It is indeed my honour and pleasure to welcome Your Excellencies and delegates from the 12 SEACEN member countries to this 3-day SEACEN Seminar on the "Impact of E-Banking and E-Commerce on Central Banking Functions". I would like to also welcome you to Malaysia, and for those of you who are here in Malaysia for the first time, I hope you will have the opportunity to discover the country during your short visit here. Selamat Datang.

The SEACEN seminar series have provided an excellent opportunity for member central banks to foster closer ties amongst central bankers, facilitating exchange of knowledge and experiences among the participants and enhancing the level of collaboration between central banks. I hope that you will walk away from this seminar with greater awareness on this important subject of the potential implications of new technology and emerging e-business models on the banking industry and central banking functions, and return home with new ideas and knowledge to deal with the issues and challenges posed in this rapidly changing business environment.

The topic we have before us for this seminar is indeed very appropriate and timely for the new year. The remarkable technological advancements in the last decade has permeated several aspects of our economy and has offered boundless possibilities in the financial system. The introduction of Internet offers seamless opportunities, sweeping through the global system and challenging the existing business structures and systems. The rules today are being redefined, new players are emerging and new ways of doing things constantly challenge the way we think. For regulators, these changes pose a greater challenge in the promotion of financial stability and integrity. As such, this Seminar should serve as a forum for central bank supervisors in this region to deliberate the key issues on the supervisory and regulatory aspects and to maintain up to date knowledge on e-banking and e-commerce activities and to collaborate in these areas. These efforts are steps towards providing the foundation for a harmonised approach to the supervision of e-banking within the regulatory regional community, aimed at fulfilling the important supervisory responsibility of financial stability while at the same time developing an efficient market for the electronic delivery of banking services.

Allow me to give our perspectives on some of the broad issues facing the financial system and central banking in this electronic age.

In this electronic age, central banks continue to have the responsibility to manage the economy and the financial system to assure macro-economic and financial stability. In every country, however, the spread of e-money and e-commerce has raised questions about the role of the authorities in this more digitised market economy. As digital transactions become widespread, currency would essentially be issued by a variety of institutions. Some would even extend beyond the reach of our national boundaries. How then would monetary growth be managed? This would be compounded by whether control can be exercised over such institutions, in particular those new non-financial entrants into financial services. E-cash and e-commerce will make it increasingly difficult to define and measure both monetary aggregates, national income and wealth. How will the authorities monitor and track electronic transactions paid for with electronic cash. The commercial and financial institutions which record the transactions will be bypassed in this digital economy as direct e-cash transactions become the norm. For those transactions that take place in cyber space across borders, the issue of which authority has jurisdiction arises.

In this new economy, the pace of financial innovation has intensified and has expanded the range of financial products requiring Central Banks to reaccess how we will meet our responsibilities. It has been argued that while the safety and soundness of the system necessitates greater government oversight, the changes brought about by the advances in technology has rendered the examination approach established earlier less relevant. It is argued that in this new environment, there should be greater reliance on market discipline. However, this requires markets to function efficiently and for consumers and markets to be well equipped with knowledge and understanding of the products and services and its implications and risks. In emerging markets, where the financial system is less developed, the task of the Central Bank is not only supervisory but developmental. Capacities and capability of institutions need to be enhanced, financial infrastructure needs to be put in place and consumers and markets educated accordingly.

Among banks and bank regulators and supervisors, there seems to be agreement that e-banking activities should be supervised as with traditional banking activities, but with greater attention on risk management procedures, greater focus on processes and mechanisms and with greater co-ordination and co-operation among the banking supervisors as opposed to giving emphasis on actual portfolios and accounts. The supervisory processes for e-banking therefore needs to be sufficiently dynamic to supervise financial entities in the virtual community that operates across multiple localities, thus requiring more co-operation between bank supervisors, and also with the banking industry. With the development of the Internet and other cutting edge technology, this has become vital with the prospects that e-banking operations may emanate from a location outside the local jurisdiction, and introduced by non-licensed entities. In this connection, the role of the home and host country supervisors would need to be enhanced and clearly defined.

In this regard, the formation of the Electronic Banking Group by the BIS (Basel Committee on Banking Supervision) in late 1999 is indeed an important step in the right direction to promote and enhance international co-operation and exchange of information among supervisors regarding e-banking risks and supervisory issues. The white papers of this group would also facilitate the adoption of a more similar approach by bank supervisors across countries, thus facilitating the need to address cross border issues.

