Second, regulations will continue to focus more on facilitating market-led adjustments that will allow the industry to evolve in response to market developments, while maintaining a sufficient degree of regulatory oversight to maintain financial stability and public confidence. This includes the adoption of principles-based regulations and an increased focus on harnessing market forces and discipline, as well as internal oversight functions, to reinforce prudential regulation and supervision. The aim is to promote a more efficient and responsive financial system. In this connection, Bank Negara will soon introduce a more facilitative process for product innovations with revisions to the new product approval framework. The changes are aimed at improving time to market for the introduction of new products by financial institutions, while ensuring that institutions put in place a sound product management programme within their respective institutions. The new framework will provide for more simplified regulatory processes and allow greater flexibility for well- managed banks and insurers to introduce new  BIS Review 83/2007  3  products more quickly in the market. Qualifying banks and insurers are expected to exercise this flexibility responsibly and in particular, with due regard to the interests of consumers. The realignment of the regulatory and supervisory structures within the Central Bank in November 2006 has marked a significant turning point in consolidating these regulatory changes.
In recent years, house prices and household borrowing have increased rapidly, partly as a result of low interest rates. We have stated that we feel some concern that this development may go too far, with a risk of severe adjustments in the future. One risk is that a sharp brake in house prices could lead to households perceiving their debt burden to be too high, and that they would therefore quickly increase their saving. This could lead to a severe decline in demand in the economy and in inflation. In the considerations behind our decision on the interest rate at the beginning of the year, we considered these risks to be one reason for not postponing an increase by a few months - which I otherwise believe would have been fully possible given the forecasts we otherwise make and the precision of these forecasts. I would not like to claim that this is necessarily always the optimum means of managing this type of risk in monetary policy considerations. The relationship between credit volume and asset prices on the one hand and monetary policy and the real economy on the other hand has not yet been sufficiently mapped to be able to draw any clear policy conclusions. In addition, our experience of deregulated financial markets is still limited to a small number of economic cycles. At the same time, we cannot ignore the risks to future inflation and economic activity with which we believe that developments in the housing market are connected.