Legal regimes are different; national authorities have different incentives; and coordinating resolution across multiple geographies in a way that treated counterparties in different jurisdictions equivalently would be a daunting mission. Similarly, designing an effective capital surcharge for systemically important institutions will be very challenging. Broadly, there are two approaches. We could either require a set of firms identified to be systemically important to hold additional capital or we could introduce a capital surcharge for firms linked to measures of systemic risk. In broad terms, the factors that could be used to identify systemically important financial institutions would be related to a firm’s interdependence with the financial system and the impact on market confidence should the firm become distressed. Measures of size, leverage, liability structure and importance in credit formation and liquidity provision could all be indicators of systemic importance. Developing a consistent, objective set of measures either to size a capital surcharge or to identify such firms is particularly difficult. For example, introducing a single measure to size a capital surcharge such as firm size, may create arbitrage opportunities and will almost certainly not capture the full extent that an individual firm may contribute to systemic risk. Moreover, identifying a set of systemically important institutions may reinforce concerns about moral hazard. We also have the difficulty that the particular metrics used to determine which firms are systemically important are likely to change over time with changes in market structure and in the evolution of particular financial institutions.

Muhammad bin Ibrahim: Creating an inclusive, sustainable and prosperous Labuan Speech by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Labuan Industry Annual Dinner 2017, Labuan, 27 October 2017. * * * It is a pleasure to speak at this dinner. Last year I spoke on the urgent need for Labuan International Business and Financial Centre (IBFC) to reinvent itself to stay relevant – in other words, for us to reinvent ourselves in order to survive in a new world reality. In my remarks tonight, I will build on last year’s theme and touch on three imperatives for change in Labuan, namely: 1. First, to ensure the local community benefits from economic activity; 2. Second, to transform the economic structure to become one that is more diversified, resilient and sustainable; and 3. Third, to rationalise and enhance tax incentives consistent with international best practices. Ensuring the local community reaps the benefits of economic activity Labuan has come a long way. After two and a half decades, it is now home to close to 14,000 companies, 54 banks, more than 200 insurance related entities, foundations and leasing companies, respectively. Nonetheless, the growth of the financial sector should have more spillover benefits to the local community. Two facts illustrate this: 1. First, gains in income must be more evenly distributed across the local population. The top 20% earns more than 5 times the income of the bottom 40% household group1.