Zeti Akhtar Aziz: Global challenges and local opportunities
Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the
IBBM-APABI Conference: "Global challenges and local opportunities", Kuala Lumpur, 8 May
2012.
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It is my honour to officiate this Asian-Pacific Association of Banking Institutes (APABI)
Conference hosted here in Kuala Lumpur by the Institute of Bankers Malaysia (IBBM). This
Association has an important role in bringing together financial industry training institutes that
share a common goal to equip financial institutions with the capacity to deal with the
transformational developments that are shaping the financial sector - by supporting the
continued renewal of its most valuable asset, human capital.
The global financial industry is experiencing a period of profound change. In the advanced
economies, decades of exceptional growth are giving way to contracting financial and
economic conditions, greater regulation and significant government intervention, while in the
emerging world however, financial and economic growth have continued. In addition, the
intensification of policies and reforms to address structural issues in several of the major
advanced economies will also have a significant bearing on the future growth prospects for
many financial institutions and businesses. This is reinforced by the implementation of new
prudential standards, both at the national and global levels, which are also set to
substantially redefine the expected norms and the boundaries of modern finance.
As emerging Asia aspires towards achieving higher levels of income and living standards, a
different path from that which led the way for many advanced economies will need to be
considered. The global financial crisis and the Asian financial crisis have provided us with
many important lessons that should form the underpinnings for the development of a sound
economic and financial policy framework. Such a framework must effectively combine strong
regulation and market discipline to reinforce financial stability. The recent crisis has shown
that markets cannot be exclusively relied on to rein in excesses. A broader perspective of
regulation that looks beyond individual institutions is also essential to identify the build-up of
system-wide risks. Equally, financial institutions need to consider how to meaningfully include
such system-wide perspectives in their approach to managing risks in their respective
institutions.
Public policy also has a crucial role in promoting economic development that benefits society
at large, and that addresses the disproportionate social welfare effects of a financial crisis on
the most vulnerable groups of society, including low-income households, retail consumers
and small businesses. Specifically, policies that protect the core savings of these groups,
promote financial inclusion and contain excessive leverage should also form an integral
component of the resolution and reform agenda. Given the high costs of financial crises there
is now a better appreciation of the need for such policies to co-exist with free markets,
working to efficiently allocate economic capital to achieve more sustainable outcomes.
While significant challenges continue to confront several of the advanced economies as they
seek to address the structural problems that remain unresolved, Asia must chart its own path
in formulating strategies to develop our economies and financial systems. Following the
Asian financial crisis, most emerging economies in Asia have strengthened their economic
and financial fundamentals, improved their fiscal and external debt positions, and reformed
their banking sectors. This has supported our economies through the recent global financial
turmoil. With a significantly stronger foundation, Asia has now every potential to meet its
growth and development goals in a manner that avoids the pitfalls that will undermine our
future prospects. This morning, I would like to focus my remarks on five factors that I believe
will serve to anchor sustainable growth and stability in Asia going forward.
Supporting sustainable growth and stability in Asia
First is that the growth of the financial sector in Asia remains largely anchored in productive,
real economic activity. In contrast to developments in recent years, financial innovation in
Asia has mostly served to support the legitimate financing, investment and risk management
needs of businesses and households. The growth of the financial sector has not significantly
outstripped economic growth and new innovations in financial products and services have
not taken on the degree of complexity and high leverage observed in the economies that
were affected by the crisis. Financial institutions in Asia also had limited exposure to highly
leveraged activities, such as complex derivatives and structured credit instruments.
Consistent with the more traditional banking models in Asia, there are now calls for a return
to basic banking and its clear separation from higher risk-taking activities. The growth of
Islamic finance, with its emphasis on the close link between financial transactions and real
economic activity and which embraces universal values such as transparency and fairness,
further supports this trend.
The emphasis on productive financial innovation has also been reinforced by a long standing
focus in Asia on promoting effective consumer protection arrangements. In the recent period,
this has received renewed attention by authorities given the experience of the recent crisis
which has underscored how market conduct failures that led to widespread mis-selling and
predatory lending, was not only detrimental to consumers, but also a source of systemic risk.
An emphasis on product transparency and disclosure, responsible sales and marketing
practices as well as investment in financial education have served to better align the interests
of financial institutions and consumers, thus reducing the potential for harmful practices.
Asian economies have also taken steps to strengthen the financial safety net including
deposit insurance, while putting in place institutional arrangements for debt counselling and
restructuring. These measures can contribute towards pre-empting widespread defaults
particularly during periods of stress.
