sme sector, banking institutions should explore other potential growth areas such as microcredit and agro - based financing, which are generally perceived as riskier and more costly than lending to larger firms. the challenge is for banking institutions to innovate and develop new form of financing arrangements and business models to exploit the opportunities offered by these market sectors. strategic opportunities are also available from a larger marketplace as economic integration and regional linkages of markets in the east asian region gather pace, driven by increasing regional trades and investment flows. in this regard, banking institutions should broaden their strategic outlook and expand their presence in the region to support malaysian businesses and investors as they venture into new activities and expand their geographical profiles. another strategic challenge facing banking institutions today is the growing and changing needs and expectations of consumers in tandem with increased education levels and growing wealth. consumers are becoming increasingly discerning and have become more involved in their financial decisions. for this reason, they are demanding a broader range of products and services at more competitive prices through more efficient and convenient channels. corporate customers have also become more performance - oriented and are demanding both competitively priced credit facilities and world - class financial advisory services. in this environment, the challenge is for banking institutions to anticipate and respond quickly to the differentiated demands and expectations of customers to sustain their competitive advantage. with growing customer expectations for continuous availability of services, the ability to continue to provide critical banking services at all times will also be crucial in the pursuit of building and maintaining their competitive edge. in conjunction with this, banking institutions must be able to quickly recover mission critical functions and assets during a major interruption to ensure efficient and reliable services to their customers. technological advancement, which has increased the complexity of banking business and which has led to the emergence of increasingly innovative products and distribution channels, also presents opportunities for the banking sector. with ict, financial services are being delivered to places and markets without requiring physical branch networks through a growing array of alternative delivery channels, including internet, atms, and even mobile phones. the challenge to banking institutions is to effectively leverage on the opportunities offered by technology to innovate products and services aimed at attaining greater efficiency, reliability and competitiveness. while the efficiency of electronic means of doing banking is acknowledged, banking institutions should recognise the need for them to meet customer expectations for more personalised and quality services. additionally, the potential benefits from electronic delivery channels need to be exploited without undermining the security and confidence of the banking public. the

are aligned with the bank's risk appetite and policies. the benefits of basel ii cannot be achieved with just a strict regulatory compliance approach. while basel ii serves as a powerful catalyst to reposition the role of, and the attention to, risk management in banking institutions, significant efforts need to be directed at strengthening the financial structure, corporate governance, risk management and data capabilities within the banking institutions. the approach adopted by bank negara malaysia has been for these efforts to complement and reinforce the positive outcomes of basel ii. these are important preconditions for, and not automatic outcomes from the adoption of basel ii. in the wake of the sub - prime mortgage crisis in the united states, several aspects of basel ii have attracted attention. among them has been the use of ratings in the regulatory framework and whether this has unintentionally discouraged investors from performing their own due diligence. the underestimation of risk for structured credit securitisations has now come under greater scrutiny. there has also been increased debate over the cyclicality impact of basel ii. the effectiveness of the supervisory review process in ensuring that additional capital buffers are provided by banks for risks not fully captured under pillar 1 of the framework has also been the subject of this review by authorities. the relative importance of these issues will be different for different countries, depending on the stage of development of the financial markets and the banking system, as well as the supervisory structure that is in place. among asia pacific countries, experiences with the implementation of basel ii have been varied. for emerging economies, basel ii has arguably a more far reaching impact. this is on account of several factors. firstly, many emerging economies continue to depend heavily on the banking system to finance economic activity. with a few exceptions, commercial banks are the main providers of credit in most emerging economies, accounting for an average of 90 % of total credit. this produces a higher correlation to the economic sectors where the implications on the banking system could result in significant disruptions to credit supply which could in turn affect economic activity. secondly, the more advanced approaches of basel ii are calibrated to the environment of the g10 countries, with significant acceleration of capital charges as the probability of default ratings deteriorate. to the extent that this inappropriately amplifies economic cycles by inducing the systemic misperception of risk in emerging economies, this can exacerbate a credit crunch during periods of weak economic performance. thirdly, the anticipation of lower regulatory capital