Are Banks in Malaysia required to hold Government Bonds by law?
Banks keep bonds, particularly highly-rated government bonds, for important reasons relating to liquidity management, regulatory requirements, risk management and income generation.
While there isn’t a specific law mandating that banks in Malaysia must hold a certain percentage of their assets in government bonds at all times, they are indirectly required to do so through the Statutory Reserve Requirement (SRR) framework managed by Bank Negara Malaysia (BNM), the central bank of Malaysia. In order to comply with regulatory requirements set by Bank Negara Malaysia, Malaysian banks in are required by law to hold a certain amount of liquid assets, which may include Malaysian Government Securities (MGS), Malaysian Government Investment Issues (MGII), and Treasury Bills.
Such holdings are part of the Liquid Asset Requirement (LAR) that Commercial banks, Islamic banks and other financial institutions must comply with in terms of specific ratios of liquid assets stipulated by Bank Negara. This liquidity framework ensures there is sufficient liquidity in the banking system and that banks maintain adequate, high-quality, and marketable assets.
Statutory Reserve Requirement (SRR): The SRR is a tool used by BNM for liquidity management in the banking system. It requires banking institutions to maintain a specified proportion of their eligible liabilities in a Statutory Reserve Account (SRA) with BNM. BNM provides flexibility to banks in meeting their SRR obligations.
Purpose of Government Bond Holdings: While the primary purpose of holding MGS and MGII under the SRR framework is to meet the statutory reserve requirements, it also means that banks do hold a certain amount of government bonds as part of their liquid assets. While banks must hold liquid assets to satisfy regulations, they are not mandated to hold only government bonds, although these are primarily considered to be the permitted, high-quality and low-risk assets in the financial system.
Liquidity Requirements: Beyond the SRR, banks in Malaysia are also subject to other liquidity requirements and prudential regulations set by BNM to ensure they have sufficient liquid assets to meet their obligations. Government bonds, being highly liquid and considered low-risk, often form a part of these liquid asset holdings.
In summary…
There isn’t a direct law stating banks must hold a specific percentage of government bonds. However, the SRR framework in Malaysia allows banks to use government securities to meet their reserve requirements, effectively making them a component of banks’ mandatory holdings with the central bank. Additionally, for overall liquidity management, banks often choose to hold government bonds due to their liquid and low-risk nature, aligning with regulatory expectations.
Consequently, banks and financial institutions are the largest holders of Malaysian government bonds, accounting for more than 30% of total outstanding MGS and MGII (which are Shariah-compliant Islamic bonds or Sukuk) as at Q3 2023, followed by social security institutions and foreign investors.
It’s important to note that the specific regulations and the extent to which government bonds can be used for SRR compliance can be adjusted by Bank Negara Malaysia based on economic conditions and monetary policy objectives. As of February 2025, the Statutory Reserve Requirement (SRR) for commercial banks in Malaysia was 2.0%.