Second is the continued commitment and sustained progress in the development of strong
regulatory and supervisory systems for the financial sector. Significant progress has been
achieved in Asia in this recent decade to strengthen the institutional arrangements and the
capacity to safeguard financial stability. This includes putting in place more comprehensive
regulatory frameworks, improving supervisory approaches and having clear mandates for
central banks and supervisory authorities to deal with system-wide risks. While these
measures have yielded tremendous pay offs, efforts have continued to be made to
strengthen further the resilience of the financial system. New initiatives are being pursued to
enhance surveillance and crisis management tools to enable swift responses to emerging
risks and vulnerabilities in the financial system, including those within the traditionally
unregulated segments of the financial system. Authorities in Asia are also continuing to refine
and sharpen the efficacy of "macroprudential" instruments to manage excesses and
imbalances in the financial system. Asia already has considerable experience with these
instruments during periods of escalating asset prices and excessive financial market
volatility. They therefore already represent an important part of the broader toolkit for
managing risks to financial stability.
The effort to implement global regulatory reforms is also now underway in Asia, with many
jurisdictions making significant progress in detailing out rules to implement the
Basel III standards. The international reform package aims to significantly raise the resilience
of the global banking system and to promote sound risk-taking. The standards will see banks
holding larger amounts of capital, including buffers which can be drawn down as losses
occur, thus ensuring their continued ability to support lending to the economy even during
times of crisis. At the same time, the standards will also require banks to significantly
strengthen their liquidity and funding positions in order to support orderly credit
intermediation processes. Concerns have however been raised about the unintended
consequences that may arise from the implementation of these standards - including
potential ramifications on the real economy - and therefore the need for the reforms to be
implemented cautiously. This underscores the importance of conducting impact and
behavioural studies during the transition period, and the need to consider how the national
implementation of the global standards should reflect domestic experiences and
circumstances.
Third is the high priority placed on the pursuit of a balanced and equitable growth through the
financial inclusion agenda as a key component of Asia's overall strategy for sustaining
medium and long-term economic progress. At its core, the financial inclusion agenda seeks
to empower all individuals, irrespective of income level, economic activity or geography, to
have the means and opportunity to undertake financial transactions, generate income,
accumulate assets and to financially protect themselves against unexpected adverse events.
Countries in this region have been active in pioneering sustainable financial inclusion tools
and models. Due in large part to a strong public policy focus on promoting an inclusive
financial sector, the financial industry in Asia is also more attuned to financial inclusion
objectives in their business outlook. This can be seen from recent evidence of financial
institutions in the region that have successfully adopted "double bottom line" strategies that
combine enhanced financial access goals with profitability, thus enabling the financial
inclusion agenda to be achieved in a responsible and sustainable manner. Institutions in
several parts of Asia have been effective in utilising innovative means of outreach to
overcome geographical and cost barriers in delivering essential financial services such as
microcredit, affordable insurance, avenues for savings, and accessible payments and
remittance services. Governments in the region continue with measures to bridge the gap
with the necessary financial infrastructure, developing rules for orderly and responsible
business conduct, and catalysing the volume of financial transactions by channelling social
transfers, wages or pensions through the formal financial system.
Such advancements by the region in financial inclusion contribute towards eradicating
poverty and uplifting living standards. As growth in the region continues, it will become even
more important to ensure that such growth does not further widen the social divide and
disenfranchise those who remain excluded from its benefits. An inclusive growth process in
the region, which draws marginalised segments into the formal financial system and that
empowers small businesses and consumers already within the financial system to better
utilise financial services, will enhance the contribution of this segment of the population to the
economic growth process.
Fourth, is the greater regional economic and financial integration in Asia which has been
supported by strengthened institutional frameworks for safeguarding regional financial
stability and a deepening of regional cooperation. With greater cross-regional participation in
the respective domestic financial systems, efforts have intensified to build a strong
foundation that will promote regional stability alongside the measures implemented to
strengthen domestic frameworks. These include wide ranging measures to develop regional
financial markets, to improve liquidity management across borders, to strengthen
cooperation networks for the supervision of regionally-active financial institutions and to
establish regional infrastructure to enhance the efficiency and lower the risks associated with
cross-border payments and settlements.
Regional arrangements between central banks and supervisory authorities have also been
significantly strengthened to actively share information on emerging risks to regional stability
and where necessary to coordinate regional responses. An important part of this includes the
ongoing work to enhance the frameworks for crisis management including the orderly
resolution of financial institutions with significant cross-border operations. Within the ASEAN
region, measures are currently being pursued to promote greater consistency in the adoption
of regulatory and supervisory standards in anticipation of a larger role for ASEAN banks in
driving regional integration as part of the broader agenda to realise an ASEAN Economic
Community by 2015. Collectively, these arrangements aim to ensure that the expansion of
cross-border financial linkages takes place within a framework and process that adequately
mitigates systemic risk across borders.
