This is an issue that concerns all of us, but bites more immediately on emerging markets. When it comes to banking supervision, the composition of the Basel Committee is rather different. In theory a G10 body, there are now 12 national members, of whom 9 are European. And, for good measure, there are two further European observers, from the European Commission and the European Central Bank. The Committee has worked hard to discuss the emerging conclusions of the revision of the Capital Accord with a broader range of countries, notably through the Core Principles Liaison Group which includes a number of emerging markets. But I cannot help thinking that, in the future, the Basel Committee’s full membership will need to change. The original justification was that the members came from countries which were homes to internationally active banks. But there are other countries which play host to such banks today, and there will be more in the future. I believe that, as a general point, if we want to put pressure on developing countries to adopt higher standards of supervision (and I am one who believes it is right to put pressure on in this sense) then we do need to ensure that the standard-setters are broadly representative, and are seen to have appropriate legitimacy. And this is not just a question of optics. We need to guard against the risk that committees from a selection of the most sophisticated economies devise standards which are not capable of easy implementation elsewhere.
In many respects, the financial sector in Malaysia has progressed ahead of current developments. A set of governance principles and rules were introduced in the early part of this recent decade. This included the parameters for sound practices with respect to risk-aligned compensations – an issue that has been a focus of the current global regulatory reforms. This was followed closely by the implementation of an improved risk-based supervisory approach which places board and senior management oversight at the centre of an effective control environment within financial institutions. A more rigorous process for assessing individuals nominated to assume the roles of director, chairman and chief executive of financial institutions have also been introduced. As part of the efforts to bring about behavioural and cultural changes to strengthen the governance practices in the financial industry, FIDE was developed and introduced in 2008. We have been encouraged by the resulting improvements observed in governance and risk management practices among financial institutions in Malaysia. Our supervisory oversight has shown that directors have exercised a more active role in ensuring effective alignment and implementation of risk policies, business strategy and capital management. The quality of engagement between boards and management has also improved substantially in particular, on major strategic decisions and risk developments. Our supervisory engagements with boards have also benefited from the issues raised on areas of concern and material developments. There has also been increased efforts to strengthen the mix of skills, experience and expertise of the Board composition to improve the overall effectiveness of boards.