A MALAYSIA BANKING STABILITY INDEX

Abstract

The main purpose of the study is to provide an index for the banking sector in Malaysia through which the vulnerabilities and risks in the banking system can be observed and monitored. Accordingly, we suggest the Banking Stability Index (BSI) that is constructed through the use of 15 variables that covers both the bank specific and macroeconomic factors, which were proposed by International Monetary Fund (IMF). By doing so, our proposed index able to provide a better measurement of banking stability than the current used measurements (i.e. Stress Testing, Z-score, CAMEL) that relays on bank specific factors in measuring stability. Furthermore, the current study uses the constructed BSI to measure the stability of the Malaysian banking sectors. The sample covers the period from 2008-2015 on 37 individual banks. We focus to provide a comparative analysis of the banking stability for different banking categories. This study compares the stability across bank specialisations (i.e. conventional vs. Islamic banks), bank ownership (local vs. foreign banks), and bank size (large vs. small bank). Based on the constructed BSI, this study found that the value of BSI for conventional, foreign and large banks are higher than their counterparts. Overall, the banking activities in Malaysia were well maintained and had potential improvements for even better performance in the coming years. This finding should offer valuable insights to financial regulators and the makers of macro prudential policy concerning the stability of Malaysia’s banking system.