An underlying solvency problem will often manifest itself as a liquidity problem, and over time, a liquidity problem will often create a solvency problem. Did the Icelandic banks face a solvency problem? Not if we look at what used to be the traditional metrics before the crisis, cf. the displayed table. Kaupthing  Landsbanki  Glitnir  CAD ratio  11.2%  10.3%  11.2%  Tier 1 ratio  9.3%  8.2%  8.0%  Leverage ratio  15.1  20.0  19.3  Equity/tangible assets  5.2%  4.0%  3.6%  5y  5y  3.2y  32.3%  72.4%  20.8%  1.95  1.74  1.52  Bond maturity Deposits/funding Liquidity ratio  Compared to peers, their capital and leverage ratios were not out of line. Neither do the underlying liquidity problems glare at us through these metrics. But that might say more about the metrics than the reality. Add to this the fact that, around a month before the collapse, the FME issued statements about how well the banks performed on a range of stress tests. However, these stress tests were flawed in the sense that they did not include liquidity. Furthermore, they tested one institution at a time and did therefore not take into account the interconnectedness and contagion elements that proved so important during the collapse.
The highly fragmented banking system and relatively weak risk management systems within the domestic financial institutions which prevailed in Malaysia prior to the financial restructuring and reforms that were undertaken from 2001 would have rendered the implementation of Basel II extremely difficult, if not impossible to achieve without risking disruptions to the intermediation process. The financial reforms that were undertaken to strengthen the underpinnings of our banking system are therefore instrumental in facilitating the smooth transition to the adoption of Basel II in Malaysia without adverse market outcomes. In the more recent period, the Asian region as a whole has made significant strides towards strengthening market structures and institutional arrangements for financial stability. Two developments deserve mention, in view of their important contributions towards mitigating some of the concerns surrounding Basel II for emerging economies. First, in the decade following the Asian crisis, the emerging economies in Asia have extensively developed their bond and equity markets. Measured in terms of market capitalisation, East Asia's equity markets have more than trebled since 1997. The bond markets in the East Asian region have also seen significant growth during this period with significantly improved liquidity conditions in these markets. There is therefore now a more diversified structure in the financial system. Second, within Asia, the regional cooperative framework has been substantially strengthened to support financial sector development, surveillance, crisis management and capacity building.