Article 4 (2) of the revised Act specifically states that it shall be one of the objective of the Bank to “ensure the stability of the financial system.”  2  The core principles recommended by the Committee on Payment and Securities Settlement Systems of the Bank for International Settlements (BIS). 2  BIS Review 50/2004  committee dealing with financial stability, the Banking Supervision Committee, and at the EU level the Bank also participates in the Economic and Finance Committee and in its Financial Stability Table. The importance of two-way cooperation with the MFSA The initiatives I have described have strengthened the Bank’s ability to monitor and analyse developments in the financial system in a wider context. It is nevertheless becoming increasingly clear that to carry out this role effectively, the Bank’s efforts in this area need to be supported by the activities of the overall supervisor in the financial field, that is the MFSA. It is, therefore, reassuring to note that good co-operation already exists between the Bank and the Authority. More specifically, the Authority’s focus on the health of individual service providers complements the Bank’s macroprudential analysis of the financial system as a whole and its oversight of the payment and settlement systems. In undertaking their respective tasks, both these institutions have access to information that may not be readily available to the other.
The question we need to ask is how those two characteristics relate to each other. In other words, what is the link between liquidity and risk? Here we could use a very simple framework. Investors have a perception that a market is liquid if they feel they can trade their assets (and positions) with no constraints and without moving prices by too wide a margin. BIS Review 128/2007  1  Liquidity exists when there are counterparties available to trade at any moment in time. It follows that liquidity is both an expression and a consequence of the ability of market participants to take risks on each other. For liquidity to exist, therefore, there must be a general sense, in the market, that each participant (or, at least, most of them) are suitably equipped to face the risks they are taking. This is what we call confidence. Looking at discussions on the current phase of market turmoil, two views have emerged as to what determines confidence. The first view emphasizes information and transparency. Crisis of confidence and drying up of liquidity occur when there is too much opacity in the system, when investors are unable to assess risks, or when market participants do not trust whatever information is available. One good example is valuation. Valuation of complex instruments is currently at the forefront of discussions between regulators, market participants and investors.