Governing Finance: East Asia's Adoption of International Standards

5. Banking Supervision and Corporate Governance in Malaysia

Malaysia is a rather different case to Indonesia and Thailand. Of the four countries most affected by the crisis, only Malaysia managed to avoid IMF intervention and conditionality. Even so, Malaysia’s government joined its neighbors in committing itself to convergence upon international bestpractice standards in spite of its reputation for macroeconomic unorthodoxy . In this chapter, I assess Malaysian compliance outcomes in the two areas covered in the previous two chapters, banking regulation and corporate governance. There are other respects in which Malaysia differs from Indonesia and Thailand. First, Malaysia’s British colonial legacy and common law legal tradition would lead some to expect considerably better compliance outcomes compared to Thailand and Indonesia (La Porta, Lopez-de-Silanes, and Shleifer 1998b; Shleifer and Wolfenson 2000). Second, Malaysia is financially more developed than Indonesia and Thailand, which should also favor compliance. Indeed, by some measures, Malaysia has one of the most capital markets–based financial systems in the world, comparable to those of Singapore and Hong Kong in the Asian region (Beck, Demirgüç-Kunt, and Levine 1999). A third difference has more ambiguous implications for compliance : political power in Malaysia has been consistently more centralized than in both Indonesia and Thailand. The enhancement of executive power and the subordination of the judiciary was a marked characteristic of the Mahathir era, which lasted from 1981 to 2003 (Gomez and Jomo 1999, 183; MacIntyre 2003, 45–48; Woo-Cumings 2003, 216).1 The attitude of the executive branch of government toward compliance with international standards has therefore been crucial, but this has varied considerably over time. 5 Banking Supervision and Corporate Governance in Malaysia 100 Governing Finance As in Indonesia and Thailand, mock compliance outcomes in banking supervision and corporate governance were clearly in evidence in the years after the 1997–98 crisis. The quality of Malaysia’s compliance with international standards in both areas has been better than that in Indonesia and Thailand, but it has still lagged that in the best performing countries in the region. In banking supervision, the quality of compliance improved considerably along with economic recovery. Interestingly, this also seems to have occurred in the area of corporate governance, in contrast to the Thai experience. I argue that this has largely been due to a more positive attitude toward compliance by the Malaysian political leadership since 2001. Compliance with International Standards of Banking Supervision The Malaysian government’s response to the Asian crisis has often been said to have been unorthodox and at odds with those elsewhere in the region , particularly in the three countries in which the IMF intervened (Indonesia , Korea, and Thailand). However, the initial policy response, led by Finance Minister Anwar Ibrahim in November 1997, was wholly orthodox in its macroeconomic aspects, “an IMF program without the IMF.” Only after Anwar’s ousting in September 1998 did the Malaysian government adopt capital controls and a reflationary macroeconomic policy. A month later, Prime Minister Mahathir remarked that “Bank Negara [the central bank and regulator] and those responsible for supervising the economy [i.e., Anwar]...were completely taken in by the IMF, which was perceived to be the authority in economic policy.”2 Nevertheless, in the area of financial restructuring and regulation, Malaysia’s response remained fairly orthodox even after Anwar’s ouster, with some exceptions and with some explicit forbearance.3 As in the other crisis-hit countries, early in the crisis the government provided emergency liquidity to banks and a blanket guarantee of bank deposits; established state agencies to purchase NPLs from the banking sector and to recapitalize banks (Danaharta and Danamodal respectively); and another agency to restructure corporate sector debt (the Corporate Debt Restructuring Committee, or CDRC). Unlike the other three countries, Malaysia did not promote foreign takeovers of domestic banks, focusing instead on a strategy of indigenous financial sector consolidation centered around a prescriptive “master plan” (IMF 1999b; Meesook et al. 2001). With this exception, the Malaysian government’s response in the area of financial reform, both before and after Anwar’s demise, was broadly similar to that in the IMF countries. In March 1988, the government committed itself to bringing prudential regulation and supervision up to international best-practice levels. Malaysia 101 In international and regional forums, the attitudes of Malaysian representatives to the promotion of international standards were very supportive.4 In the judgment of an IMF report, The [Malaysian] authorities...pursued fundamental reforms in the financial and...