Financial institutions in Asia also had limited exposure to highly leveraged activities, such as complex derivatives and structured credit instruments. Consistent with the more traditional banking models in Asia, there are now calls for a return to basic banking and its clear separation from higher risk-taking activities. The growth of Islamic finance, with its emphasis on the close link between financial transactions and real economic activity and which embraces universal values such as transparency and fairness, further supports this trend. The emphasis on productive financial innovation has also been reinforced by a long standing focus in Asia on promoting effective consumer protection arrangements. In the recent period, this has received renewed attention by authorities given the experience of the recent crisis which has underscored how market conduct failures that led to widespread mis-selling and predatory lending, was not only detrimental to consumers, but also a source of systemic risk. An emphasis on product transparency and disclosure, responsible sales and marketing practices as well as investment in financial education have served to better align the interests of financial institutions and consumers, thus reducing the potential for harmful practices. Asian economies have also taken steps to strengthen the financial safety net including deposit insurance, while putting in place institutional arrangements for debt counselling and restructuring. These measures can contribute towards pre-empting widespread defaults particularly during periods of stress. Second is the continued commitment and sustained progress in the development of strong regulatory and supervisory systems for the financial sector.
The establishment of the Deposit Protection Agency should reduce banks’ moral hazard and  4  BIS Review 54/2008  introduce more market discipline to the banking sector by putting pressure on banks to improve financial strengths if they want to attract and retain depositors. I now turn to the Bank of Thailand’s financial sector master plan (FSMP). You may recall that the implementation of the first master plan started in 2004 and was completed in March 2007, when the last commercial bank licensed under the plan started its operation. Key initiatives under the first plan involved 1) improving financial access, 2) increasing efficiency of the banking sector through removal of regulatory obstacles to market development and through consolidation of smaller financial institutions, and 3) strengthening market discipline through more stringent information disclosure and enhanced consumer protection mechanism. Through licensing reform and the so-called one-presence policy, there has been a significant consolidation and reduction in the number of financial institutions under the supervision of the Bank of Thailand. While evaluation of FSMP Phase I is currently being undertaken, there is evidence to suggest that the banking sector has shown improvement in both operating efficiency and resiliency. Turning to the second-phased financial sector master plan, the overarching objective is to improve efficiency, competitiveness, and resiliency of the financial sector. The goal is that financial institutions can more effectively perform their intermediary functions and meet the challenges of a rapidly changing environment.