Given the different stages of development and levels of market sophistication, applying Basel II, that is designed fundamentally based on parameters and experiences drawn from developed economies, may not be appropriate without some customisation to better reflect the situation in the emerging markets. The low liquidity in some markets and the higher level of market volatility in most emerging markets may not be adequately captured in the underlying assumptions within the Basel II framework. It is therefore important to emphasise that such constraints and the need for some customisation must be well understood and acknowledged by foreign banks operating in emerging markets. In essence, the discussions on the cross-border implementation of Basel II will contribute towards avoiding the imposition of "one size fits all' solutions, and minimising the potential adverse implications of the differences in approaches in addition to avoiding the unnecessary duplication of efforts and investments. Ladies and gentlemen, In many emerging economies, Basel II is seen as an important catalyst to accelerate the introduction of best risk management practices within the banking sector in the medium and longer term. While best practices that have been adopted by global banks have even surpassed the expectations of Basel II, this is not the case for most domestic institutions. In many emerging markets where the banking system is still highly fragmented, promoting the adoption of these practices throughout the entire industry will indeed be a challenge.
While there may be differences in the operational arrangements and in the nature of activities undertaken by global players in emerging markets in Asia and Latin America, the significance of their presence in the financial systems in both regions makes this dialogue session most relevant and timely. In Malaysia, foreign banks' account for almost 30% of the total assets of the banking industry. In the context of cross-border banking, the local incorporation of all foreign-owned banking institutions' branches in 1994 has contributed towards the strengthening of Bank Negara Malaysia's supervisory oversight over the activities of foreign-owned banking institutions in Malaysia. The capital and resources dedicated to support the domestic subsidiary operations reflects the commitment of the foreign-owned banking institutions in the country. In addition, it has also facilitated the assessment of the financial soundness of local operations of foreign banks. While the merits of different operational arrangements are a matter of much debate, particularly in terms of business flexibility, the subsidiary structure of foreign-owned banking institutions in Malaysia has facilitated the consistent application of rules and regulations by Bank Negara Malaysia to the entire banking system. The increasing significance of the foreign institutions, along with the different operational structures were key factors that influenced the design of the early cross-border supervisory framework. This is detailed in the Basel Concordat, that outlined the principles for supervision of foreign banks by home and host authorities, issued by the Basel Committee of Banking Supervisors (BCBS) in 1983.