TURMOIL

Global Financial Turmoil

Global Financial Turmoil

The global financial turmoil has resulted in markets around the world generally falling by about 45% in 2008. The Malaysian capital market has been similarly affected by global trends and has not been insulated from price swings. However, holistic capital market development has insulated the stock market from financial vulnerabilities affecting other markets. The fundamentals of our national economy remain healthy and the Malaysian market has demonstrated financial soundness, continuing to price assets in a fair and orderly manner.

Two categories of policies

Since the outbreak of the current turmoil almost a couple of years ago, the world's financial regulators have been working on two categories of policies. One is short-term crisis management measures to stabilise the financial markets. The other category is medium-term reforms to “re-design” the regulatory framework in order to prevent the recurrence of a similar kind of crises in the future(Azcona, 2008).

Admittedly, it is the crisis management measures that have attracted much attention so far. This may be inevitable because, if fire strikes, priority is naturally given to putting it out immediately rather than establishing a fire-proof building to prevent another emergency.

It may also be because these measures are sometimes extraordinary in terms of massive public support that is unthinkable in normal times. They include those measures currently witnessed in the United States and Europe, such as large-scale capital injection with public funds, temporary bank nationalisation, credit guarantee by governments and massive liquidity provisioning by central banks. Although many of these extreme actions have not been taken in Japan in response to the current turmoil, a number of regulatory measures have been introduced to maintain the functioning of financial intermediation in order to cope with difficulties in the real economy(Ellis, 2008). They should also be included in the category of short-term measures.

However, author would like to emphasise that we have been working on medium-term reforms of financial regulation at the same time. Discussions are underway globally regarding capital adequacy of banks, procyclicality in the financial system, market integrity and transparency, and international cooperation among regulators. A number of measures in this category have already been planned or implemented. They include strengthened disclosure requirements with respect to the securitisation market, establishment of supervisory colleges for each of the global financial firms, and internationally consistent frameworks for regulating credit rating agencies.

The first concept is enhancing risk management at financial firms

A long period of benign macroeconomic conditions created complacency among market participants, which gave rise to an erosion of sound practices. The internal presence of risk management sections at financial firms was low, and their views were often suppressed by the drives for maximisation of short-term profits(Fang, 2008). Also, the risk management systems of financial firms failed to capture the risks associated with their business models. On the regulatory side, the Basel II framework was certainly an improvement from Basel I in terms of risk sensitivity, but even this new capital regime did not pay sufficient attention to the complexities of risks regarding structured ...