Acting in pre-emptive fashion, Bank Negara Malaysia in August 1998 set up an
agency known as Danamodal to fortify the capital positions of Malaysian banking
institutions adversely affected by a weakening economy and falling asset prices. In
the event, Danamodal injected 7.6 billion ringgit (US$2 billion) of cash into 10 banks
in exchange for subordinated capital instruments convertible into preferred shares,
subordinated debt and ordinary shares. The impact on Bank Negara’s balance sheet
was minimised by its making a modest equity investment of 3 billion ringgit (less
than US$1 billion) and Danamodal’s issuing 11 billion ringgit (US$3 billion)
zero-coupon bonds (Danamodal 2001b). By the end of January 2001, the bulk of the
investments actually made had been redeemed by seven of the beneficiary banks,
with a number of redemptions related to the consolidation of the Malaysian banking
system (Danamodal 2001a). Whether or not Bank Negara’s equity investment has
at this stage been reduced, the fact that most of Danamodal’s investments into banks
have been repaid implies that the central bank is more than half-way to undoing the
effect of the crisis on its own balance sheet and contingent liabilities.