reference rate framework.
In the recent period, retail lending rates on new loans offered by financial institutions have been at a substantial discount to the BLR. This has resulted in a divergence between changes in the retail lending rates on new loans and the BLR of financial institutions, suggesting that the BLR has become less relevant as a reference rate for the pricing of retail loans.
The new reference rate aims to improve the transmission of monetary policy to both new and existing borrowers, and promote a transparent pricing of floating rate retail loans that is more reflective of market conditions.
Key recommendations
Under the proposed reference rate framework, the new reference rate will be determined by the respective financial institution's funding costs which reflect its specific funding structure and strategy and the statutory reserve requirement.Other components of pricing such as borrower credit risk, liquidity risk premiums, operating costs and profit margins are proposed to be reflected in the spread to the reference rate. Currently, there is insufficient transparency in the basis adopted by individual financial institutions for setting the BLR which reduces the sensitivity of the BLR to changes in an institution's funding costs and comparability across institutions.
The proposed basis for setting reference rates will eliminate negative spreads to the reference rate going forward. Future changes to the reference rate will directly reflect changes to a financial institution's funding costs due specifically to monetary policy changes, regulatory changes and market funding conditions. This is also important for effective monetary policy transmission. In addition, borrowers will be better able to compare lending rates between financial institutions for better informed decision making.
The proposed changes in the reference rate framework will have not have an impact on effective lending rates charged to retail borrowers which are determined by a range of factors, including the financial institution's assessment of a borrower's credit standing. These changes mainly serve to strengthen the link between retail lending rates and the reference rates that financial institutions use to manage the risk of future changes in the funding costs incurred by the financial institutions in providing the loans. It is important to note that the changes in the reference rate framework do not represent a change in the monetary policy stance.
The new reference rate will be used for the pricing of new retail loans and the refinancing of existing loans after the effective date of the new framework. Existing loans will continue to be referenced against the BLR. However, when a financial institution makes any adjustments to the new reference rate, a corresponding adjustment will also be made to the BLR.
Financial institutions are given until 14 February 2014 to provide feedback to Bank Negara Malaysia on the proposed reference rate framework.
Bank Negara Malaysia
16 January 2014
© Bank Negara Malaysia, 2014. All rights reserved.
|
distributed by
|
