While there has been wide ranging financial reforms at the international level to strengthen the resilience of the financial sector, the cross  2  BIS central bankers’ speeches  border dimension of policy-making has not been as extensive. This is despite the swift spread of financial and economic shocks throughout the global economy and international financial system following the eruption of the financial crisis in 2008. Despite these increased challenges, the institutional arrangements for policy cooperation and coordination have yet to reach the levels that are commensurate with the degree of global economic and financial integration. While the individual efforts by any single economy is vital, it can no longer guarantee global financial stability. Emerging economies that are more open and integrated with the global economy and international financial system are the most affected by these developments. The crisis has forcefully demonstrated the importance of the international dimension of policy. Finally, a consequence of financial crisis that deserves increased attention is the widening of income disparities within economies. The recent crisis has worsened this trend given the conditions of high unemployment in many parts of the world. At the national level, the development of inclusive financial systems and the development of social safety nets will contribute to containing this trend. Financial internationalisation and the Malaysian experience In pursuing financial sector liberalisation to transition to a more internationalised financial system, Malaysia adopted a gradual and sequenced approach.

New licences were issued to foreign conventional and Islamic banking institutions, while the minimum foreign strategic stakes in the insurance and takaful industry were increased. Increased operational flexibilities were also accorded to the existing foreign banking institutions in the financial system which now account for about 30% of the banking system. At the same time, the foreign participation in our securities market was liberalised in 2007 to allow foreign corporations to raise financing either in domestic or foreign currency. The capital account liberalisation throughout the first decade in the 2000s has involved the progressive removal of restrictions on foreign exchange administration rules. This liberalisation was intensified after 2005, taking into account the state of readiness of the financial system and the economy to manage the consequential increased cross border financial flows. In July 2005, Malaysia migrated from a fixed exchange rate regime to a flexible exchange rate regime to accord greater flexibility to adjust to changing structural conditions in the region and the global economy. With the progressive dismantling of restrictions, businesses now had the flexibility to manage their financial exchange exposures. This encouraged two way capital flows and contributed towards stabilising the volatile capital flows to our economy. Finally, in addition to being accorded with the necessary powers in the new legislations, the policy toolkit of the Central Bank has also been expanded to address the potential build-up of financial imbalances and its risks to financial stability following increased internationalisation. This includes macro-prudential and supervisory measures to collectively address the underlying causes of financial stability.