It is the case, however, that mitigating the implicit subsidy to TBTF institutions does correspond to a socially desirable increase in the cost of doing business for these institutions. Is maximising return on equity an appropriate objective? As mentioned in our discussion of the cost of capital, return on equity will be affected. A more highly capitalised bank is expected to have a lower ROE because of its lower risk profile. However, this is socially desirable. The common emphasis on ROE should be handled with scepticism, as ROE is a measure that is not adjusted for the risk profile of the bank and thus can be easily manipulated by increasing leverage. Because ROE depends on the capital structure of a bank, this measure should not be used to compare two banks with different capital structures. If, however, two banks have the same capital structure, does it follow that targeting the highest ROE is the appropriate strategy? If a bank is operating efficiently, its return on equity will be positively correlated with the risk taken: on average, more risk means more reward and thus more profitability. However, as we have seen, there is such a thing as too much risk-taking from society’s perspective, in particular in the context of TBTF or systemically relevant institutions. That is, the amount of risk taken by a TBTF bank can diverge from the risk that society would like the bank to take.
For an open trade-dependent economy, stability in the exchange rates accords significant advantage in enhancing trade and investment opportunities. By eliminating wide swings in the exchange rates, the pegged exchange rate regime has provided a stable environment for businesses to plan their investments and to undertake their operations. At the same time, stability of the exchange rate also provides an environment that facilitates continuous structural reform to improve Malaysia's competitive position. It is through long-term structural adjustments rather than frequent adjustments in the exchange rate that a country can build a strong business foundation, improve efficiency and create the enabling environment that encourage competition and innovation. As a small open economy, Malaysia does not have influence over the external factors that affect the economy. However, by working on strengthening domestic economic fundamentals, Malaysia will be in a stronger position to manage and mitigate the impact of the volatility in the external sector. Three elements are important in ensuring that an exchange rate regime continues to operate effectively. First, it needs to be well supported by the domestic fundamentals. Second, there must be flexibility in domestic markets to enable the economy to adjust and absorb the impact from external volatility. Third, increased competitiveness is achieved through efficiency and productivity gains rather than relying on currency depreciation.