Zeti Aziz on the "Asian network economy"

24/04/2006 |

Extracts from a speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Tun Ismail Ali Chair Public Lecture in, Kuala Lumpur, 18 April 2006.

The theme for today's Public Lecture: "Monetary and Financial Policies in the Asian Network
Economy" is indeed timely and highly relevant, in the current regional and global environment. The
Asian economies have always been highly integrated into the global economic and financial network.
Indeed, the success of the Asian economies lies essentially in its ability to be highly networked. The
nature of these networks however, has evolved over time, heightening the complex nature of the inter-linkages.

In this recent decade, this trend is being reinforced by the intensification of regional integration. It is being facilitated by increased liberalisation and the increased potential for complementarities in the region. It is also driven by the conscious efforts by the authorities to facilitate the integration process.

There is a growing recognition of the need for enhancements to the institutional arrangements and
regulatory and legal framework to better manage the risks and vulnerabilities associated with the
network economy. In this regard, an enhanced understanding of the changes in the way financial
markets and payment systems operate in a more connected environment becomes important. As part
of this process is the support provided by an enhanced surveillance mechanism.

A further implication of a more networked economy is in the area of payments, clearing and settlement systems, in which the benefits are derived from the economies of scale and the positive network externalities of
increased participation. Inevitably, payment networks could become more interconnected and a single
and large payment network could emerge. It then becomes essential to be in a position to manage the
risks that may emanate from places beyond national boundaries. There has to be then a high level of
preparedness against any disruption in the flow of information, funds and securities becomes vital.

How have these developments changed the way Bank Negara Malaysia operates?
In Malaysia , efforts are currently being taken on several fronts to meet the challenges arising from
these trends. These range from structural enhancements to the macro surveillance systems, to
strengthening of the robustness and capacity of financial players, in addition to promoting greater
understanding of the intricacies of the interconnectivity, and the nature and speed of contagion risks
within the overall system.

On the regulatory front, closer regulatory oversight is particularly important in ensuring the strength of
the risk management framework of large and complex financial institutions that are active in cross-
border transactions. Towards this end, Bank Negara Malaysia is enhancing its prudential framework
for the management of operational risks among such financial institutions, with the introduction of sound practices. The Bank's prudential framework has also been refined and enhanced to ensure that
financial institutions address the risk management implications of new financial products
, including
credit derivatives, credit default swaps, credit linked notes and collateralised debt obligations.

In addition, the introduction of the Payment System Act in 2003 provided Bank Negara Malaysia with a
broader scope on the oversight function over payment systems and instruments that are operated or
issued by banks or non-banks, given that advances in ICT have increased the participation of non-
banking institutions in the payments system. The Bank has therefore put in place a specific legislative
authority to institute more comprehensive and effective mechanisms for achieving effective oversight
of the payments system in a networked environment.

Bank Negara Malaysia also maintains very close contacts with its counterparts in other jurisdictions to
keep abreast of developments in the financial markets. Strengthened surveillance and information
sharing on a real-time basis has become key. Cooperation among the Asian central banks is very
strong, and there are various avenues for increased interface for collaboration at all levels in the
regional central banks.

To maintain effective surveillance, importance is also placed on regular engagement with the financial
market participants, the industry and the public.
An emerging dimension in the changing environment
is to strengthen Central Bank communications. The aim is to enhance market understanding and
awareness of the benefits as well as the potential risks and the policy initiatives in a network economy.
The regular publication of the Bank's Monetary Policy Statement is to appraise markets of the direction
of monetary policy. Other measures include outreach programmes on investor and consumer
education to enhance financial literacy.

Finally, Bank Negara Malaysia has also put in place business continuity plans as part of its
contingency programme to deal with all eventualities and threats to financial stability, in particular,
those emanating from a more networked financial system. Similar contingency plans have also been
introduced in the domestic financial industry, where regular test-runs are conducted to ensure the
integrity of all the back-up systems.

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