There is neither an effective platform nor an established framework for policy coordination or for crisis containment, management and resolution. There is also no true global lender of last resort as the IMF itself has only limited resources. This has led to the rise of governance innovations amongst many economies, including Malaysia and its neighbours. Since the Asian Financial Crisis of 1997, various initiatives have fostered stronger regional cooperation, including information sharing and alternative liquidity support arrangements that are bilateral or regional in scope. While these efforts have reinforced the region’s defences against external shocks, they have not reduced the vulnerability of individual economies to external shocks. Were the fault lines in the global monetary and financial system to widen, there is no guarantee that emerging economies like ours will not be dragged into those crevices. Given the lack of global initiatives to close those fault lines, what economies like Malaysia must do is to ensure that our house is strong. We must build-up our defences and have the resilience to withstand the volatility and headwinds created by the global economic and financial environment. One important source of that resilience is having sound financial governance at all levels of our society: the government, the corporate sector and the household sector. Financial governance: foundation of sustainable economic growth Financial governance sets the stage for sound financial decision-making. Broadly defined, strong financial governance is a sum of many parts including strong institutions, efficient processes, and effective rules, regulations and norms.
Other things being equal, bank balance sheets – and so broad money – would expand, but it might be hard to judge the extent of any inflationary impulse coming through a “shock” to the supply of broad money over and above that stemming from a relaxation in credit constraints and higher asset prices. Also, although a “counterparts” approach to the monetary aggregates would incline one to think that shocks to the supply of credit would flow into broad money, changes in the “technology” of banking and financial intermediation might in some conditions make the connection tenuous. After all, the intermediation of credit occurs via capital markets and not just across bank balance sheets. That could matter, for example, if an increase in the supply of credit happened to occur at much the same time as an increase in incentives or the means for banks to securitise – ie sell – the loans they originate. In the limiting case, a big positive shock to the supply of credit could coincide with shrinking bank balance sheets and so negative broad money growth. That is, of course, not at all what we have 33 seen recently. But the thought experiment underlines two things. First, we need to attend carefully to the underlying drivers. As part of that effort, the Bank has recently launched a new Credit Conditions Survey, which should enrich our grasp of what is going on.