Bank Negara Zeti appointed to financial reform task force

Malaysia is one of the very few countries least affected by subprimes and CDOs....thanks to a large extent to Bank Negara Governor Zeti.

Source: Central Banker Analysis
Published on November 19, 2008

The governor of Malaysia’s central bank says early detection and action is critical to minimising financial crises.

Bank Negara Malaysia governor Dr. Zeti Akhtar Aziz was recently appointed a member of the newly-formed United Nations high level task force to examine possible reforms of the global financial system, including the International Monetary Fund and the World Bank. She tells The Asian Banker that the current global financial crisis might have been less severe if the multilateral financial institutions had exercised a leadership role at an earlier stage.

“We have not really seen the international financial institutions come forward and certainly not at the early stages of the crisis. They are now coming forward to deal with the effects of the crisis,” says Zeti, who will have a hand in recommending reforms of the institutions through the UN task force known as the Commission of Experts on Reforms of the International Monetary and Financial System.

Since the global financial crisis took a more severe turn in October, some world leaders have called for a new financial world order or a review of the role of the Bretton Woods institutions in promoting financial stability.

Aside from Zeti, the other members of the task force include Chukwuma Soludo, Central Bank of Nigeria governor; Jean-Paul Fitoussi, professor of economics at the Institute d’Etudes Politiques de Paris; Avinash Persaud of Barbados, chairman of Intelligence Capital; Yaga Venugopal Reddy, former governor of the Reserve Bank of India; Eisuke Sakakibara, professor at Waseda University; Yu Yongding, director of the Institute of World Economics and Politics. Joseph Stiglitz, Nobel prize winner for economics and former chief economist at the World Bank, will chair the Commission.

With several Asians on the task force, it is seen as a key platform to give the region a greater voice in efforts to reform the global financial system. Zeti says she hopes international financial institutions will engage more with Asia at the international level to better appreciate Asian perspectives and conditions. There are moves towards achieving this, she adds, as there is a growing appreciation of the fact that Asian participation is crucial in unwinding current global imbalances.

Zeti, who was also appointed chair of the Bank for International Settlements Asian Consultative Council, recognises that it is important for the region to have a strong interface with the rest of the world and appreciates the forums that are paving the way for this. The council is currently assessing the spillover effects of the financial crisis and looking at how these may be best managed.

For Zeti, early detection and action is critical. “I believe that crisis may happen from time to time in different parts of the world, but when there is a detection that the crisis is imminent, it is very critical to take early action, because if early action is not taken then what happens is the crisis has to run its full course,” Zeti points out. In Malaysia’s experience, early intervention reduces the costs of a crisis, she adds.

In the wake of the Asian financial crisis, Malaysia set up entities to acquire the non-performing assets of its beleaguered banks and recapitalised some institutions. Zeti says within six months of initiating these institutional arrangements, the banks started lending again, helping the country recover quickly from the Asian financial crisis. “The cost of the crisis was less than 5% of GDP,” she says. “The main reason for early action is to minimise the costs. Once the crisis is prolonged the deterioration that takes place will be greater and the cost of any resolution or repair is going to be much higher.”

In the current situation, Malaysia itself is preparing for tougher times. Zeti says it is closely monitoring financial institutions and that Bank Negara will take pre-emptive action.

“In the previous crisis we had a debt restructuring committee that dealt with it (non-performing corporate loans), and even during normal times we had a small debt restructuring entity for small and medium scale enterprises that include financial advisory services and so on. We also have such services for households to deal with their financial problems before they result in foreclosures or repossessions and so on. This is what we are managing well before it happens,” Zeti explains.

From a regulatory perspective, Bank Negara is looking at the issues that have surfaced in the crisis, including how to deal with non-regulated institutions when they need liquidity, and how to improve the coordination of regulators within the financial system like the relationship between the central bank and the Securities and Exchange Commission. It will be hoping it has taken the right actions early enough to minimise the pain to the financial system.