are crucial. in addition to healthy financial positions, good systems of risk management and corporate governance would ensure better management and a healthy corporate sector. another important aspect is the availability of timely and reliable financial information and the strengthening of the legal and regulatory framework for enforcement of the laws and regulations. strong professional organisations can also play an important role to improve and enforce the standards and best practices. developing and diversifying the financial infrastructure is another important component of capacity building. in this respect, our financial sector master plan which was released in 2001 represents a ten - year strategy that charts the development of the financial sector. the focus of the initial phase of the plan is on the development of the financial infrastructure and financial markets as well as capacity enhancement and institutional development, in particular, of the domestic financial institutions, thereby putting in place the pre - conditions for moving forward to a more liberalised and competitive environment. gradualism has been adopted to avoid disruptive and unstable conditions. the aim is to evolve a more diversified financial system with financial institutions that are efficient, innovative and resilient. the masterplan places priority on good corporate governance and transparency within an effective regulatory and supervisory framework and a strong structure for consumer protection. liberalization of capital account the second factor in enhancing national resilience is the approach to liberalising the capital account. while liberalisation of the capital account has potential benefits, it also carries substantial risks. for emerging economies, where the financial infrastructure is still relatively less developed, the premature liberalization of capital flows could lead to an accumulation of risk factors that could lead to instability and culminate into a financial crisis. the approach for the liberalisation of the capital account in malaysia has been to adopt appropriate sequencing so that the increase financial integration will not have destabilising implications. it is important to have sufficiently developed domestic financial markets, sound macroeconomic conditions and sound institutions in place. also important is a surveillance mechanism to monitor capital inflows and outflows. of particular importance is the monitoring of the accumulation of external liabilities by the financial system and the private sector. advance knowledge of imbalances and risks would facilitate early actions to manage emerging vulnerabilities. an appropriate exchange rate regime finally, i would like to mention the significant value to national resilience of having an exchange rate regime that is aligned to the economic fundamentals. it is important to understand that the exchange rate is a means to an end and not an end in itself. its purpose is to provide

risk management - the need for new accord new institutional structures and evolving market practices have reduced the effectiveness of the existing accord. while the basic categorization of risks have not changed significantly, the ways in which risks present themselves have changed quite substantially. with the introduction of new products and more complex financial transactions enabled by technological innovations, risks can be disaggregated and rebundled in new ways. similarly, the advances in financial engineering and improved expertise have allowed the introduction of new hedging instruments to facilitate risk management. significant enhancements have been achieved in the measurement of market risk where the use of internal value - at - risk models is fast becoming the industry standard. the advances in the quantitative approach to the management of market risks have also expanded to the areas of credit as well as operational risks. despite the significant data constraints, new research has strengthened the theoretical foundation for internal credit and operational risk modeling. the development of new hedging instruments such as credit derivatives has also increased the use of credit risk transfer mechanisms within the financial system, thus promoting more active credit portfolio risk management. key developments have also taken place in the area of operational risk. the experience of large corporate failures due to fraud and lapses in internal controls has focused greater attention on improving operational risk management in banking institutions. this has prompted the need for banking institutions to provide capital for operational risk and to put in place a more integrated risk management framework on an enterprise - wide basis. the essence of the new accord ladies and gentlemen, the efforts of the bis to introduce an enhanced framework for capital adequacy regulation through basel ii is in the context of these developments. the accord seeks to bring into greater alignment the more advanced concept of capital management into the regulatory equation. the assessment of capital adequacy needs to look beyond the computed capital ratio. the new basel accord therefore comprises three pillars. the first pillar provides a minimum capital measurement framework for credit and operational risks. in essence, the regulatory capital requirement is aligned more closely with the actual degree of underlying risk that the banking institution faces. it provides the capital measurement that has three options with different levels of complexities for both credit and operational risks to better reflect actual risk. the second pillar focuses on strengthening the supervisory process, particularly in assessing the quality of risk management in the banking institutions. the supervisory process aims to provide the mechanism to ensure that other risks such as concentration risks and market risks in the banking books being managed. under such an environment, prudent