Timelines for some of these measures have already been  announced. These reforms will be reinforced by strengthening further the current consumer protection framework to address mis-selling practices and facilitating a more effective enforcement of business conduct regulations. Strengthening the domestic infrastructure for financial stability An important part of the efforts to strengthen the domestic infrastructure for financial stability is legislative reform. The Bank is in the process of drafting a new legislation that will amalgamate existing legislations governing financial institutions and intermediaries in Malaysia that are administered by the Central Bank. Provisions in the current banking, insurance and takaful laws will be updated to support a more differentiated regulation and supervision according to risk. It will also reinforce the emphasis placed on effective board oversight and enable pre-emptive supervisory and enforcement actions by the Bank. This will include the introduction of a broader and more flexible enforcement framework, with consideration to civil and administrative penalties to deal with different types of offences. Proposed legislative changes also include the introduction of a more comprehensive insurance compensation system for the protection of policyholders. The draft legislation is expected to be completed in 2010. Progressive liberalisation of the financial sector This year marks the ninth year into the implementation of the Financial Sector Masterplan. Following the release of the Plan in 2001, more than 90% of the recommendations in the Plan have been implemented. Collectively, these measures have contributed towards achieving a more efficient, effective, stable and resilient financial sector as was envisioned in the Masterplan.

Even before the build-up of financial imbalances, the underpricing of risk and increased leverage in the financial system had been identified as sources of potential instability well before the eruption of the crisis. The warnings that were issued by central banks and international institutions were largely ignored and failed to result in appropriate responses either by market participants or by the authorities responsible for the oversight of individual financial institutions or the specific market segments. This has led to calls to regulate such market excesses through counter-cyclical or macroprudential measures such as increasing capital buffers in good times which could be drawn upon under stress conditions, the implementation of a leverage ratio to supplement riskbased capital requirements and through-the-cycle provisioning standards. There is also a call for systemically important institutions to be required to meet higher regulatory standards that are reflective of the risks that they pose to the system, rather than a consideration only of their institutional risk profile. The international reactions to these measures have been mixed, mainly because they are extremely difficult to calibrate in a way that will not unduly constrain output potential in good times, while avoiding significant demands for more capital and a confidence crisis during bad times. The Bank will carefully assess the details of these measures as they are released, and we will do so taking into account the regulatory and supervisory regime in Malaysia.