Philosophy of financial regulation Ladies and Gentlemen: The ability of regulators, banking institutions and market participants to respond to the changing financial landscape is key to the development of an efficient, effective and resilient banking system. Given the unique role of the banking system in the economy, and the importance of maintaining public confidence and trust in the banking system, regulation and supervision is a vital component of a well-developed financial system. In designing and implementing financial regulation, a careful balance is made between achieving the objective of promoting efficiency in the banking system and the objective of maintaining financial stability. Consideration also needs to be given to the socio-economic agenda. In addition, a fine balance needs also to be made between the objective of promoting competition and innovation and that of maintaining prudence and stability in the financial system. In line with this, the regulatory approach has become increasingly more “principle-based” rather than “rule-based”. To ensure that regulation remains relevant in preserving financial stability, while allowing sufficient flexibility for banking institutions to design their own strategies and market niches, the regulatory approach is increasingly focussed on developing broad prudential guidelines and principles, rather than prescribing common requirements across institutions and activities. The Central Bank is therefore moving away from prescribing detailed rules and regulations to govern the activities of banking institutions. Regulation will instead focus on identifying risks at the system level, and on ensuring that individual banking institutions have the necessary capacity in terms of internal controls and systems to undertake and manage risks.
Such new applications need to be reviewed as to how they will contribute towards improving product and services delivery, aid in risk management activities, and enhance management capability. Opportunities from regional integration Ladies and Gentlemen: Another important development that is taking place is the growing regional integration, driven by increasing intra-regional trade and investment flows. Asia has seen a rising pattern of intra-regional trade and investment where trade between countries in the region now accounts for almost half of Asia’s trade from just a fifth over a decade ago. Malaysia’s share of trade with ASEAN member countries now accounts for 24% of our total trade reflecting higher intra-regional trade (notably, increased imports from lower-cost suppliers such as Thailand, Indonesia and the Philippines) and better economic performance of ASEAN countries. In 2003, Malaysia recorded strong growth in exports of 29.6% to China and 26.7% to Hong Kong. Large businesses and corporations have begun to review their business architecture more aggressively and have moved to relocate their business operations. Such structural shifts driven by new demand patterns and new ways of organising production have led to increased specialisation and complementarity within the region. ASEAN alone offers a huge growing market of 500 million people. Therein lies the opportunities for the domestic banking institutions, opportunities to support Malaysian businesses and investors who are venturing abroad and opportunities to diversify across geographical sectors and across product range. The role of banking institutions needs to extend beyond the traditional role of being a financier, to manager of financial relationships.