Following the joint meeting of the ASEAN+3 Finance Ministers and Central Bank Governors in May this year, a press statement was released on their common position with respect to both macroprudential measures and capital flow management measures. I quote: “…deepening global financial integration …require MPPs and CFMs that counter increases in financial stability risks from changes in macroeconomic policies in countries with major currencies.” Beyond the resilience of policy frameworks, my third and final point has to do with the resilience of domestic fundamentals. Firstly, having a diversified, flexible and competitive economy is a key strength in dealing with instability from the external sector, whether it is in the real economy or in the financial system. Secondly, having a strong and resilient financial system is an important source of strength against vulnerabilities rising from living in an integrated world. In the period after the onset of the financial crisis in the AEs, many Asian economies have been able to sustain growth because their financial systems were healthy and were able to finance and support domestic economic activity even as growth in the AEs disappeared. A deeper and more diversified financial system can also help to intermediate capital inflows in a less distortionary manner. In the post-crisis period, we have been pleased that the depth of the financial markets in Malaysia and the presence of large institutional players have contributed to stability in the domestic financial markets, even in the face of significant volatility in foreign portfolio flows.
This is a particularly important source of resilience when confronted with a volatile global environment. The prudent conduct of monetary policy to ensure price stability and provide a supportive environment for sustainable growth is a key contribution of central banks. Ensuring that credit growth is not excessive and that it is not channelled into unproductive uses is important to guard against future problems with excessive leverage and bad bank assets. A financial system that is burdened by a legacy of bad lending is obviously not going to be able to efficiently perform its function when the economy is hit by an external shock. It is for this reason that over the past several years, BNM has strengthened the credit culture at our banks and non-banks, undertaken rigorous stress-testing of banks, and introduced various measures to address vulnerabilities arising from the household indebtedness. Fiscal policy, the other tool in the macro-policy toolkit, also needs to be conducted prudently and this is to ensure that there is fiscal policy space to respond to shocks. Prudent fiscal policy can be a significant force is supporting growth in the face of adversity. Another key determinant of policy effectiveness is whether policy makers have enough policy instruments to address the challenges that they are facing. With respect to risks related to financial globalisation, I will just mention three points. •  Foreign exchange reserves. Reserves are an important policy buffer for economies that are becoming globally financially integrated.