Muhammad bin Ibrahim: The lessons of managing risks during the global
financial crisis - the Malaysian banks' experience
Opening remarks by Mr Muhammad bin Ibrahim, Deputy Governor of the Central Bank of
Malaysia, at the Asian Institute of Finance (AIF) and Institut Bank-Bank Malaysia (IBBM) Risk
Roundtable Forum 2010, Kuala Lumpur, 12 October 2010.
* * *
My opening remarks will consist of three parts. Part I, I will make comments on global
financial reform and regulatory priorities. Part II, I will share some regulatory initiative
embarked upon by BNM. Part III, I will conclude by giving you an assessment of the banking
industry during the recent financial crisis and why it had remained resilient.
Global financial reform and regulatory priorities
The global financial reform initiative to strengthen the financial sector is consistent with our
priorities to enhance prudential regulation and supervisory framework in Malaysia. Efforts to
further improve risk management and corporate governance, strengthening the role of
supervisors in the oversight of financial institutions and improve market discipline are not
new to Malaysia. We have been doing this well before the global financial crisis and these
initiatives will continue into the future. For example stress testing on banking institutions was
introduced many years ago.
In carrying out our regulatory responsibility, we will continue to ensure an effective balance
between maintaining prescriptive rules and allowing some degree of flexibility under a more
principle-based approach to regulation. Our principled based approach to regulation will be
supported by effective supervisory oversight. Therefore, we do not foresee a significant shift
in our current approach to regulation following the proposed global financial reforms. In fact,
this reinforces our thinking that the approach we are taking is appropriate for our system.
Bank Negara Malaysia has been engaging the banking industry to better understand the
impact that the proposed reforms have on Malaysia's economy and financial system. This
will allow us to develop implementation strategies for Malaysia after taking into account
specific characteristics of the domestic financial system, including compensating tools and
arrangements within the financial system that mitigate risks to financial stability. An important
point to consider is that, the implementation process does not result in any unintended
consequences. This is where engagement with the banking industry is of utmost importance.
We used inputs from the industry and share the inputs at regional and international-level
regulatory fora, thus providing an emerging market perspective to the recommended
proposals.
Malaysian financial reform, regulatory framework and conduct of supervisors
Some key regulatory initiatives by Bank Negara Malaysia to further enhance its prudential
regulatory framework and conduct of supervision moving forward.

First, to strengthen financial sector legislation through the modernisation and
consolidation of existing regulatory/oversight laws under Bank Negara Malaysia's
purview. The enhanced legislation ensures that Bank Negara Malaysia is entrusted
with the necessary mandate and power to maintain financial stability and to conduct
effective supervision of financial institutions.

Second, complement existing micro-prudential rules with macro-prudential
instruments to address system-wide risks with the aim of ensuring greater resilience
of individual institutions, and the financial system as a whole.

Third, enhance comprehensive cross-border crisis management and financial
stability surveillance arrangements. This can be done via channels such as the
EMEAP Monetary and Financial Stability Financial Committee, which was established
in 2007 to enhance regional collaboration and cooperation in the area of
macromonitoring and crisis management. Efforts are also directed to strengthen financial
safety nets within the region (e.g. cross-border collateral arrangements, currency
swap arrangements). We are quite confident these arrangements will further
strengthen the resilience of regional financial systems and economies. These
measures will become increasingly important in the light of our effort to increase the
integration of financial systems within the region.

Fourth, establish a holistic framework for consolidated supervision. All the activities
of financial conglomerates are within appropriate risk levels and not overly complex,
and the large groups are not a source and channels for amplifying contagion effects.
Supervisory cooperation initiatives at the regional level will also be directed at
enhancing existing or introducing additional platforms (e.g. creation of supervisory
colleges) for discussing issues related to the supervision and resolution of
cross-border financial institutions.

Fifth, promote fair and transparent market conduct practices by financial institutions
through heightened market conduct surveillance and transparency requirements,
while also raising the level of financial capability of consumers through education
and awareness programmes.
How Malaysia survived the global financial crisis
Let me conclude by outlining why we
had not been adversely affected by the recent financial
crisis.
Banking system maintained strong financial and capital buffers at end 2008 during the peak
of the crisis as evidenced by:

Strong capital position with RWCR of 12.6% and core capital ratio of 10.6%.

Ample liquidity with total interbank placements of more than RM150 billion with BNM
that can be unwound to release RM liquidity to the system at any time.

Low exposures to foreign currency (FX) denominated assets.

Banks' leverage position remains manageable and lower than foreign institutions
abroad.
- Balance sheet leverage (i.e. total assets / common equity) for the Malaysian
banking system of about 15 times (vs. global average of about 20 to 30 times).
Banks had strengthened institutional set-up and capacity post Asian Financial Crisis through:

More robust risk management standards and practices.

Stronger corporate governance structure.

Smooth implementation of the Standardised Approach of Basel II's Capital
Adequacy Framework.

Balanced and diversified business portfolios.
Enhanced financial infrastructure post Asian Financial Crisis through:

Enhanced depth and size of bond and Sukuk market (about 107 % of GDP).

Strengthened financial safety nets (e.g. establishment of Malaysian Deposit
Insurance Scheme)/Danajamin/CDRC/SDRS.

Strengthened regulatory and supervisory approach (e.g. gradual move towards
principles based regulations, adopting of risk based supervision).

Legislative reforms (e.g. introduction of the Central Banking Act to articulate the
financial stability mandate; amendments to the Companies Act to codify directors'
duties).

Enhanced role by the training institute too develop talent and leaders of tomorrow
(ICLIF,INCEIF, AIF).