This article first appeared in The Edge Financial Daily, on November 11, 2015.

KUALA LUMPUR: The Association of Banks in Malaysia (ABM) has dismissed concerns about foreign currency deposits posing a risk to the country’s banking system stability.

The association said foreign currency denominated liabilities and assets of Malaysian banks have expanded in line with the banks’ regional operations and their regional trade activities, as well as their centralised liquidity management.

“Additionally, these liabilities do not represent immediate claims on Malaysia’s international reserves as foreign currency liabilities are generally well covered with foreign currency external assets, including overseas assets, lending and investment in debt securities,” it said in a statement on Monday.

The ABM was responding to a report by Reuters on Monday which had pointed to Malaysia’s heavy short-term overseas borrowings by banks, and scarce international reserves.

The association further explained that while some residents have recently increased their foreign currency deposits due to the depreciation in the ringgit for reasons such as immediate business needs and children’s education, the Malaysian banking system’s foreign currency deposits remain relatively small at about 7% of total deposits.

“According to Bank Negara Malaysia’s (BNM) recent monthly statistical bulletin, total non-resident deposits (in both ringgit and foreign currency) amounted to about RM70 billion, but make up to only about 4% of total banking system deposits,” it noted.

The ABM added that banks have proactively managed foreign exchange and foreign currency funding risks through robust internal controls, contingent funding plans and foreign currency funding programmes.

“We are given to understand that there is no dependence on external or cross-currency funding for operations in Malaysia. As a matter of fact, many, if not, most banks in Malaysia practise the same asset liability management as they would do with regard to their ringgit exposure,” it said.

The association also pointed out that BNM’s US$94 billion (RM412 billion) international reserves as at Oct 30, remain adequate to facilitate international transactions without disruptions.

It also noted that more than two-thirds of the short-term external debt is accounted for by the banking sector, largely in the form of interbank borrowing and non-resident deposits, adding that debt liabilities are partly covered by the banks’ corresponding external assets.

“The Malaysian banking sector remains resilient due to sound capital ratios, solid liquidity and low credit risks. The commercial banking sector is well-positioned to weather various challenges given the system’s strong regulatory framework,” the ABM said.