zeti akhtar aziz : innovative financing for transformation speech by dr zeti akhtar aziz, governor of the central bank of malaysia, at the langkawi international dialogue 2011 : innovative financing for transformation, putrajaya, 19 june 2011. * * * the world is transforming. our motivation for accelerating our own pace of transformation is to ensure that we will be able to effectively participate in this new economic and financial environment, and in the process, maximize our potential performance. central to this is having a well functioning financial system and the right financial policies. the recent financial crisis in the developed world has shown that when things have gone wrong in the financial system, the consequences have been catastrophic. instead of creating wealth – it destroys wealth, instead of generating employment – it results in job losses, instead of facilitating economic progress – it derails growth and development. it is my great honour and pleasure to speak at this 2011 langkawi international dialogue on innovative financing for transformation. the overarching objectives of economic transformation is surely to generate sustainable and balanced growth, to improve living standards, to create employment opportunities and to achieve a more inclusive development. this decade has however seen how innovative financing in several of the developed economies have fuelled excessive levels of leverage that have resulted in deeply indebted private and public sectors, which in turn have become highly destabilizing to their financial systems and to their economies. the challenge before us is how then should the financial system be developed and regulated so that these pitfalls will be avoided while at the same time remaining dynamic and innovative so that we can push our frontiers and gain the progress that we aspire. while innovation remains essential to economic progress, it needs to be within the context of stronger governance and sound risk management practices. positive innovation can make enormous contributions to economic performance. the financial system has to deliver the essential financial services that would cater to the financial needs of all sectors of the economy – from households, small and medium enterprises, including to micro enterprises and to the corporate sector. the financial system also has to take into account the fundamental changes taking place in the global economy and the growing participation of emerging economies in the global economy. as we become more interlinked, financial systems also need to become more internationalized to facilitate and reinforce this trend. the role of the financial system is essentially to effectively intermediate and to meaningfully mobilize funds including from across borders to be channeled to productive economic activity. such intermediation must be

2 % this year to close to 3 % in both 2000 and 2001. consumer price increases, as measured by the harmonised index of consumer prices ( hicp ), have recently resumed their upward trend, as expected. in october the annual rate of change in the overall hicp was 1. 4 %, up from 1. 2 % in september and august owing to higher price increases for food and non - energy industrial goods. the impact of higher oil prices on energy prices in the hicp, which had accounted for most of the upward pressure since june 1999, was countered in october by more moderate increases in other energy components. some additional counterweight to the upward movement in goods prices came from a further moderation of increases in prices in the services sector. in general, the overall upward trend is expected to continue until early 2000 as a result of the increase in oil prices since spring 1999. forecasts available suggest that price increases will nevertheless remain below 2 % in the course of 2000 and 2001. however, the actual developments will very much depend on the behaviour of a number of factors, and in particular on wage developments remaining in line with price stability. in addition, our assessment has to take due account of prevailing uncertainties. on the upside, these relate to, inter alia, the behaviour of money and credit aggregates, the developments in oil prices and the path of the effective exchange rate, all of which are closely monitored with regard to their impact on price stability. on the downside, main factors are linked to the effects of deregulation and liberalisation. in conclusion, the current monetary policy stance should ensure a sustainable expansion of non - inflationary economic activity in the euro area. in line with its monetary policy strategy, the governing council will remain vigilant with regard to any risks to price stability arising either from domestic or from external sources and act in a timely manner. let me now give the floor to the vice - president to introduce some of the additional topics we discussed during our meetings. the governing council today also took a decision on the subject of the minimum reserve system. as you may be aware, interbank liabilities are not subject to reserve requirements. in this respect, the ecb allows those credit institutions which cannot provide evidence of their interbank liabilities - in the form of debt securities issued with an agreed maturity of up to two years or money market paper to apply a standardised deduction to the aforementioned liabilities in the computation of their reserve base.