At present, however, credit underwriting standards are not contemplated in European legislation, although some authorities, including the Banco de España, are empowered to set them. I do believe that consideration should be given to including them in future revisions of the European regulation. In my view, this would offer at least three advantages. First, it would allow harmonisation of the different dimensions of the credit standards. Second, it would enable the different jurisdictions to request reciprocity of the measures adopted, which would duly make them more effective. Last but not least, it would allow the European Central Bank to top up the measures, reducing the potential inaction bias of national authorities. On the use of borrower based tools vs capital instruments, it seems reasonable, in my view, that, if credit is showing high and sustained growth over time but without credit standards being relaxed, the ideal would be to increase entities’ resilience using capital instruments. But, even if credit were to show moderate growth, if the conditions for granting these loans are being relaxed (thus increasing the volume of credit at risk of default), it would probably be more efficient to use the borrower-based tools to guarantee sound credit underwriting standards. In any case, our experience shows that, especially at the end of expansionary credit cycles, high increases in the volume of credit tend to go hand-in-hand with a substantial easing of the conditions for granting the loans. Accordingly, both types of tools should perhaps be used simultaneously. With what gradation?

Firstly, the better economic prospects for recovery in Asia, and the expectations that Asia will lead in the emergence from the global recession could draw large capital inflows into the region. Such flows would not only lead to more volatile exchange rates, but also to increases in asset prices. Increases in commodity prices could also potentially feed into inflation and affect the economic recovery process. Most economies in Asia, including the policy makers, the financial industry and the private sector, have however, the capacity to manage these challenges. Stronger financial positions, low levels of leverage and buffers built during the good times have rendered the potential to manage the more challenging environment. The role of the financial sector is particularly important in ensuring the flow of  financing to productive economic activity is not disrupted, while exercising prudential restraint in an environment of excess liquidity. Towards the medium term, significant uncertainties remain for the outlook of the global economy. Overall global growth is expected to remain weak over the medium term with structural weaknesses in the advanced economies weighing down the overall economic growth in these economies. Being highly integrated with the global economy, the continued weakness of the advanced economies could present a challenge for overall economic growth for most emerging economies in the medium term. Therefore, it is crucial for the external sector of Malaysia to evolve into a more diversified structure to increase resilience and rely less on the traditional markets for growth. It is encouraging to note that this is already happening.