An important element in the framework is the strong collaboration between the supervisor and deposit insurer in promoting discipline in the banking system. As the supervisor, recognition is given to sound risk management practices demonstrated by banking institutions to have greater business flexibility, while the deposit insurer, through a differential premium system, provides incentives for financial institutions to adopt sound financial and business practices. In adopting this framework, clear accountabilities have been critical in ensuring that there is no duplication in efforts so that the banks would not be over burdened by overlapping regulation and submission requirements. There was also a need to ensure close cooperation and collaboration between the supervisor and the deposit insurer to ensure the intervention and resolution actions instituted by the deposit insurer, would not be to the detriment of the system as a whole. These resolution powers would be invoked by the deposit insurer following notification by the Central Bank that a member institution was likely to cease to be viable. It is in this context, the strategic alliance between the Central Bank and the deposit insurer was formed as a basis for cooperation to ensure the safety and soundness of the financial system. In Malaysia, Bank Negara Malaysia is mandated with the responsibility of safeguarding and ensuring the stability of the financial system. The overall supervision of the financial institutions remains within the functions of Bank Negara Malaysia.

Boards set the tone for their institutions' risk taking activities, and provide effective oversight to ensure that their decisions are followed. Of paramount importance is the need for boards to ensure that risks are estimated in a consistent and timely manner, and escalated to the board with attention being focussed on the management of the emerging risks. Today, boards face additional challenges of discharging these responsibilities in an environment that is rapidly changing and highly competitive. Achieving effective boards and strengthening the foundations of sound corporate governance have therefore become a priority in the reform agenda for many countries in the recent period. The implementation of Basel II, new financial reporting standards and principles-based regulatory approaches have also significantly increased the importance of, and reliance on sound judgement, integrity and competence by the board and senior management. This, in turn has been a key driver in galvanising efforts to strengthen market discipline as a countervailing influence that will rein in high risk behaviour by banking institutions. Achieving a framework with the right mix of regulatory and market-based incentives, however, continues to remain a significant challenge. Transitioning to market-based discipline can be particularly challenging in emerging markets where regulation has tended to be more prescriptive. In these markets, safety nets are also more prevalent and the tolerance for institutional failures is lower given its far reaching implications on consumer confidence. For the most part, the liabilities of banks are not traded in the market, so debtholders generally lack the opportunity to exercise market discipline.