One of the explanations for these insufficient holdings of liquidity was that the stress scenarios considered by banks were far too optimistic. While secured funding remained the most stable source of refinancing, it was much less stable than banks and regulators had assumed. 11 Liquidity problems at individual banks have imposed considerable stress on the entire international system. To prevent a destabilization, central banks had to provide massive liquidity support. In some countries, this support has been provided against collateral of poor quality and even on an unsecured basis. As in the area of capital, the Basel Committee is moving rapidly towards an international liquidity standard for banks. This standard should incorporate the following basic features to be effective: The standard should reflect an adverse scenario, including a significant loss of confidence from depositors and a severe disruption of secured funding. Moreover, the standard should require banks to hold a buffer consisting of assets whose liquidity and value is robust to massive disruptions in the financial markets. Overall, the standard should materially improve banks’ liquidity positions and make their funding more robust. In Switzerland, liquidity requirements for the big banks are in the process of being comprehensively revised. In line with the features I have just outlined, the new regime will ensure that the big banks are able to cover their potential liquidity needs in the event of a widespread loss of market confidence. The new regulation will enter into force in spring 2010.

Therefore, we do not foresee a significant shift in our current approach to regulation following the proposed global financial reforms. In fact, this reinforces our thinking that the approach we are taking is appropriate for our system. Bank Negara Malaysia has been engaging the banking industry to better understand the impact that the proposed reforms have on Malaysia’s economy and financial system. This will allow us to develop implementation strategies for Malaysia after taking into account specific characteristics of the domestic financial system, including compensating tools and arrangements within the financial system that mitigate risks to financial stability. An important point to consider is that, the implementation process does not result in any unintended consequences. This is where engagement with the banking industry is of utmost importance. We used inputs from the industry and share the inputs at regional and international-level regulatory fora, thus providing an emerging market perspective to the recommended proposals. Malaysian financial reform, regulatory framework and conduct of supervisors Some key regulatory initiatives by Bank Negara Malaysia to further enhance its prudential regulatory framework and conduct of supervision moving forward.   First, to strengthen financial sector legislation through the modernisation and consolidation of existing regulatory/oversight laws under Bank Negara Malaysia’s purview. The enhanced legislation ensures that Bank Negara Malaysia is entrusted with the necessary mandate and power to maintain financial stability and to conduct effective supervision of financial institutions.