The ability to continue to do this as we advance forward into the future will however, become more challenging amidst the rapidly changing global environment, characterised by increased competition and a higher degree of global and regional economic and financial integration. Fundamentally, the successful transition of Malaysia towards a high value-added, high income economy will depend on several critical factors. The first is to achieve an orderly shift towards new areas of growth and new areas of comparative advantage. This transformation requires all sectors of the economy to be increasingly involved in higher value added economic activity. In the manufacturing sector, existing industries need to move up the value chain. This will be complemented by knowledge-intensive services sectors, such as information and communication technology (ICT), education and health. While multinationals and large domestic corporations will remain important in these sectors, the contribution of small and medium enterprises (SMEs) have an important role in supporting these new growth areas. The second critical factor is that productivity improvements will become a critical determinant of our future growth prospects. Continuous increases in productivity characterised by greater innovation and efficiency in production and business processes, are vital to achieve this transformation. Indeed, such productivity improvements are taking place in the financial sector. The comprehensive efforts in capacity building and institutional development in the early part of this decade have resulted in the opportunity to achieve scale, and thus allow for increased investment in technology and in people. Increased competition also facilitate this trend.

While it is recognized that the global reforms have been designed to address problems not faced in our financial system and are guided by different value and incentive systems, it is still important that we embrace initiatives that will enable us to avoid the same such mistakes. As more of our banks and insurers venture abroad into the regional markets, financial institutions will also be assessed by investors, analysts and market participants against these global standards. Moving forward, after a consultative process with the industry, the following enhancements will be incorporated to the Risk Weighted Capital Adequacy Framework for banking institutions:  4  BIS Review 146/2010    higher capital requirements to support risks in trading activities, securitizations and counterparty credit exposures;    strengthened definitions and criteria for the recognition of Tier 1 and Tier 2 capital; and    higher levels of common equity, Tier 1 and total minimum capital requirements which also provide for capital conservations buffers. The appropriate timing of transition to the new requirements, will be determined in 2011. While the Basel Committee has set a generous timeframe for implementation of the new requirements, we anticipate that given the current position of strength of our banking system and together with other jurisdictions, including those in this region, we are in a position to be on a faster track to adopt the new requirements.