First, more information has to be gathered to determine more accurately the extent of the US slowdown and its possible transmission to the world economy. Second, the ultimate effects that the upward revision of credit risk premiums will have on the cost and availability of private sector financing will have to be determined. These premiums had reached very low and, in general, scantly discriminatory levels in recent years against a background of widespread optimism and economic boom, and so may have led to probably excessive investment in certain potentially high-risk activities. Such a revision is, in itself, a healthy sign, but it is yet to be seen how large it will be and whether it will be orderly, as would be desirable. Also, the significance, and the impact on European corporate and consumer confidence, of the poor functioning of some markets will largely depend on how long this bout of turbulence lasts. Against this backdrop of uncertainty, on 4 October the ECB Governing Council decided to hold official interest rates unchanged, reiterating its commitment to price stability, close attention to ongoing developments and readiness to act as necessary to prevent the risks to price stability from materialising. At the same time, the ECB has expressed its determination to use the resources available to it to smooth the process of normalisation of European interbank market conditions.
While at one end of the spectrum, the case is being made that there is no other alternative to the market to generate an efficient functioning financial system, at the other end of the spectrum the call is for a more interventionist regime. The solution lies in a balance between these, and the avoidance of an over reaction in addressing weaknesses and excesses that have been built over an extended period of time. Equally important is to recognise that for markets to function efficiently, institutional and market infrastructure need to be well developed. The incentive structure, the rules of the game, the transparency and the levels of financial literacy also needs to be in place. When these elements are still yet to be developed, as in many emerging economies, it increases the risk to financial stability. For advanced financial systems, however, when the institutional structures and rules became deficient and less relevant, it is necessary for them to be changed. In essence, the environment has become highly dynamic requiring regular regulatory reinvention. Let me turn to the approach adopted by Bank Negara Malaysia. The recent global developments will not fundamentally alter the main tenets of our approach to the regulation and supervision of financial institutions in Malaysia. It will continue to be a balance between rules-based and principles-based regulation. The principles-based approach is more likely to produce more efficient market outcomes, better risk-alignment and socially responsible behaviour.