The financial crisis has followed a familiar pattern Our actions during a financial crisis are very important, but the main task in our work on financial stability must be to prevent crises. History has shown that financial crises arise when financial imbalances have built up over a long period. Our most important task is therefore to contain the build-up of imbalances and secure a robust financial system. No two financial crises are alike. However, similar features can often be identified in the runup to the crises. This slide illustrates three features. These elements were also prominent in the unfolding of the most recent global financial crisis.   The first feature is often a sharp and persistent rise in property and other asset prices.   The second, strong debt growth, is closely linked to the first. Rising debt and increasing property prices is a mutually reinforcing dynamic. Higher property prices lead to higher collateral values for loans. With easier access to credit, purchasing power increases.   Debt growth exceeds growth in bank deposits and banks must increasingly resort to market-based funding to finance the rise in lending. They become ever more reliant on market funding, which is often short term. When this cycle is allowed to continue for a period, the financial system becomes vulnerable.   Banks accumulate large loans secured on inflated collateral values.   Borrowers’ debt-servicing capacity becomes vulnerable to income loss.

The new legislation has also improved the ability of the Bank to respond to financial stability risks that can originate from shadow banking activities, including to issue orders requiring such intermediaries to address any risk identified which could threaten financial stability. A Financial Stability Executive Committee chaired by the Governor, which includes the Treasury Secretary, heads of key regulatory authorities and independent parties as its members may impose macro-prudential measures on these non-bank financial institutions to prevent the build-up of financial imbalances from this sector. With these necessary preconditions firmly in place, Malaysia embarked on a gradual and sequenced approach towards liberalisation and internationalisation. In 2005, Malaysia migrated to a flexible exchange rate regime at the very same moment that China did. It has provided Malaysia with greater flexibility to adjust to changing structural conditions in the region and the global economy. This has been reinforced by the progressive liberalisation of foreign exchange administration rules which have enhanced business competitiveness and facilitated larger volumes of trade and foreign direct investment flows. This has generated greater two way flows in the foreign exchange market and thus promoted orderly conditions in an environment of highly volatile capital flows. In the financial sector new licences and foreign equity interests in the banking and insurance sectors have now moved beyond the prescription of hard limits, to assessments based on the prudential and in the best interest of Malaysia criteria. In building a stable and resilient financial system, the Central Bank has accorded greater emphasis on financial inclusion.