While the economy contracted 1.7 per cent in 2009, threats to financial stability were identified and responses put in place early, Bank Negara Malaysia says in its 2009 Annual Report.
During the weak economic environment of 2009, there were concerns of rising debts, massive layoffs and business closures.
But overall, Malaysia only experienced a technical recession and not a widespread one. There were layoffs and business closures but these were not as widespread as initially feared.
Amid the weaknesses, the domestic financial markets remained orderly and with ample liquidity in the system, it was able to continue carrying out its role in financial intermediation, payment and settlement and in providing other financial services.
Overall loan delinquencies continued to decline in 2009, contrary to inital expectations and Malaysian banks were able to continue providing enough credit at reasonable costs.
Bank Negara and the financial sector as a whole referred to lessons learnt during the Asian financial crisis a decade ago and dedicated resources to banks to enable them to attend to borrowers' problems fast and with much flexibility.
There was a sense of high aversion to risk in the early part of 2009 but trading liquidity in both the equity and and corporate bond markets improved significantly from the second quarter of the year.
In the non-financial sectors, households and businesses faced enormous challenges but were generally able to withstand the pressures.
Consumer sentiments reached a low level early 2009 before turning sharply positive in the second half of the year with more signs of improvement in the macroeconomic environment.
In the financial sector, about 70 per cent of total capital of the Malaysian banking industry comprise Tier-1 capital, while for the insurance sector 93 per cent of capital comprised Tier-1.
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