jessica chew cheng lian : corporate governance at the central bank of malaysia opening speech by ms jessica chew cheng lian, assistant governor of the central bank of malaysia, at the third institute of chartered accountants in australia - the malaysian institute of certified public accountants ( icaa - micpa ) audit forum, kuala lumpur, 27 september 2012. * * * it gives me great pleasure to be here this morning at the 3rd icaa - micpa audit forum. the theme for the forum this year is the role of the audit committee within the context of corporate governance in insurance companies. it has been said that an audit committee is like a good insurance policy - it is better to have it and not need it, than to need it and not have it. i am certainly happy to know that we have established strong audit committee practice within our financial industry, and while admittedly, some institutions have moved further than others in improving the effectiveness of the audit committee, it represents without exception a core pillar of governance systems in our financial sector. i say this because as we speak, there are countries that are now debating the requirement for financial institutions to establish separate audit committees. there are a number of reasons why the theme chosen for this forum is particularly relevant in current times. corporate governance problems have once again come under intense global scrutiny since the outbreak of the global financial crisis. it is however worth noting that quite aside from the crisis, recent episodes of compliance and market misconduct issues surrounding financial institutions have had very little to do with the crisis, but nevertheless have their roots in corporate governance problems. poor governance allowed, and in some cases, likely encouraged, internal control failures leading to large - scale fraud, excessive risk - taking, market manipulations, and an endemic disregard for compliance with laws and regulations. while such issues have not plagued our domestic financial industry to nearly the same extent as they have in some other parts of the world, there are other reasons why we need to continue to pay close attention to corporate governance in malaysia. for one, global economic and financial conditions have become considerably more uncertain. in the last monetary policy statement, the bank negara malaysia observed that economic activity is slower in most major advanced economies. there is considerable policy uncertainty in these economies, while conditions in the international financial markets continue to be volatile. in this environment, effective leadership reinforced by a robust framework within financial institutions for directing strategy and for regulating behaviour will be especially important. domestically, the financial industry also faces greater competition as a result of the

two simple bins. certainty equivalence holds in the case of simple specifications of additive uncertainty. when certainty equivalence holds, it is optimal for policymakers to respond to the expected values of their targets as if they held these values with complete certainty. in a sense, uncertainty has no effect on policy in this case, though it results in some decline of its effectiveness. additive uncertainty and certainty equivalence are perhaps best seen as devices to allow the incorporation of some stochastic elements into a model without the complications that arise in more meaningful encounters with uncertainty. in the case of multiplicative uncertainty, the most well known result is william brainard ’ s conclusion that policy should be somewhat more cautious in this case. assuming policymakers don ’ t like uncertainty, they become less aggressive with their policy instruments, because bolder use of policy adds to uncertainty about outcomes. however, some recent evidence ( arturo estrella, rick mishkin, and glenn rudebusch ) suggests that this type of uncertainty may have a relatively modest quantitative effect on the policy outcome. also, newer theoretical results, such as tom sargent ’ s, question the conclusion that parameter uncertainty would make policy more cautious. the newer entry into the uncertainty literature relates to imperfect or noisy observation of the economy, although concern about this problem certainly predates the recent studies. for example, by examining the historical record at the federal reserve, athanasios orphanides uncovered substantial and persistent measurement error associated with estimates of the output gap - one of the measures we sometimes identify with “ excess demand ”. this uncertainty starts by looking a lot like additive uncertainty, but its policy implications often end up similar to the brainard result of more cautious policy, with policy response attenuated at least with respect to movements in variables about which there are noisy observations. the literature supporting this attenuation result has at least two strands. one consists of theoretical models based on signal extraction, as in the work that eric swanson and lars svensson and michael woodford are presenting at this conference tomorrow. suppose, as in swanson ’ s work, that inflation depends on an unobservable variable we call “ excess demand ” and policy responds to the unemployment rate, which is only an imperfect indicator of “ excess demand ”. since the unemployment rate is a noisy indicator of what the policymaker is interested in - the unobservable “ excess demand ” - the weight the policymaker will give this variable will vary with its reliability as an indicator for excess demand.