Nor Shamsiah Mohd Yunus: Crisis preparedness menu for guardians of
financial stability
Opening address by Ms Nor Shamsiah Mohd Yunus, Deputy Governor of the Central Bank of
Malaysia (Bank Negara Malaysia), at the 14th IADI Conference on "Crisis Preparedness
Institutional Arrangements and Coordination, Crisis Communication and Contingency
Planning", Kuala Lumpur, 28 October 2015.
* * *
It is a great pleasure to be here amongst the company of distinguished members of the
deposit insurers' fraternity, fellow supervisors and central bankers. We meet here today,
almost seven years, after the collapse of a single firm that shattered conventional wisdom
and redefined the "rules of the game" for the management of financial system stability. Seven
years later and counting, the path to sustainable recovery remains unclear. The cumulative
impact of reforms in the financial sector also remains to be seen. In such an increasingly
unpredictable world, crisis preparedness has become more important.
Much is already being done on various fronts to prepare us better to manage crises. This has
mostly focused on policy reforms, the supporting infrastructure and institutional
arrangements. Also important however, and much less discussed, are aspects of crisis
preparedness that cannot easily be reduced to a pre-defined framework or template for
action. These aspects are humility, agility and trust, and this is what I would like to address
today.
Let me begin with a short story. On 10 May 1996, three teams set out to conquer the world's
tallest peak, Mount Everest. Due to a combination of factors, including over- confidence, a
hostile environment and poor communication, the expedition ended in one of the worst
tragedies of the peak's history. Rob Hall, one of three team leaders of the great expedition,
had successfully scaled the mountain numerous times before. Underestimating the risks
when faced with unstable weather conditions, Hall decided to proceed with the climb rather
than turning back. He had strong belief that his past successes, which invariably inflated his
confidence, sufficiently equipped him for the challenges ahead.
This has now become a classic case study on leadership and risk management under
extreme conditions. Interesting parallels can be drawn in the context of crisis preparedness
in the financial sector.
Over the course of crises history, policymakers and market participants that were involved in
every financial bubble were repeatedly afflicted with the conviction that "this time would be
different". The majority voice was quick to dismiss rising risks, and contrarian views were
often ignored. It was reasoned that efficient markets would work as they should to contain
risks, and economies would have the structural flexibility to adjust to residual risks that might
materialise. In hindsight, such views were surprisingly intractable throughout periods that
have followed multiple episodes of crises - from the 30's Great Depression, the 80's debt
crisis, the 90's Asian and Latin American meltdowns, to the Great Recession of this century.
Conditions surrounding each crisis differed widely, but this recurring mindset appeared to
prevail in the run-up to each major collapse.
Playing to form, during the period of the Great Moderation, it was held that central banks and
policymakers had successfully moderated destabilising booms and busts in the long term.
Financial 'innovation', while not eliminating risk completely, had found new ways to
effectively distribute risks across diversified agents and borders. Or so it seemed, even
though no one fully understood or had enough information to know where the risks ultimately
ended up. All of the above lent credence to the deep-seated faith that "this time would be
different", until the extended period of macroeconomic calm was abruptly brought to a jolting
halt by the Great Recession.
The future terrain of crises will continue to be fraught with uncertainty and a humbling
recognition of our inherent limitations. Policymakers therefore need to proceed with a healthy
dose of humility. Much like the harsh, volatile weather conditions at the world's highest
peak, the next crisis will be unpredictable, and likely exceed our capacity to control or
prevent. In this post-crisis era, we have seen wide ranging policy and institutional reforms in
many jurisdictions. They are important, even critical, to correct past errors and respond to
future anticipated challenges. But their implementation, and our reliance on them, should
acknowledge the constraints that we face. Contemporary understanding of the sources,
drivers and transmission channels of systemic risks remains incomplete. Multifaceted policy
frameworks and toolkits designed to curb systemic risks and manage crisis are also still
evolving. We can certainly expect that data quality and analytical frameworks will continue to
improve over time. But our understanding of future crisis dynamics will never be perfect. Far
from it. This means that we must be prepared to change course when required and
acknowledge errors in judgment sooner rather than later, even if it means re-evaluating
wellreasoned positions.
This brings me to my second point on agility. Financial crises are inflection points of a cycle
which materialise in the least predictable manner. This demands a high degree of agility of
policymakers and the financial system to adapt to the new operating reality. Such agility is
derived from crisis management frameworks that are well-anchored in clearly defined
strategic outcomes and accountability structures, but also flexible enough to respond to a
range of conditions. And critically, it requires investing in resources with deep experience and
knowledge.
