In the late 70s, many countries including advanced economies experienced rapid monetary expansion and as a result very high inflation rates, in many instances in double digits. 1981 was the turning point of central banking. The Federal Reserve, under the leadership of its chairman Paul Volcker, engaged in a very tight and painful monetary tightening, despite the harsh criticism from the US administration and the real sector. As inflation rate in the US gradually declined to low single digits, the Federal Reserve earned the reputation of an uncompromised inflation fighter, which gradually extended to other central banks in advanced economies as well. This was also the period in which many central banks gained operational independence. Over time it became a conventional wisdom among policy makers that the most important and long lasting contribution of central banks to long term growth and financial stability is to establish and sustain price stability. As the issue of financial stability has gained critical importance during the recent global crisis, central banks are asked to address directly not only price stability but also financial stability as well. As I explained before, to maintain smooth functioning of the financial system has been a concern of many central banks since their foundation. In fact, that is the reason we are called as “the bank of banks” or “the lender of last resort” for financial institutions.
To its credit, the insurance industry has taken important strides in rising to the challenges faced. Generally, Bank Negara has been encouraged by the positive response of the industry to new regulations that further strengthen corporate governance and risk management standards and promote the fair treatment of consumers. Of course, some companies have been more progressive than others in absorbing the regulatory principles within their companies. But overall, our supervisory interactions with the industry have shown that the industry as a whole has made good progress in lifting standards of financial and business practices. This is encouraging as ultimately, both the industry and Bank Negara have a common interest in promoting an efficient and stable insurance market in Malaysia. At Bank Negara, we are continuing to strengthen our regulatory and supervisory capabilities as well as sharpen our focus. As those from Malaysia would be familiar, we are now into the fourth month of the Bank’s new regulatory and supervisory structure. The new organisational structure for the regulatory and supervisory functions within the Bank were realigned back in November last year to move from the previous sectoral approach to regulation, to one that will integrate the Bank’s regulation of the different financial sectors under its purview along functional lines. As a result, the functions previously under the former Insurance Regulation Department have now been assumed by the newly established Financial Sector Development Department, the Prudential Policy Department, the Consumer and Market Conduct Department and the Financial Surveillance Department.