Fifth, central banks and regulatory authorities in most emerging economies in Asia have the
broader mandate that includes a focus on the development of the financial sector as a
means not only to enhance the growth and development potential, but also to reinforce a
strong foundation for financial stability. In Malaysia, the development and reform of the
financial sector in the decade that followed the Asian financial crisis has not only developed
the financial sector to better serve the Malaysian economy, but it has also better positioned
financial institutions to withstand the destabilising episodes emanating from external shocks.
This has included strengthening financial intermediaries, not only in terms of scale but also in
their financial positions, risk management and governance practices. This has contributed to
more efficient financial intermediation while improving access to financing, particularly for
small and medium scale businesses. Efforts to develop a vibrant capital market have
meanwhile opened up alternative channels for financing, while mitigating concentration risk
in the financial system and enhancing its ability to absorb large and volatile cross-border
capital flows.
These factors will place Asia on a firm foundation to achieve its growth and development
goals. While public policy clearly has an important role, it is as important for the financial
industry to align itself with the desired outcomes of sustainable growth within a longer term
horizon. This will involve a number of important considerations for financial institutions,
including the rethinking of business models in the light of a re-assessment of risk and return
expectations, a reflection on fundamental value systems that ultimately shape individual
actions, with greater premium placed on responsible and ethical behaviour, and the
regulatory changes taking place.
New imperatives for talent development in the financial sector
Having the required talent will be a key pillar in managing the challenges confronting the
Asian financial sector moving forward. The increased demand and competition for
highly-skilled financial professionals in the financial sector continues to be fierce. In Malaysia,
demand is expected to be particularly pronounced for specialised skills in risk management
and high growth and niche areas.
At the same time, the new financial landscape also raises critical leadership and
organisational challenges, particularly as banks in Asia become larger and more complex
with increasingly diverse geographical and product markets. This underscores the need for
financial institutions to be helmed by world-class leaders, with critical strategic and
leadership capabilities to build institutions that are dynamic, resilient and agile in the face of a
more challenging operating environment. In line with the increasing regional character of the
financial sector, there will also be a greater emphasis on talent that better appreciates
national and cultural differences. Meanwhile, boards of directors are also be expected to
have a more effective role in providing independent oversight and strategic guidance that
promotes the long-term resilience and continued viability of financial institutions.
These imperatives translate into significant demands on human capital development. New
talent development strategies are needed, as well as a critical re-assessment of the existing
content and approach to training for the financial industry workforce to ensure their continued
relevance, within a broader regional context. This represents a significant challenge and an
important priority for Asia. In order to bring talent development to the next level, there is
scope to pursue meaningful strategic partnerships in financial sector education and training.
With growing cross-border linkages of the region's financial systems, there are significant
benefits to be gained from improving the quality and consistency of standards in financial
sector training in the region.
On collaboration in financial industry training
This conference represents a unique collaborative opportunity to discuss current issues and
trends in human capital development in the banking sector across different financial systems
within the Asia Pacific region. The efforts of APABI in providing this platform should therefore
be well leveraged by its member institutes. Given the varying levels of financial sector
development across the region, there will be tremendous benefit in the sharing of ideas and
methodology on human capital development especially in newly introduced areas in banking
and finance.
In Malaysia, our approach to human capital talent development is also founded on the
collaborative approach. With the establishment of the Asian Institute of Finance (AIF) in
2009, talent development in the financial sector is given a strategic priority and is coordinated
in a holistic manner, across the spectrum of the financial services industry. This is important
as many of the initiatives supporting these human capital development strategies are
multi-disciplinary and multi-layered. Under this arrangement individual training institutes
comprising banking, insurance, Islamic finance and the capital markets sector have now
converged onto a single platform to formulate a unified approach in strategic direction. The
ultimate goal for this is to develop financial sector talent with world class capabilities to drive
a sustainable growth and development of the financial sector.
Conclusion
Notwithstanding a more challenging period ahead, the financial industry in Asia is
well-positioned to benefit from continued favourable growth prospects, supported by
strengthened fundamentals that underpin the financial sector. The financial industry has an
important role in reinforcing these fundamentals through the business strategies that are
pursued, alignment of incentives and developmental priorities, including the development of
human capital. Conferences such as this can contribute towards developing a broader
understanding of the important issues to the industry, and to direct the focus of cooperative
opportunities to build a stronger foundation for sustainable growth. On that note, I wish you a
productive and engaging Conference.
Thank you.