Going back to the 1996 Everest expedition, Hall and his team had made every reasonable
effort to incorporate comprehensive risk management and contingency planning into the
preclimb plan. As things turned south, it became clear that the team was unable to respond
quickly to the dynamic situation. Outdated and inefficient radio systems led to a
communication breakdown of vital information. Physiological, psychological and technical
readiness of some of the climbers was also in question. Their inability to respond fluidly to
changing conditions created an overdependence on key resource persons. Combined with
lack of experience to deal with a series of new challenges, leaders were incapacitated and
team dynamics disintegrated quickly.
In essence, crisis preparedness frameworks should provide clarity of purpose for actions
taken, enable policy options to be properly evaluated, and support effective and swift
execution of crisis responses, including the communication of such responses. It is not
however intended to be a fail-safe mechanism with a pre-set comprehensive plan, designed
exclusively for each likely manifestation of a crisis. We need to anticipate that plans will fall
apart midway, or work selectively throughout various stages of the crisis for a variety of
reasons. Market participants are irrational, infrastructures flawed, economies and financial
systems are imperfect, and the political environment is unpredictable. Markets are also prone
to excesses, manipulations and fickleness. Therefore crisis preparedness frameworks need
to flex and evolve accordingly and ensure that framework, instrument and resource rigidities
do not become binding constraints to the effective management of future crises.
At the heart of the operational and governance framework for crisis management will be a
team comprising first responders, surveillance/crisis experts and decision makers, cutting
across a range of competent authorities. The ability of these key operating agents to respond
nimbly is imperative during a fast-moving crisis to reconnect the financial system lifeline, and
maintain coherence in the overall crisis management process. This in turn depends on the
ability to bring together a dynamic set of crisis managers across jurisdictions and agencies.
Such a pool of crisis expertise needs to be identified beforehand and continuously
developed, including through simulations, to reduce the time to action during a crisis.
Last, but certainly not least, is the element of trust. In the panic and chaos during crisis
situations, feeble coordination and communication arrangements will falter easily. This can
occur even with well-established frameworks and dynamic resource persons at hand.
Communication failures during Robert Hall's expedition were not caused by the lack of
infrastructure or defined channels for information dissemination. It stemmed from a more
fundamental issue. Those involved in the final climb were complete strangers until several
weeks before. Unfamiliarity among team members generated communication barriers,
distrust and uncertainties. This did not engender efforts to create a robust co-dependency
and coordination structure to collectively weather extremities faced on Mount Everest. Strong
policy frameworks and institutional arrangements only make interagency coordination and
communication feasible. But it is entrenched mutual trust, fostered during stable times, that
makes them credible in challenging times. Trust ensures that collaboration arrangements,
secured in good times, remain firm and functional in the face of crises. Trust nurtures
confidence and enables reliance on the competence of others. Without trust and symbiotic
crisis networks within and across agencies, a crisis framework offers little more than false
comfort during crises.
The Bank's own experience in the management of crises, as well as global reforms that are
taking place in this area, continue to be useful in guiding us as we navigate this increasingly
demanding policy domain. We have continued to make important progress. In the spirit of
building trust and agility during normal times, we have worked hard to strengthen
coordination arrangements with our regional counterparts and key domestic authorities. To
name a few, this has included the development of crisis management protocols that are
outlined in the Strategic Alliance Agreement with PIDM, the Operational Framework for
Financial Crisis Management and Resolution with the Securities Commission, and the
Executives' Meeting of Asia-Pacific Central Banks (EMEAP) Crisis Management and
Resolution Framework involving 11 jurisdictions. Numerous refinements have been
introduced, and several crisis simulations were conducted. All in response to anticipated
changes in the financial and regulatory landscape, and to continuously elevate our level of
operational preparedness. We remain committed to building strong relationships based on
mutual trust that will serve us well through the uncertainties that invariably accompany any
crises. And we continue to work on ensuring that these arrangements are credible when
disaster strikes. For us, it is as important to encourage open and honest communications
with our counterparts, as it is to have formal arrangements for information exchange. We
cooperate with each other in conducting joint surveillance and capacity building initiatives.
Through these collaborations, we gradually build respect, trust and goodwill, the kind that no
framework can hope to manufacture.
Let me now conclude. In no trivial part due to my mentors, predecessors and colleagues,
past crises that affected Malaysia were well-managed, leading to speedy recovery with
minimal losses to taxpayers, and the equally important structural transformations that
followed. Clear statutory remits. Independent policy making. Effective coordination and
implementation. Sound governance and accountability. Building agility and trust. And
proceeding with utmost humility. These building blocks and experience accumulated laid the
necessary foundation for the Bank's work on crisis management, and continue to anchor our
efforts to enhance crisis preparedness on various fronts.