The developments in the pipe-line include the unique set of prudential regulatory and supervisory standards for Islamic banking operations by the Islamic Financial Services Board, tailor-made set of accounting standards for Islamic financial business by the Malaysian Accounting Standards Board and introduction of the Deposit Insurance Scheme in Malaysia. Having achieved the critical mass, Bank Negara Malaysia conducted a review in 2003 of the existing 'window' institutional structure of the banks to prepare an enabling structure that can assimilate future developments in the Islamic financial regulatory infrastructure over the longer term and thus strengthen the prudential regulatory and supervisory regime. This represents the third phase in the development of Islamic banking in Malaysia. The new institutional structure known as 'Islamic subsidiary' was introduced in 2004. It is envisaged that greater strategic focus and resources as well as higher autonomy and governance will be accorded to the Islamic banks. To-date, two Islamic subsidiaries of two banking groups have been set up. Integrating with international financial system Another significant milestone in the progress of Islamic banking and finance in the Malaysian banking system in its two decades of development is the issuance of three new Islamic bank licences to Islamic financial institutions from the Middle East. The new entrants with distinctive capabilities and strengths will have the opportunity to bridge the two regions, participate in the growing Islamic banking industry as well as tap new markets in Malaysia and in the region, and promote healthy competition thereby contributing to elevate the industry to new levels of dynamism.

Accordingly, the European Commission’s recent proposal, which introduces a new category of senior debt instruments, subordinate to deposits, is a step in the right direction. In any event, the most critical element of the MREL-setting policy is the determination of the minimum volume of eligible liabilities and own funds. Under the current regulations, within 6/10  the Banking Union, it is for the Single Resolution Board (SRB) to determine, case by case, this volume for all significant institutions (which are supervised directly by the SSM), as well as for non-significant institutions engaging in cross-border activity or whose supervision has been assumed by the SSM, following consultation with the prudential supervisor. For the moment, the SRB has publicly voiced its inclination for a stringent approach, ensuring an extensive availability of loss-absorbing instruments on bank balance sheets. Indeed, by way of indication, it has been advocated that the institution subject to resolution should have loss-absorbing capacity of a volume equivalent to its regulatory capital requirements (the so-called loss-absorption component) and the ability to restore immediately the minimum level required (or recapitalisation component). However, MREL requirements like those arising from the mechanistic formula indicated may entail very high needs in respect of the issuance of eligible instruments – such as subordinated debt or convertible bonds – for numerous banks, owing to the abovementioned reasons. Further, these issuance requirements would be concentrated in the same period of time for all the institutions concerned, hampering market take-up.