Indeed, it has shown that in today's globalised and increasingly internationally integrated financial markets, seemingly isolated events in a small segment in one market can have far reaching and vastly magnified implications in other financial markets across the world. This recent episode of financial turmoil has shown that even the more sophisticated and informed investors are pre-disposed to over-react to uncertainties in financial institutions. It also needs to be recognised that the changes in the international environment has also increased the challenges to understanding and managing risks, even for financial institutions and the authorities. These developments have also brought issues of the effectiveness of financial safety nets as well as institutional arrangements for the regulation and supervision of banks, to the forefront. Elements of financial safety net It is in this context that the components of the financial safety net, the prudential regulation and supervision, deposit insurance, liquidity support arrangements, crisis management approaches and the consumer protection framework – have continued to evolve over the recent decade. My remarks this morning will consider some of the developments and challenges that are shaping the calibration of the financial safety net in the current environment. Prudential regulation and supervision Sound risk management by banking institutions, which is reinforced by prudential regulation and supervision, remains the first line of defence against financial crisis. This recent decade has seen important strides being achieved at both the international and national levels towards strengthening the prudential regulatory and supervisory frameworks in response to the changing nature and scope of banking activities.
This has evolved a high rate of participation in the financial system with deposits now accounting for 160% of GDP. This has allowed for the efficient functioning of the intermediation process to effectively mobilise and channel savings to productive activity thereby supporting the overall growth and development process. BIS Review 130/2007  5  Conclusion Ladies and gentlemen Essential to a progressive financial system is prudential safety and soundness, competition and consumer protection which needs to co-exist to effectively serve the interests of various stakeholders. As regulators we need to adopt the right balance between providing adequate protection for consumers while promoting competition and financial innovation in the financial system. But it is the combined efforts of regulators, the industry, and consumers that ultimately maintain market confidence and ensures the effective and efficient functioning of the financial system. The recognition of, and commitment to this shared responsibility will not only contribute to the evolution of the financial landscape and preserving financial stability, but will enhance its overall contribution to the overall functioning of the economy and securing its full potential. 6  BIS Review 130/2007