Identifier
Created
Classification
Origin
07KUALALUMPUR1541
2007-10-18 09:02:00
CONFIDENTIAL
Embassy Kuala Lumpur
Cable title:  

MALAYSIA'S CENTRAL BANK: LET'S MAKE A DEAL!

Tags:  ECON EFIN EINV MY 
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P 180902Z OCT 07
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC PRIORITY 0119
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUCNISL/ISLAMIC COLLECTIVE
RUEHGP/AMEMBASSY SINGAPORE 4448
RUEHGV/USMISSION GENEVA 1519
C O N F I D E N T I A L SECTION 01 OF 03 KUALA LUMPUR 001541 

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STATE PASS USTR: WEISEL
STATE PASS FEDERAL RESERVE JENNINGS AND O'DAY
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN
USDOC FOR 4430/MAC/EAP/J. BAKER
TREASURY FOR OASIA AND IRS AND BOUKOL AND CARNES AND
MBEASLEY
STATE PASS OCC NWENTZLER
STATE PASS OTS GAFFIN
GENEVA FOR USTR
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E.O. 12958: DECL: 10/18/2017
TAGS: ECON EFIN EINV MY
SUBJECT: MALAYSIA'S CENTRAL BANK: LET'S MAKE A DEAL!
REGULATION BY NEGOTIATION


Classified By: ECON COUNSELOR MATT J. MATTHEWS, FOR REASONS 1.4 (b) and
(d)

C O N F I D E N T I A L SECTION 01 OF 03 KUALA LUMPUR 001541

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STATE PASS USTR: WEISEL
STATE PASS FEDERAL RESERVE JENNINGS AND O'DAY
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN
USDOC FOR 4430/MAC/EAP/J. BAKER
TREASURY FOR OASIA AND IRS AND BOUKOL AND CARNES AND
MBEASLEY
STATE PASS OCC NWENTZLER
STATE PASS OTS GAFFIN
GENEVA FOR USTR
SIPDIS

E.O. 12958: DECL: 10/18/2017
TAGS: ECON EFIN EINV MY
SUBJECT: MALAYSIA'S CENTRAL BANK: LET'S MAKE A DEAL!
REGULATION BY NEGOTIATION


Classified By: ECON COUNSELOR MATT J. MATTHEWS, FOR REASONS 1.4 (b) and
(d)


1. (C) Summary: A number of U.S. financial services firms
operating in Malaysia have described various informal
practices undertaken by staff at Bank Negara Malaysia, the
Central Bank, designed to encourage US firms to shift
investment and jobs to Malaysia in return for regulatory
approvals. In some cases the staff's demands to support
Malaysian government policies are quite direct, while in
other more subtle cases, the central bank,s regulatory and
licensing approvals conveniently and predictably follow
investment decisions made by U.S. firms that contribute
toward the government's development initiatives. U.S. firms
attribute these actions by Bank Negara to an effort to earn
bragging rights for its support of the GOM,s development
plans. Unfortunately, the use of regulatory oversight
authority by Bank Negara staff to prod U.S. firms to expand
investment and jobs in Malaysia raises serious questions
about the central bank's role as a neutral regulator
safeguarding financial stability. U.S. firm in Malaysia
believe concluding an FTA that includes obligations to
liberalize the financial services sector will be the most
effective way to address this issue. End Summary.


GETTING CONNECTED REQUIRES "REINVESTING" IN MALAYSIA
-------------- --------------


2. (C) In one case reported to Economic Counselor and
Treasury's Financial Attache for Southeast Asia, Bank of
America Malaysia (BoAM),a wholly-owned subsidiary of Bank of
America (BoA),has been unable to expand its business up to
now largely because the central bank, Bank Negara Malaysia
(BNM) would not permit the subsidiary to connect to the
parent company's Electronic Credit File (ECF),the bank's
centralized credit-decision making and risk management tool.

Across the globe, BoA approves credit decisions and maintains
all its credit files electronically on a single system. In
Malaysia, however, BoAM has been forced to make loan
applications on paper and send them via fax, maintaining
originals in a bulletproof safe.


3. (C) In April, after several years of negotiation, BoAM
finally secured approval from BNM to connect to its global
server by promising to "compensate" for using off-shore
credit analysis and risk management tools by "reinvesting" in
Malaysia. BNM had cited data secrecy provisions in
disallowing the connection, but this prudential issue was not
part of the negotiation. Instead, BoAM reported that the key
part of the negotiation revolved around the question of what
the bank would "bring back into Malaysia" if it were allowed
to "take this out."


4. (C) Similarly, BoAM has not been able to take advantage
of its global internet bank because the server for that was
located in Hong Kong. According to one BoAM representative,
BNM said connecting to a server outside of Malaysia --
whether for internet banking or credit risk management -- was
"outsourcing." When the bank argued that connecting to the
box would not result in any Malaysians losing their jobs, BNM
countered that, in the event of a financial crisis, foreign
banks were likely to "flee the country" unless they had
sufficient "brick and mortar" invested here. BoAM responded
that, in the event of a disaster, there was no back-up system
for its Malaysian customers without a connection to an
outside server as is done elsewhere in the region.


