FMC members became the bridge between the regulator and the industry at large in the implementation of the many initiatives that have seen us through to this day. I see quite a few of the FMC members tonight and I understand that many have continued to contribute and help Bank Negara Malaysia further shape the development of our financial markets. Thank you to all, and especially to Dato’ Lee Kok Kwan for previously leading FMAM to become the success it is today. The fact is, three years on, we have not only weathered the volatility and challenges then. The financial markets have actually moved from strength to strength. Amidst heightened global volatility, not to mention the many domestic political upheavals and uncertainty of the recent years, it is a wonder that the Malaysian financial market has continued to grow consistently. The onshore foreign exchange market has expanded from an average daily trading volume of USD8.1 billion in 2016 to USD 12.3 billion today. This is mirrored by the growth of the ringgit bond market which stood at RM1.2 trillion in 2016 to reach RM1.5 trillion now. Despite our markets growing larger, stability has been a key feature as witnessed by a moderate level of volatility in the onshore markets. The 1-month USDMYR implied volatility hovers around 3 to 4 percent compared to a high of 12 percent in 2016, supported by a much less disconcerting level of nonresident holdings of government bonds at 22% compared to 34% back then.
We refer to this as the lack of a macroprudential perspective. 3 In general, we have not taken enough account of systemic risks; that is risk that can spread throughout the financial system. In a capital adequacy context, the lack of a macroprudential perspective is reflected in the fact that the banks have calculated their capital adequacy requirements on the basis of the risks to their own operations. They have thus ignored the negative external effects that banks may have on the system as a whole. This has led to a banking system with too high a level of risk and too small buffers in terms of capital and liquidity. It has also led to the risk of distorted market prices for risk, capital and liquidity. Another example is that the models that the banks have used to calculate their capital requirements for market risks systematically underestimate the risk of losses under stressed market conditions. As a result, the calculated capital adequacy requirements have been too low to enable the institutions concerned to manage the losses that occur in serious economic downturns, like the one we have just experienced. A third and closely-related example is that the banks have not held sufficient capital for the counterparty risks that they are exposed to in their derivatives trading. As financial assets, including derivatives, are accounted in accordance with the real value principle, changes in counterparty risks enter the banks’ balance sheets via their income statements.