More recently, the Central banks in the East Asian region have come together to put in place a comprehensive regional surveillance system that is supported by a comprehensive integrated crisis management framework that would deal with any imminent financial crisis in the region. These initiatives are aimed at effectively preventing or containing developments that could trigger destabilising consequences, thereby promoting regional financial stability. Deposit insurance system Ladies and Gentlemen: Following the restructuring and reform of our financial system, Malaysia has two years ago implemented the deposit insurance system as part of our efforts to build a cohesive and mutually reinforcing financial safety net system. The deposit insurance system has an important role not just in promoting confidence with explicit coverage of deposits, but also in reinforcing sound risk management practices. It therefore has embed features that complements the supervisory process in promoting sound risk management practices in the financial institutions. In addition, the deposit insurance corporation in Malaysia is also mandated with the responsibility for the “least-cost” resolution of problem financial institutions. 4  BIS Review 130/2007  A comprehensive approach was thus adopted in establishing the Malaysia Deposit Insurance Corporation (MDIC). To promote depositors confidence, the deposit insurance scheme was designed to ensure that there was optimum coverage with sufficient reach to retail depositors. In designing the deposit insurance scheme, about 95% of all depositors are covered in full while in value terms about 35% of total deposits is covered.

Moreover, the market preoccupation with short-term stock price, rather than long-term creditworthiness also presents potential risks to financial stability. Notwithstanding these challenges, several recent positive developments in emerging economies have augured well for market discipline to have a more effective role in reinforcing sound governance. In particular, the development of financial markets have resulted in more efficient markets with wide options for investors to exert discipline. The adoption of international financial reporting standards, efforts to strengthen auditor independence as well as financial capability initiatives will also reinforce market-based discipline going forward. All of these initiatives will improve the prospects for financial stability by preventing problems from occurring at the level of individual institutions. However, the recent events in the international financial environment have demonstrated the increasing complexity of banking activities which has raised the broader challenges for financial regulation and the design of safety nets in the context of managing systemic risk. Regulators have begun to carefully consider the need to re-calibrate current regulatory approaches to appropriately address risks to the financial system stemming from large and complex institutions that are increasingly engaged in non-traditional activities. This has, in turn, placed new demands on financial regulators as well as for institutions to develop a deeper understanding of the interlinkages between the financial system and the economy, and in particular, the macroeconomic transmission of financial risk.