5. (C) BNM came back to the "brick and mortar" question,
pointing out that HSBC had invested $28 million in
back-office operations in Cyberjaya, making a significant
contribution toward the government's goals of becoming a
regional hub for back-office operations and building up the
government-initiated cyber-city. BoAM responded that their
operations in Malaysia were much smaller than those of HSBC
and that $28 million represented roughly half their total
business in the country; therefore they could not possibly

KUALA LUMP 00001541 002 OF 003


commit to such an investment. BoAM asked what was required
to "reinvest" in Malaysia, but BNM told them, "We do not have
a framework for that." So it became clear, according to the
bank representative, that BoAM was expected to bring
something to the table. Finally, BoAM offered to build a
$1.5 million Global Disaster Recovery Center for its internet
banking system and hire two Malaysians to operate the system.
BNM then agreed to allow them to connect to the server in
the U.S.

DIRECTED LENDING FOR HOUSING AND SMALL BUSINESSES
-------------- --------------


6. (C) Directed lending also has been a problem. BNM set
an individually-determined housing loan quota for all banks.
BNM instructed BoAM to finance 50 low-income housing units
(at less than RM60,000 each). BoAM pointed out several
difficulties they would have in meeting this quota. First,
BoAM did not do private mortgage lending in Malaysia, only
corporate lending, and as such would have difficulty in
assessing credit risk in this consumer market. Second, very
little housing was available at that price in Kuala Lumpur
and BoAM had no presence outside the capital city, due to BNM
restrictions on foreign conventional banks. Homebuyers from
outside the city were unlikely to travel to KL to apply for a
mortgage loan, the bank pointed out.


7. (C) BNM relented, imposing instead a RM 20 million quota
in loans to small and medium-sized enterprises (SMEs). BoAM
had been able to meet only about RM 5 million of that quota,
so every year it paid a fine. Bank headquarters, however,
became increasingly concerned about its reputation risk for
not complying with BNM's quota, and sent BoAM back to the
negotiating table with BNM. Finally, BNM removed the
official quota but established a "target" whereby BoAM was
expected to make RM 5.6 million in loans to SMEs, 50% of
which must be to SMEs owned by ethnic Malays.


GE COURTS BANK NEGARA
--------------


8. (C) Separately, Stuart Dean, General Electric President
for Southeast Asia, described a similar approach to getting
approval from BNM. GE has not been able to enter the
Malaysian market because BNM will issue licenses only to
banking institutions and GE Money is a finance company.
According to Dean, Malaysia has the largest consumer finance
market among the five countries in Southeast Asia in which it
operates, which also include Thailand, Indonesia, Singapore,
and the Philippines. If they could enter the consumer
finance market, he argued, GE could double its business in
Malaysia.


9. (C) Dean described his company's relationship with BNM as
"excellent" and said he was optimistic that GE would get the
approval they needed. In working with the Malaysian
government, it was necessary to show them how Malaysia would
benefit from any proposal, he explained. GE recently decided
to move 100 of its "backroom" positions to Cyberjaya to serve
its clients in Singapore, Hong Kong, and the Philippines.
This supports three key goals of the GOM: back-office
operations, regional operations, and a boost to the
cyber-city. GE also provides scholarships -- another high
priority for the GOM which recognizes that the country's
acute shortage of skilled labor is one of the major barriers
to its development. Last week, press reports announced that
GE planned to invest in yet another high-priority government
initiative, the "Iskandar Development Region" bordering
Singapore, in partnership with the government-linked company
UEM World.

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AMERICAN INTERNATIONAL ASSURANCE GROUP
--------------


10. (C) Brad Bennett, CEO of American International
Assurance Group (AIG) said he was confident that the company

KUALA LUMP 00001541 003 OF 003


would get the approvals it needed because it was contributing
to the country's explicit development goals. While the GOM
does not state outright that it will award approvals to
companies that invest in the government's targeted sectors
and initiatives, the company makes the investments and then
"trusts" that the regulators will come through. A year ago,
Bank Negara was very helpful in working out a solution for
AIG's requirements to incorporate locally and meet foreign
equity thresholds, and is assisting the company in navigating
the approvals required from various ministries for a
data/call center to service the region. Bank Negara
specifically requested AIG not to publicize its plans to
invest in the data/call center. Bennett believes this is to
allow Central Bank Governor Zeti to take credit for bringing
in this high priority investment. "It will be a political
feather in her cap," he told Econoff. AIG's next priority is
to get a license for Islamic insurance, as the company
perceives that its market share will decline as customers
switch from conventional insurance to a Sharia-compliant
product.


11. (C) Comment: Malaysia has a complex regulatory system
whereby approvals are awarded on a case-by-case basis after
what often are lengthy negotiations. U.S. companies
operating here have spent years investing time and money in
the negotiating process and in developing good relationships
with Malaysian regulators. U.S. firms do not wish their
various ongoing negotiations with Bank Negara to become the
subject of government-to-government discussions that could
undermine the deals these companies are working so hard to
complete. However, these financial sector companies do hope
that the successful conclusion of an FTA with Malaysia will
create a more transparent and liberalized operating
environment which will eliminate the need for such
interactions with Bank Negara in the future. Finally, the
aggressive effort by Bank Negara to use what should be
prudential or regulatory tools for the benefit of unrelated
government policies should raise some questions about how it
will implement any "prudential carve outs" in the FTA.
Clearly some of the policies imposed by BNM on the banks
actually undermined their global risk management
capabilities. End Comment.

KEITH