Zeti Akhtar Aziz: Greater financial integration and financial stability
Opening remarks by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the
SEACEN 30th Anniversary Conference "Greater financial integration and financial stability",
Kuala Lumpur, 20 October 2013.
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Bank Negara Malaysia is honoured to welcome you to the SEACEN 30th Anniversary
Conference on "Greater Financial Integration and Financial Stability". We are especially
honoured by the presence of Governors and senior officials who are here today, despite the
pressing demands on our institutions during this period of persistent uncertainties in the
global financial and economic environment. We continue to face challenging and often
testing times. Over the recent five years, we have been confronted with recurring episodes of
turbulence, followed by phases of transitory recoveries. We have seen, and have been part
of, extensive collaborative measures and reforms pursued at both the regional and global
level. Yet, the calm after the storm continues to evade us.
The SEACEN and Asian economies have seen significant structural adjustments and wide
ranging financial reforms in this decade. During this period intra-regional trade activity has
rapidly increased, signifying the deepening of economic ties within the region. Intra-regional
trade in East Asia has expanded from an average of 44% of total trade in 1995, to 50% in
2012. Intra-regional investment activity has also been on an uptrend. Asia's young and
increasingly urban and increasingly more affluent population, supported with policy initiatives
to strengthen social safety nets - including for healthcare and retirement - will further
enhance domestic demand in the region. This will further unlock our trade and growth
potential. Our diversity also continues to be an important source of strength for the region.
The complementarities between the economies in the region provide significant opportunities
for greater shared prosperity and mutually reinforcing regional growth. The progressive
liberalization of the domestic financial sectors, the development of domestic capital markets
and the integration of payments and settlement systems have opened up new channels for
regional financial institutions and markets to intermediate funds across borders. These
developments have facilitated the recycling of surplus funds from the region for economic
development in the region, while also enabling greater diversification of risks.
The lessons drawn from the Asian financial crisis more than 15 years ago also continue to
shape our financial sector reforms, liberalization and economic and financial integration in
the region. The focus is on developing a financial sector that serves the needs of the real
economy, and which is built on solid foundations of sound risk management and strong
financial buffers. An important precondition for financial liberalization and integration in the
region has been ensuring that we build the capacity and financial infrastructure that would
enable us to respond to emerging risks while also minimising their contagion effects. The
recent global financial crisis and its aftershocks remind us that these lessons remain relevant
and that we need to stay firmly on course in strengthening our foundations and resilience. A
gradual and phased approach to financial liberalization and integration has served the region
well, allowing time for the building blocks to be put in place, and flexibility to set the pace at
which our financial systems can continue to grow and expand in line with the capacity to
manage the attendant risks of a more open and interconnected financial landscape.
To date, financial integration in Asia has mainly manifested itself in the form of the increased
regional presence, with increase participation of indigenous Asian banks in the regional
financial system and increased participation in regional financial markets. The prospects for
such greater regional financial integration are significant given that large flows of capital
currently continue to be directed to developed economies outside the region. This is in
contrast to the trade patterns in the region where intraregional trade flows account for more
than half of total trade in the region. Promoting greater financial integration in Asia will not
only serve to reinforce economic integration, but also enhance the depth and breadth of
Asia's financial markets, contribute to the development of more sustainable funding sources
for economic development, and potentially improve terms of trade by reducing transaction
and information costs.
The strategy and path towards greater financial integration in Asia seeks to preserve the
strengths inherent in the diversity of the region, while raising the standards which promote
financial stability in the region. Recognizing the various stages of development across our
economic and financial systems, the Asian financial integration model for the ten ASEAN
economies is focused on: (i) strengthening preconditions through collective capacity building
to promote more open market access; (ii) progressively reducing barriers to facilitate
crossborder trade; (iii) developing the market infrastructure and an enabling environment to
promote the efficient and effective intermediation of cross-border financial flows; and
(iv) establishing appropriate safeguards for financial system stability. Two distinct elements
of this process are important. The first is that it allows for different speeds of integration
depending on the state of readiness of respective member countries. The second is the
commitment of members to support each other in developing the preconditions that would
make financial integration viable for the group as a whole in the long run. These elements
are important for achieving a process and outcomes that will be sustainable.