The trend for new entrants and existing banks to set up stand-alone banks or Internet-only banks requires our legal framework to be modernised to make them more realistic and consistent with the realities of the market. However, in moving forward, we need to proceed cautiously, facilitating innovation while ensuring prudent behaviour. While recognising e-banking transactions are more cost competitive compared to branch operations or even phone transactions, and that e-banks may be easy to set up, one needs to be mindful of the high start-up costs for an e-bank and the need to ensure security and safety of the system. Furthermore, these operations also require huge initial capital outlay as well as the need to provide adequate incentives to consumers in terms of attractive rates. This may result in negative or marginal returns in the short term. Recent reports in fact indicate that online banking has yet to live up to its expectations. Since their establishment, pure Internet banks only accounted for 0.02% of $9.6 billion in FDIC-insured deposits by year-end 1999. Nonetheless, customers have benefited as the new entrants have "forced" the existing players to be more competitive and efficient. To gain market share, the new entrants have resulted in keener competition by offering attractive deposit rates and new services, resulting in shifts in demand from the conventional providers of financial services to these new entrants. It is recognised that these developments also provide an increased range of products to a wider spectrum of consumers and businesses. While these activities may now be small in magnitude, if the trend persists in the financial market, it will require regulators to consider the implications on liquidity management, and the extent of coverage of the central bank's financial safety net for the deposits of Internet-only banks. Essentially, dealing with the implications of the rapid pace of development of e-banking requires supervisory agility, resources and changes to the existing rules and regulations. Central banks all over the world must therefore prepare themselves for the transition into this new business era.

The new technology has essentially resulted in the convergence of products and services, blurring the lines between banks and non-financial institutions and bringing significant changes to the global financial markets. Businesses are increasingly using automated electronic networks to select, execute and process transactions. Technological progress has also made possible changes in market structure and business chains that have paved the way for further efficiency gains. During the transition period as conventional financial institutions adapt to this changing environment, we may see some disintermediation in the traditional banking functions and facilities, particularly in the retail payment area. Therefore, financial institutions need to innovate and build the necessary capacities and alliances to respond to these changes and to reintermediate and remain relevant.

A further issue that needs to be addressed is the numerous issues and risks, which Internet presents. Appropriate monitoring system and policies needs to be put in place to deal with this. Essential in this process is the dissemination of accurate information to ensure the economic well-being of a financial system its stability.

Security issues are another major source of concern in e-banking that needs to be addressed in an effective manner. Banks must examine their risks and the need for operating system security to maintain the integrity and reliability of their web servers, while allowing real-time, on-line electronic commerce, essential to Internet-based financial services. As security systems are continuously evolving with improving functionality, banks have to continuously progress and invest the new technology. Thus, in monitoring and managing the security threat, it is important for banks to have in place a strategic and proactive approach to information security and maintaining sufficient staff with information security expertise. Thus, it is extremely important for the regulators to address the broader issue of consumer protection and transparency framework, and the ability of the consumers to make informed decisions and take well-calculated actions.

Finally, the Internet has enabled new forms of payment modes, such as digital money, person-to-person payments and barter trading through trade units instead of currencies. Some firms have already adopted the new e-commerce technologies, and others are increasingly realising the importance of making e-commerce an integral part of their businesses. However, it remains uncertain as to how quickly these technologies will change the business landscape. However, one thing is certain, e-commerce will speed up the process of globalisation and will expose the weaknesses in today' s marketing tools and commerce activities.

These are a few of the major issues facing central bank today and I am sure the Seminar will explore further these and other important issues at greater length.

To conclude, I must say how very pleased Bank Negara Malaysia is to be host to this Seminar. Today, we are in the period of learning and collaborating. It is recognised that e-banking is emerging as a powerful new force in the global economy. As corporations come to depend on e-commerce and extranets for their mission-critical business processes, the e-banking technology will become more and more important to our economic and ordinary life. Thus, we need to keep abreast with the new developments that affect the financial system and we need to co-operate to foster greater financial stability in our financial systems. Central banks must therefore continue to evolve, to remain effective in our central banking functions. While these developments have resulted in greater supervisory challenges, the advances in technology, have also enhanced the supervisory process. On our part we need to evaluate how we can modernise our approach to supervision and regulation, and improve our ability to assess the risks and to maintain an up to date information and knowledge base as well as to be in a position to recognise and deal with problems before they occur. The new technology should therefore also be used to develop new tools for supervisors to enhance the supervisory process.

On this note, I am pleased to declare this seminar open and wish you a successful and beneficial seminar and a pleasant stay in Malaysia.

Thank you.

Bank Negara Malaysia
9 January 2001