muhammad bin ibrahim : a broader view of compliance in banking and financial sectors remarks by mr muhammad bin ibrahim, governor of the central bank of malaysia ( bank negara malaysia ), at bank negara malaysia's compliance conference 2017, kuala lumpur, 18 may 2017. * * * the topic of compliance has become a widely discussed topic in recent times, often headlined by massive regulatory fines slapped on financial institutions for compliance failures. banks globally are estimated to have paid over usd320 billion in regulatory penalties since the global financial crisis for multiple failures ranging from market manipulation to money laundering and conduct failures. on the bright side, these fines signal a continued, if not increased, priority given by authorities to strong enforcement. but the fact that such failures occurred at all, and were allowed to reach such extensive proportions to the detriment of the public, should worry us. there is no doubt that the compliance burden has increased significantly. and for good reason. even though the debate will continue to rage on over the relative benefits and costs of compliance, it is unlikely this question will be settled in the foreseeable future. given our experiences from the various discoveries that institutions continue to push the boundaries of what constitutes a fair and ethical practice, there is clear evidence that we need to do more to improve compliance. the industry has made some important strides. in earlier times, the compliance function was largely left to a single, usually mid - level, individual within the organisation, whose principal job was to serve as a contact point with the regulator, or to handle matters relating to anti - money laundering and counter financing of terrorism. today, almost all financial institutions have a compliance function, staffed with whole teams dedicated to all aspects of a firm ’ s compliance with relevant laws, regulations and internal policies. indeed, we have progressed. many efforts have been taken to continuously strengthen the supervisory framework. bank negara malaysia has identified the compliance function as one of the key control functions in a financial institution – right up there with senior management, risk management function, and finance and reporting functions. in 2015, we issued the compliance standard for financial institutions, which raised our expectations of boards and management to address the full breadth of structural, operational, resource and process issues that go into assuring compliance. we also issued strengthened corporate governance standards which reinforce the accountability of the boards in overseeing an effective compliance function. while it should be obvious why compliance is so important, i think it bears repeating. if motivations for an increased focus on compliance are

. thus, policy makers should make good use of the time that monetary policy is buying. and indeed, europe is proceeding with a comprehensive reform agenda to tackle the root causes of the remaining challenges. one of these challenges is the close link between banks and sovereigns. breaking this link is important for making the euro area more stable. to achieve this objective, we have to adjust the regulatory treatment of sovereign exposures over the medium term. two steps are important : first, an upper limit for banks ’ exposure to individual sovereigns should be introduced. second, banks ’ investments in sovereign bonds should be backed with capital. but there is more to do. a banking union can represent another major step to break the link between banks and sovereigns. centralising supervisory powers over large banks can foster bis central bankers ’ speeches a comprehensive view and unbiased policy action that is not held hostage by national interests. a first step in this direction will be the balance sheet assessment under the auspices of the ecb. it is important to conduct this exercise in an impartial and unprejudiced manner. the german banking industry has already spent considerable efforts on cleaning its balance sheets – some as part of the commission ’ s state aid decisions, some in reaction to eba stress tests, some for other reason. thus, banks are in a better condition now than they were a few years ago. i am not afraid of huge surprises. but for all banks subject to the assessment it cannot be excluded that problems still remain. we need to uncover and address these problems now, before the single supervisory mechanism is launched. meanwhile, a comprehensive banking union has to comprise more than just an effective single supervisory mechanism. it needs to be complemented by a single resolution mechanism. this is a necessary step to solve the too - big - to - fail - problem. large banks must be able to fail without endangering the stability of the whole system. otherwise, the government would have to step in to prevent a systemic crisis. this would create an asymmetry : heads, banks win, tails, taxpayers lose. against this backdrop, establishing a clear hierarchy and minimizing discretion in the handling of bank creditor bail - ins is indispensable to win back lost trust. based on the eu finance ministers ’ agreement of june 2013, the recovery and resolution directive is now close to being adopted. it might ultimately turn out to be a net positive, as it provides clear orientation for markets. moreover, it