Let me now turn specifically to financial regulation. To the extent that financial regulation contributes to procyclicality and excessive risk-taking, supervisors could design their regulation in a counter-cyclical fashion to reduce procyclical behaviour of financial institutions. Reflecting this thinking, discussion to date on the role of financial regulation to address procyclicality has focused on four areas. The first is to reduce procyclical tendencies of the Basel II capital regulation by aligning capital requirement more with a longer-term perspective of risk. On this, key measures under discussion include: (1) building capital buffers by capital conservation measures; (2) reducing procyclical effects of minimum capital requirement by adopting through-the-cycle risk parameters to achieve a less pro-cyclical capital ratio; (3) promoting forward-looking provision that can cover loan losses that are not yet incurred but expected, with supporting accounting rule and valuation; and (4) using additional capital charge for the large and more complex banks based on indicators of systemic relevance. The second area of focus is the use of macroprudential supervision. The aim is to use prudential measures, when needed, to restrain the build-up of risk either in the overall financial markets or in specific asset class. Examples here include use of loan-to-value ratio on real estate loans and margin requirements for derivatives and securities transactions. Also, a recent idea of using leverage ratio to help take account of the unknown risk beyond those identified by the risk-adjusted capital regulation also falls into this category.

This prompted Bank Negara Malaysia to document the industry’s transformation in a box article that we published in our latest edition of the Financial Stability and Payment Systems Report. Today, the industry stands among the more developed money services markets in the world and our MSB companies have a good reputation that will open doors for growth opportunities both within and outside Malaysia. The industry’s credibility has also avoided the negative impact from de-risking strategies by banks that have been experienced in other countries. We should not forget however that good reputations are hard to earn, and easily lost. So while we have come a long way, a number of priorities must continue to stay in clear focus for the industry to progress further. Let me just mention three of these priorities. First, we must continue to work at reducing transactions that are conducted through informal channels – in particular, through education and enforcement activities. Since 2012, the Bank has taken enforcement actions against 140 illegal MSB operators. This included criminal and civil actions pursued against over 70 companies. We will continue to intensify our efforts on this front. Second, we must continue to raise compliance and professional standards across the industry, regardless of size. Every company that holds a licence must be able to meet the expectations that have been set to protect the integrity of the financial system and provide a high standard of service to the public. Over the years, more companies have been given licences for longer periods.