Holistic regulation and supervision


  • Business
  • Saturday, 08 Aug 2009

SBW: How do you see the role of Bank Negara going forward, in view that in some economies, central banks only focus on managing monetary stability while the banking regulation and supervision is handled by another agency?

Zeti: Since the establishment of our central bank five decades ago, the banking regulation and supervision mandate has been with the central bank. Our track record over this period has demonstrated that this institutional arrangement has been effective to achieve financial stability.

The current international financial crisis has resulted in a revisit to the issue of the most effective regulatory and supervisory structure.

Evidence has shown that the more fragmented the regulatory and supervisory regime, the less effective is the managing of crisis and achieving of financial stability.

It is, therefore, vital that this function remains with the central bank. It is well-positioned to make a comprehensive assessment to detect the risks and vulnerabilities of the financial system.

In its surveillance of the financial system, the central bank is able to leverage on its role in macroeconomic management and international reserve management as well as its oversight on the payments system and the money and foreign exchange markets.

During the Asian financial crisis, the institutional arrangement of having the regulation and supervision function under the purview of the central bank allowed for a comprehensive assessment of how the crisis would evolve and on the implications it would have on other parts of the financial system. As a result, swift resolution action was taken and a comprehensive solution was implemented to restore stability.

Can you share with us the highlights of the new Central Banking Act that was recently passed in parliament? What are the key changes made as compared to the present Central Banking Act?

The Act is a completely new legislation which we believe will enable us to continue to be an effective central bank in this now significantly changed environment that is more complex and more challenging.

The Act defines with greater clarity the mandates for which the central bank is accountable. Previously, the mandate was more broadly defined. It now provides a clear indication of what we want to achieve and thus provides a better ability to evaluate the results achieved.

The Act also institutionalises the governance structure and practices to ensure good policy decisions are made with respect to ensuring monetary and financial stability, and the development of a progressive and inclusive financial system.

Checks and balances are also emphasised in the Act, including stipulating a higher level of transparency and disclosure.

The new Act also ensures that the central bank has adequate powers and autonomy to undertake these mandates, thus providing for the credibility and integrity of the decisions of the Bank.

In particular, the powers to address financial stability issues have been strengthened significantly. This includes new provisions to support increased surveillance, regulatory reach and powers to manage crisis that include intervention and resolution.

It also provides specific provision for the oversight on money and foreign exchange markets and on the coordination with other regulators for crisis resolution.

The new Act also enhances the framework for the development of Islamic finance and, thus, gives due recognition for the dual financial system in Malaysia. The authority of the Shariah Advisory Council on issues relating to Islamic finance has also been enhanced to facilitate consistent application of Islamic law on Islamic financial matters.

There has been greater collaborative action from central banks across the world to deal with the recent financial crisis, what role do you see Bank Negara playing in the international arena, going forward?

Regional financial cooperation has intensified over this recent three years in the area of surveillance development. Since 2006, a regional monetary and financial stability committee has been established to monitor risks and vulnerabilities that may affect the region. Bank Negara has been very much a part of the formation of this committee and its role in regional surveillance.

We are also actively involved in various other regional groupings that are working on the development of the regional financial infrastructure, which will facilitate trade and investment in the region, and the strengthening of financial supervision in the region, including the development of an integrated regional crisis management framework that can be activated in the event of an imminent financial crisis.

Another area of international cooperation has been in the field of Islamic finance. As the Islamic financial system in Malaysia develops into an international Islamic financial hub, we are working towards enhancing our linkages with other international financial centres. This is aimed at promoting enhanced inter-linkages not only with developed financial centres but also with other emerging markets.

NEXT CRISIS?

There are a lot of predictions as to when the next financial crisis will happen and what the root cause could be. What is your comment, especially with regard to Malaysia’s position?

Over the past two decades, there have been more than a hundred banking crises worldwide. What we can say is that the world is likely to be plagued by financial crises and, therefore, what is it that we can do to avoid one?

First, the biggest lesson is that during good times, we must build our resilience and that is what we have done. This is through consolidation, rationalisation, the building up of buffers, improving the quality of portfolios within the financial institutions.

Although we are affected by the crisis, our financial system has not been affected. It is our economy that has been affected.

We have built up our buffers; even in late 2008, some banks were raising capital. Our risk weighted capital ratio is about 14% and excess capital is over RM50bil.

We have the resilience to ride out this kind of crisis that may happen in different parts of the world.

Our surveillance is able to detect where the next crisis is coming from and that is why we have enhanced our local and regional surveillance.

We work collaboratively now and look at all the risks and vulnerabilities that might cause instability in our region.

We have also put in place an integrated crisis management system framework so that it can be activated to deal with the crisis early and in a collaborative manner to contain its severity.

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