But PAS will not give up and is girding itself for a long-term struggle. In Indonesia, it is significant that all three major Presidential candidates are secular nationalists. But all three have also found it necessary to seek Vice Presidential candidates with strong Muslim credentials, and support from Muslim parties. Although Indonesia has a long history of tolerant, syncretic Islam, more so than other Southeast Asian countries, political Islam is now at the centre of Indonesian politics and a crucial swing factor. In Thailand, Prime Minister Thaksin’s pro business and pro growth economic policies have not found resonance in the Muslim south. The recent upsurge of Islamic separatist violence is worrying, though there is so far no evidence of international terrorist connections. Southeast Asian governments, even those with large Muslim populations, are secular, moderate and intent on economic growth. If progressive and moderate forces are to win the global battle for the hearts and minds of the Muslims, Southeast Asia is perhaps the most favourable battleground. Riding on Asia’s growth This backdrop gives hope that the strategic and security environment in Asia will remain stable. I am also optimistic that Asian countries will continue to maintain stable political environments, pursue pro-business economic policies, and participate in the global economy. One significant economic issue countries must tackle is to strengthen and develop their financial sectors. BIS Review 33/2004  3  Asian countries need a two-pronged approach to do this. First, they should foster greater regional cooperation in financial markets to leverage on their collective strength.

Clearly, these losses generally produce second-round effects, mainly through reputational damage that tends to affect the financial sector as a whole, rather than individual institutions. As is currently the case, these losses tend to rise, precisely, in the aftermath of crises, where some of the questionable commercial practices are exposed. Banks are hit by these losses at a time when customers, shareholders and public stakeholders are questioning their business model, precisely because of this risk. Consequently, the upshot could be a clear procyclical effect. In a nutshell, we must acknowledge that non-financial risk presents certain features that can exacerbate or compound the effect of a crisis. It is also very hard to estimate and, unlike traditional risks, cannot be eliminated; at best, it may be mitigated. This would be the key question for today: what can we do to mitigate non-financial risk to the maximum extent? In my view, the mitigation of non-financial risk is linked to the quality of internal procedures, IT systems, governance structure or compliance function of a bank. In other words, it is not so much about what banks should do, but how they should do it. Naturally, enhancing governance, compliance or IT systems is not easy. It generally involves additional spending that adds pressure to the already beleaguered profitability of the sector. Understandably, some firms see spending in these areas as an additional cost. I believe it is more appropriate to see improvements in IT or governance as long-term investments.