Over time, our regulatory and supervisory framework would rely more on market discipline through increased disclosure and transparency. In this respect, shareholders are expected to play a more active role in overseeing the performance of banking institutions and the effectiveness of management in conducting the business in an efficient and professional manner. As we advance into the second phase of the FSMP or the Financial Sector Masterplan Plan, progressive liberalisation will take place to level the playing field for domestic and foreign banking institutions. To this end, greater operational flexibility will be accorded to the existing foreign banking institutions. Bank Negara Malaysia has, in addition, granted three new full-fledged Islamic banking licences to foreign financial institutions. Additionally, foreign direct investment of up to 49 per cent has been allowed in the equity holding of the Islamic subsidiary of a commercial bank. The overall market shares of local and foreign banking institutions have not changed drastically, but there has been qualitative improvements in operational efficiency, service levels, risk management and corporate governance standards. Over time, as the industry further evolves, Bank Negara Malaysia will reassess the environment before deciding on further liberalisation measures. Ladies and Gentlemen, Macroeconomic and financial conditions are evolving swiftly, posing more significant challenges and lending urgency to accelerating efforts towards realising our vision of a more progressive and dynamic financial system. Greater commitment towards enhancing strategic competence and organisational effectiveness are critical as we strive for higher standards of performance and greater efficiency in the banking system.

In response to the unfolding crisis, Governments and central banks adopted aggressive measures, including fiscal stimulus packages, bank recapitalisations and the provision of government guarantees, and injections of huge amounts of liquidity. It was also important to critically review the legislative and regulatory framework in order to pre-empt the recurrence of, or at least better manage, similar situations. The de Larosière Report, mandated by the European Commission (EC) and published in February 2009, set the scenario for reforms at a European level. Similar work was undertaken at the global level by the Financial Stability Board (FSB) and by the Basel Committee on Banking Supervision (BCBS). This work has clearly showed that the Basel II capital requirements did not ensure an adequate buffer to sustain an institution on a going concern basis. Confidence in regulatory capital waned and the market started to assess bank robustness using other tools. Liquidity measurement, for example, had been largely excluded from Basel II. Some internal risk models were based on short-term statistical horizons that failed to capture periods of stress. The potential of the regime to exert a strong pro-cyclical bias also became manifest. In its efforts to address identified weaknesses, the BCBS issued two consultation documents in December 2009, one on “Strengthening the resilience of the banking sector” and another on an “International framework for liquidity risk measurement, standards and monitoring”. Concurrently, the EC is proposing amendments to the Capital Requirements Directive (CRD) in order to align it with the recommendations of the BCBS.