zeti akhtar aziz : strengthening the banking sector for further competition keynote address by dr zeti akhtar aziz, governor of the central bank of malaysia, at the dialogue session with banking institutions, kuala lumpur, 17 february 2005. * * * bismillahirrahmanirahim distinguished guests, ladies and gentlemen, economic transformation, a more competitive environment, advances in technology, strengthening international linkages, and more discerning customers will be the important forces that will drive changes in the domestic financial landscape in the years ahead. economic transformation can be expected to be more pronounced as efforts intensify to shift resources to new areas of growth. a more competitive environment will emerge from increased deregulation and further liberalisation. advances in technology will continue to increase the potential for creating new instruments, new business processes and enhance the ability to measure and manage risks. strengthening international linkages will come as foreign presence and participation in the domestic financial system increases and as initiatives are taken by domestic groups to operate beyond domestic borders. against this background, more demanding customers with higher expectations will see greater consumer activism exerting their influence on the financial landscape. these developments will indeed present a dynamic environment with new challenges for the banking industry. ladies and gentlemen, it is my pleasure to welcome you to the dialogue session between bank negara malaysia and banking industry. this dialogue will provide an opportunity for the industry to discuss with the central bank these developments and their implications, important issues that have emerged and the central bank's policy initiatives. as the year 2005 unfolds, it is important for us to reflect on our progress achieved, the new challenges that have emerged and the actions that need to be taken to drive performance in the period ahead. the banking system in malaysia today is vibrant, strong and profitable. in fact, the banking system is at its strongest position since the financial crisis. the high level of capital, improving asset quality and strong profitability have also been reinforced by substantial enhancements in the areas of corporate governance and risk management standards. large investment has also been made to strengthen internal systems and processes, to improve delivery channels and to acquire talent. cumulatively, these enhancements have enabled the banking institutions, particularly the domestic banking institutions, to remain competitive and to offer differentiated products and value - added services. undoubtedly, the competitive environment has also driven domestic banking institutions to strive for greater efficiency as well as to venture into new areas of businesses, tapping new sources of income and entering into alliances with regional

capital flows and transient shifts in exchange rate expectations. ladies and gentlemen, in spearheading the development of the financial sector, bank negara malaysia's objective is to develop a dynamic, competitive and resilient financial sector. in the year 2005, focus will be accorded to strengthen the effectiveness of the banking sector in meeting the new requirements of the economy, enhance competition and hence efficiency and to strengthen the infrastructure for consumer protection. these initiatives would be taken in the context of preserving the soundness and stability of the financial system. an important component of a strong financial sector is the institution of a robust regulatory and supervisory framework. two main principles will be taken into consideration in the formulation and implementation of prudential policies. first, is the creation of a regulatory environment that fosters innovation and competition, while promoting best practices to preserve financial stability. policies will therefore balance the need to attain efficiency whilst preserving stability. second, regulations will increasingly be " principle - based ". regulations will focus on identifying parameters within which banking institutions must operate, whilst retaining sufficient flexibility to allow institutions to determine their own individual strategies and approaches within these parameters. this is in the light of the improved corporate governance and risk management practices within banking institutions. the board and management will be accountable for strengthening individual institutions. the success of the principle - based approach to regulation will depend on the ability of banking institutions, individually and collectively as an industry, to make use of the flexibilities given without giving rise to excessive risk taking, overpricing, credit rationing and other actions that could threaten stability in the financial system and overall economic well - being of the nation. the key is for banking institutions to act responsibly, as the actions of banking institutions would have implications on all segments of the economy. due attention must be given to ensure that all segments of the society have access to banking services at reasonable cost and no groups should be marginalised in this process. in this respect, while we advocate a principle - based regulatory framework, bank negara malaysia will closely monitor the performance and actions of banking institutions, and would intervene and prescribe specific regulations in the event that actions by banking institutions could jeopardise financial stability and public confidence in the financial system. as a custodian of public funds, and as a service - oriented industry, the banking sector must continuously strive to maintain public confidence in the system and deliver high standards of services. maintaining public confidence entails efforts beyond maintaining strong financial results and having