Financial stability refers to an environment where institutions in a financial system are strong and can continue to meet their contractual obligations without interruption or without any external assistance. Market participants can also confidently enter into transactions at prices that do not change substantially over short periods when there has not been any changes in market fundamentals. Why is financial stability important? Financial stability creates a conducive environment for businesses to undertake their activities and for savers and investors to enter into short-term or long term contracts. As the nation's regulatory authority, one of the fundamental roles of Bank Negara Malaysia is to develop a sound banking system that responds to the changing needs of the economy and society, a system that is made up of strong and resilient financial players and well-functioning financial markets. The overall objective of financial stability has been achieved not only through the formulation of strong legal, regulatory and supervisory framework, but also through the development and strengthening of new institutions and system infrastructure. Regulatory rules have been continuously enhanced with the adoption of international standards to instil appropriate risk management system to enable financial institutions to undertake their intermediation function effectively. The enactment of new laws such as the Banking and Financial Institutions Act in 1989 and the Insurance Act in 1996 has enhanced Bank Negara Malaysia's regulatory authority over the financial system. Similarly, the enactment of the Islamic Banking Act in 1983 has given Bank Negara Malaysia additional mandate to supervise new types of institutions, namely the Islamic banks
As a central bank in an emerging economy, Bank Negara Malaysia has an important developmental role. This role ranges from developing the necessary institutions and market...