The modernization of Asian financial systems during this period has also been accompanied
by significantly strengthened regulatory and supervisory frameworks, improved financial
safety nets, more effective surveillance of financial stability risks and stronger legal
underpinnings. These reforms supported the transition towards more market-oriented
financial systems that are anchored in stronger institutions, risk management capacity and
governance. Today, our financial markets are better able to intermediate volatile financial
flows and our financial institutions are supported by stronger financial buffers to withstand
adverse developments and shocks. Significant strides also continue to be made in
strengthening consumer protection frameworks, promoting financial inclusion, and enhancing
market discipline. These developments continue to support the region through the recent
episodes of turbulence in the global financial markets.
The region has also made important strides in enhancing monetary and financial cooperation
arrangements to address regional financial stability issues and global policy spillovers. Much
has been accomplished in the areas of surveillance arrangements, financial safety nets and
crisis prevention, management and resolution. We have already experienced the important
benefits of having these arrangements in place as the region came together to respond
where needed to events that were unfolding during the global financial crisis. The authorities
in the region remain committed to build on these foundations to bring regional cooperation to
higher levels not only to reap its benefits but to also preserve financial stability in the region.
In this effort, the current priorities for cooperation include improving information flows on risk
assessments; advancing regional financial infrastructure and capacity building; and providing
a regional voice on key international developments that may affect the region.
As financial integration gains pace, the demand will increase for greater convergence in
regulatory and supervisory approaches and standards, including their implementation across
borders. An important objective of such regulatory convergence is to ensure that
crossborder financial linkages act to foster regional growth, while mitigating the propagation of
systemic risk across borders through such linkages. The convergence of standards has
proceeded in different ways in different parts of the world. In Europe, regulatory convergence
has been driven by EU-level bodies and agencies, including the European System of
Financial Supervisors and the European Systemic Risk Board. The EU-wide prudential rules
are formulated and implemented through directives and regulations legislated by the
European Parliament and European Council, with limited room for member states to apply
"national discretion". Recent proposals to establish a single supervisory mechanism for
banks led by the European Central Bank, and a single resolution mechanism, will further
reinforce the role of EU-level institutions in the management of financial stability in the Euro
area.
With significantly more diverse economies and financial systems, promoting greater
regulatory convergence in Asia is more likely to proceed on the basis of a set of shared
principles for developing and maintaining sound financial systems, while providing for the
unique and distinct legal, financial, social and economic structures of individual countries
within the region. It will be important to have clarity around the key principles, an inclusive
process in agreeing on these principles, and mechanisms that support their effective
implementation in individual countries. Under such an approach, individual countries will
have the necessary degree of flexibility to tailor national implementation approaches to
reflect the specific characteristics of their respective economies, while committing to uphold
the essential regulatory and supervisory principles that underpin financial stability.
With Asia's varied experience in weathering financial crises, in developing our financial
systems and in implementing the various regulatory reforms, valuable lessons can be drawn
from the region to advance the progress and development of our respective financial
systems and of the region as a whole. SEACEN has had an instrumental role for more than
30 years in the efforts to share this knowledge and experience widely among its members
through providing a platform for such information sharing and through its research, training
and capacity building initiatives. Today, SEACEN takes yet another important step forward in
advancing this agenda with the launch of the SEACEN Financial Stability Journal. We live
in a world in which the management of financial stability is a highly complex undertaking, and
its dimensions have continued to evolve in an environment that is rapidly changing. It is
hoped that the Journal will contribute ideas, perspectives and insights and thus generate the
intellectual dialogue and discourse on financial stability issues. As a region, Asia has many
unique perspectives and experiences to share with others facing similar challenges in
managing financial stability. I congratulate the SEACEN Centre on this important initiative. I
wish it every success and look forward to contributions from SEACEN members and from the
other parts of the world. The Journal can have a significant influence in drawing attention to
the financial stability issues that are most important and thus contribute towards the thinking
and responses on these issues. It is a process that should have an inclusive participation in
this important agenda of financial stability.