zeti akhtar aziz : cross - border challenges in implementing basel ii in emerging economies keynote address by dr zeti akhtar aziz, governor of the central bank of malaysia, at the publicprivate dialogue session of the 7th seacen conference of directors of supervision of asia pacific economies, kuala lumpur, 4 august 2005. * * * dr. subarjo, executive director of the seacen centre, mr. karl cordewener, deputy secretary general of the secretariat of the basel committee on banking supervision, distinguished guests, thank you for the invitation to speak at this 7th seacen conference of directors of supervision of asia pacific economies organised by the seacen centre in collaboration with the apec business advisory council, the asian bankers'association and the pacific economic cooperation council. this event is of particular significance as it brings together the regulators and practitioners from the banking industry, to exchange ideas and share experiences on the operational and policy issues involved in cross - border banking, in particular, with respect to the implementation of basel ii. the participation of regulators and industry players from latin america will, i believe further enrich the discussions. it is in our common interest to resolve these issues expeditiously, as the implementation date of 2007 for g10 countries approaches. ladies and gentlemen, in most emerging markets, the banking sector forms the key component of the financial system that drives the economy. in malaysia, despite the increased significance of the domestic capital market, the banking sector continues to be the predominant source of financing in our financial system, as it evolves to offer more innovative financial solutions to meet the more sophisticated needs of customers and investors. the increasingly complex nature of their operations have had a significant impact on their risk profile over the years. the domestic financial environment has also become more competitive, following an intensification of the liberalisation and deregulation process. domestic banking institutions have now also ventured beyond our domestic borders. increasingly, supervisory attention is therefore directed towards ensuring that a robust risk management framework is put in place to support such business expansion and growth strategies. against this background, the call for improvements in risk management through the adoption of basel ii and the discussions on the effectiveness of supervisory arrangements on cross - border banking and financial activities are most relevant. the case of the bcci in the early 90's and baring in the mid - 90's have also brought to the fore the gaps in supervisory oversight activities and highlighted the need for greater cooperation between home and host supervisors. similarly,

and standards can be expected to exist. our main task will be to find areas where convergence can be accelerated. there may also be room for greater mutual recognition of supervisory assessments among fellow supervisors that could avoid duplication of efforts and resources that could contribute towards reducing compliance costs to the banking institutions. while we deliberate on the complex issues relating to cross - border implementation of basel ii, supervisors and banking institutions operating in emerging markets also need to take into account the broader implications of basel ii on the economy as well as the access to financing for specific economic sub - sectors, such as the small and medium size enterprises ( smes ). the highly risk sensitive framework could indeed have a potential adverse impact on bank lending behaviour. there has to be continuing discussion between supervisors and the banking institutions on the broader supervisory issues and the effectiveness of regulatory and supervisory framework that could mitigate such potential adverse implications. basel ii is only one component of prudential regulation, and hence must not be viewed in isolation. in this context, the suitability of other rules such as the provisioning framework and the stress testing practices must also be discussed with a view for future enhancements. ladies and gentlemen, while we engage in the intricacies of implementing basel ii we should not loose sight of the ultimate objective of maintaining financial stability. this dialogue is most important in providing a forum for the exchange of views and the sharing of experiences. indeed, the outcome of the discussions should be escalated to a higher level of policy deliberation so as to further accelerate the progress in detailing the issues relating to the cross - border implementation of basel ii. on that note, i wish all of you for a stimulating and productive discussion. thank you.