Boards also need to be accountable and ensure that the risks associated with consumer financing are well understood and being effectively managed. The second area that is being closely monitored is residential property prices. The aim is to ensure affordable housing for the population and that imprudent financing to this sector does not become a source of financial instability. Generally, the price levels of properties in Malaysia have remained relatively stable, recording an annual increase of 5.6% in the first quarter and 4.2% in the second quarter of this year. At the national level, residential property prices have increased steadily in tandem with economic development and the rise in household income levels. This aggregate growth trend of this sector has remained largely manageable and residential property prices have not deviated from the long term trend. In the more recent period, however, certain specific locations, particularly in the urban centres, have experienced faster growth, both in house prices and the number of transactions. Supporting this trend has been the increase in financing for multiple unit purchases by a single borrower. This suggests investment activity that is of a speculative nature. BIS Review 146/2010  3  While Malaysia is not experiencing a general property price bubble, targeted pre-emptive measures are appropriate to moderate the increases in property prices that are evident in select locations arising from purchases that are speculative in nature. These measures aims to support a stable and sustainable property market, and to ensure that prices of properties remain affordable for the general public.

The high degree of interconnectedness across the financial system has a number of implications. First, supervision must not just be vertical – firm by firm, or region by region, but also horizontal – looking broadly across banks, securities firms, markets and geographies. Second, this means that supervisory practices need to be revamped. They need to be coordinated and multi-disciplinary. I think the U.S. Treasury is right in proposing a systemic risk regulator as part of their regulatory reform plan. But, we shouldn’t kid ourselves about how difficult this will be to execute. You will need a flexible and dynamic governance process to be able to identify the important elements of systemic risk, to elevate those concerns to the appropriate level and then to act on those concerns in a timely manner. It will take the right people, with the right skill sets, operating in a system with the right culture and legal framework. I don’t believe creating this oversight process will be an easy task. Consider, for example, subprime lending. There were obvious excesses in terms of underwriting standards, product design and risk management. But addressing those issues during the boom would have required the supervisor to absorb attacks that reining in some of these practices would make it more difficult for some low- and moderate-income households to become homeowners for the first time. System dynamics In thinking about interconnectedness, we also need to focus on system dynamics. By system dynamics, I mean how the different parts of the system interact.