There is neither an effective platform nor an established framework for policy coordination or for crisis containment, management and resolution. There is also no true global lender of last resort as the IMF itself has only limited resources. This has led to the rise of governance innovations amongst many economies, including Malaysia and its neighbours. Since the Asian Financial Crisis of 1997, various initiatives have fostered stronger regional cooperation, including information sharing and alternative liquidity support arrangements that are bilateral or regional in scope. While these efforts have reinforced the region’s defences against external shocks, they have not reduced the vulnerability of individual economies to external shocks. Were the fault lines in the global monetary and financial system to widen, there is no guarantee that emerging economies like ours will not be dragged into those crevices. Given the lack of global initiatives to close those fault lines, what economies like Malaysia must do is to ensure that our house is strong. We must build-up our defences and have the resilience to withstand the volatility and headwinds created by the global economic and financial environment. One important source of that resilience is having sound financial governance at all levels of our society: the government, the corporate sector and the household sector. Financial governance: foundation of sustainable economic growth Financial governance sets the stage for sound financial decision-making. Broadly defined, strong financial governance is a sum of many parts including strong institutions, efficient processes, and effective rules, regulations and norms.

In the US alone, conservative estimates have placed the loss from the financial crisis at between $ trillion to $ trillion, or 40 to 90 per cent of the annual economic output 6. In response to the global crisis, more extensive international reforms have been pursued to strengthen the financial buffers of financial institutions through, among others, stricter capital and liquidity requirements. These reforms have helped to strengthen the balance sheets of financial institutions and sustained their ability to support orderly financial intermediation. While I acknowledge the importance of these reforms, there is an even more important issue related to the overall “governance of finance”. The financial crisis contains many lessons on how governance of finance failed as well as the consequences of such failure. The governance of finance relates to the behaviour of financial institutions and their determinants from the perspective of organisational arrangements, incentive structures and ethics, as well as the regulatory and market environment. When these factors are correctly aligned, the financial system plays its role in supporting sustainable economic growth; when they are not, the financial system creates risks that can potentially undermine economic growth. Central to the robust governance framework of financial institutions are strong institutional arrangements that provide effective checks and balances to facilitate sound decision-making. At the broadest level, this entails well-defined responsibilities and accountabilities,  6  6  Luttrell, Atkinson and Rosenblum (2013). Assessing the Costs and Consequences of the 2007–09 Financial Crisis and Its Aftermath. Economic Letter 8(7), Federal Reserve Bank of Dallas.