7 The first one is commonly called contagion and is closely studied in the research literature. For example, a supposedly idiosyncratic failure of a financial intermediary leads to the failure of other intermediaries. The second one emerges from imbalances that build up over time, such as credit booms or concentrations of lending in certain regions or sectors. These “bubbles” can go on profitably for most participants who “ride” them for quite a while. Then relatively small events or changes in expectations can lead to their breakdown, simultaneously bringing down a wide range of intermediaries and markets. 8 The third way in which systemic risk can materialise relates to economic downturns or other aggregate shocks that cause the collapse of a wide range of intermediaries and markets simultaneously. 9 Other important elements in systemic risk include the strong information intensity of financial contracts and transactions, and a high degree of connectedness between financial intermediaries and markets as well as a strong reliance on debt financing (leverage) and on maturity mismatches between assets and liabilities. These factors imply feedback mechanisms that amplify shocks and can lead to non-linearities in the financial system that then are easily transmitted to the real economy. Systemic stability, or the absence of systemic risk, can be seen as a public good, thereby legitimising the role of governments and other authorities in addressing it.
The development of the venture capital industry, a better framework for SME financing and the provision of micro financing continue to be important priorities to ensure that credit is made available to all segments of the economy, as well as to support the growth of new areas and industries. Increased focus on developing these financing modes has been supported with higher public sector budget allocations for the venture capital industry and for specific development financial institutions to channel micro-credit to small micro-enterprises. Priority has also been accorded to investment in information and communications technology by the banking sector. With the completion of the consolidation exercise, domestic banking institutions have actively embarked on upgrading their systems, including in product delivery, risk management and information systems. The adoption of technology in the Malaysian banking system has predominantly been to automate business processes. However, more recently technology has been used as a tool to assess and drive business performance. With competition in the market becoming increasingly intense, the ability to understand the drivers of performance and the ability to make prompt response is vital to remain competitive. Business delivery channels and business processes have also been reviewed to enhance efficiency levels and service quality to the customers. Many have formed strategic alliances with partners to enrich their value proposition to their customers through cross-selling of products and services. Indeed, the Malaysian banking industry has now become more consumer-centric.