KUALA LUMPUR, Oct 23 (Bernama) – Bank Negara Malaysia (BNM) has urged the authorities to increase policy agility as one of four strategic priorities for financial stability as the country navigates an uncertain future.

BNM Governor Datuk Nor Shamsiah Yunus said every crisis or financial stability issue is different, and each requires a different policy response.

“The pressure will be on authorities to be able to respond to an infinite variety of problems, which are very rarely understood clearly at the onset, and which often evolve rapidly,” she said in her opening remarks at the Bank Negara Malaysia Financial Stability Conference here today.

Going forward, Nor Shamsiah said long-standing policy frameworks are likely to come under increasing pressure, simply because they are not built to respond to the intensity and pace of change taking place in the financial system.

“I believe the solution lies not in building new frameworks, but in strengthening institutional foundations which allow for more nimble frameworks to emerge. Such foundations include clear decision authorities, credible analysis to support decision-making, effective policy feedback loops and strong monitoring and accountability frameworks.

“Equally important is the ability to react to unplanned events given the inherent difficulties in predicting market behaviour, especially further out in time,” she added.

The central bank has also called for the authorities to have a broad policy toolkit for responding to financial stability risks, as in recent years, central banks and other authorities responsible for financial stability have had their mandates clarified and powers strengthened for this purpose.

However, she said this is by no means assured in many other countries where financial stability authorities continue to face significant limitations in their ability to act, particularly during a crisis.

Nor Shamsiah also suggested the authorities continue to develop and deepen their understanding of risk transmission as approaches to quantify the immediate, direct impact on institutional resilience are now reasonably well developed.

“However, further work remains in mapping out the second and higher order effects on the broader financial system and economy. Authorities need to continue pushing the envelope to advance the development of more holistic approaches to systemic risk assessments.

“This needs to be able to capture propagation channels and feedback loops not just among entities within the financial system, but also across the domestic and global economy. An understanding of structural changes driving such inter-linkages will become increasingly critical,” she said.

She said the authorities need to remain vigilant as near-term risks to global financial stability have risen modestly, while medium-term risks remain elevated, despite the global financial system now on a stronger footing.

“Emerging economies face mounting pressures that continue to see more volatile capital flows. Tightening financial conditions may also expose financial fragilities that have been created over an extended period of easy monetary conditions,” she said.

In addition, Nor Shamsiah said structural changes in the financial system are giving rise to new risks, including those presented by a growing shadow banking system and fintech players which might not fall within the regulatory net.

“Roboadvisors, algorithmic trading and other automated trading platforms powered by artificial intelligence (AI) also have the potential to induce highly disruptive pro-cyclical market behaviour, notwithstanding their substantial benefits in reducing transaction costs and increasing market liquidity.

“And of course, there are cyberthreats with the global cost of cybercrime projected to reach US$2 trillion in 2019,” she said.

She said both the tools and coverage of surveillance activities to support financial stability have evolved significantly in the post-crisis period and it is imperative that the authorities continue to build on this to capture current and future emerging risks.

“The good news is that with the rise of big data and new technologies, authorities have the capacity to achieve what was not possible before to keep a pulse on developments affecting the financial system,” she added.

-- BERNAMA