However, in the present day, Central Bankers and other policymakers around the world are confronted with a number of challenges in maintaining financial system stability due to the high contagion effect resulting from the increased complexity and connectivity in this hyper-connected world. Although globalisation can allocate savings and investments more efficiently worldwide than in the past and the net benefit of financial globalisation for developing countries can be large, the financial crises the world encountered over the last 80 years, ranging from Wall Street Crisis during 1929–33 to Subprime Crisis in 2008–09, have shown us how large, costly and disastrous the spillover effects could be and how they have made the financial system deteriorate while spreading fast to other economies. Recently, US Fed Chairperson Janet Yellen said, I quote, “No economy is immune from financial instability and the adverse effects on employment, economic activity, and price stability that financial crises cause”. However, since there is no universally governed law or standard for defining or measuring financial system stability, we have to understand our own circumstances and find tailor made solutions that are appropriate for us to sustain the stability in the financial system. The main benefit of financial globalisation for developing countries is the improvement of their financial system through positive spillover effects from more complete and stable, deeper and better-regulated financial markets. A smooth functioning deep financial system with capital buffers and an effective level of credit expansion and risk mitigation capacities are crucial for developing nations as they foster economic growth.
As far as it has been established through research, a national policy on financial sector consolidation in other countries has been formulated and implemented only in response to a more damaging and widespread crisis in the past. However, the initiative by Sri Lanka to consolidate the financial sector is a unique paradigm, marking a record in global economic history, as this proposal is a prudent and forward looking regulatory move to prevent and minimise the costs of future crises. Recently, the Governor of the Reserve Bank of India, Dr. Raguram Rajan was in Colombo to attend the SAARC Governors’ Conference and the Central Bank arranged a special evening presentation for him to deliver a lecture on the banking industry. There he reminded us, I quote, “Regulators need to take right actions at the right time”. We believe the consolidation programme is the “Right Action” taken by the Central Bank at the “Right Time” to reform the Financial Sector in order to facilitate the rapid transformation of our economy. Distinguished guests, the Government and the Central Bank believe the financial sector consolidation will result in cost efficiencies, productivity gains and improvements in corporate governance in the financial sector while enhancing the sector’s contribution to uplift nationwide economic activity to facilitate the inclusive growth required for raising the country’s per capita income to over USD 7,000 by 2020. Part II: Financial sector consolidation: how? Ladies and gentlemen, let me now move onto the second part of the oration.