The recent crisis clearly demonstrated a number of vulnerabilities both in the liquidity risk management in individual banks, and on a systemic basis. Uncertainty and the lack of transparency over the holdings of toxic assets led to general reluctance to provide funding to each other, resulting in the freezing of the wholesale money market in several developed economies. This resulted in short term liquidity to evaporate affecting participants that were too dependent on the market for funding. This largely stemmed from poor liquidity risk management practices, and has now prompted the Basel Committee to develop new proposals for global liquidity management standards. In the context of Islamic finance, the impact of the proposed Basel requirement to maintain sufficient cushion of high quality liquid assets needs to be carefully  BIS Review 64/2010  5  considered, as the infrastructure and tools for liquidity risk management by Islamic banks is still in its infancy in many jurisdictions. A very narrow definition of liquid assets that is currently proposed may exacerbate liquidity risks in many Islamic financial markets in which Islamic banks compete with conventional counterparts for the limited stock of shariahcompliant government securities. This will certainly increase compliance cost and render the market illiquid when the demand exceeds supply, placing Islamic financial institutions at a disadvantage. The importance of a robust liquidity management infrastructure for Islamic financial institutions is well-recognised.
Ladies and gentlemen, A sustained process of excessive financial deregulation and over reliance on market discipline particularly in advanced economies which led to a prolonged cycle of optimism and  BIS Review 64/2010  3  risk taking has been widely cited as part of the root cause of the recent global financial crisis. Indeed, the pre-crisis era was a period of exuberance in financial innovation and rapid development in the conventional financial landscape. Although it was argued that financial deregulation encourages innovation which in turn result in the more efficient allocation of resources, the recent crisis has shown that there is a need to balance between market discipline and regulatory oversight. Whilst there is general support for the reform measures, there is also concern on the dangers of over-reaction by policymakers that could undermine the role of financial intermediation, and adversely affect the ultimate objective of economic growth and development. The concern is specifically on the unintended consequences of the regulatory reform. Financial stability is not an end in itself; it is a means towards achieving the ultimate goal of sustainable growth and shared prosperity. This presents the challenge for policymakers in finding the appropriate balance between preserving the resilience of the financial system versus maintaining the ability of the system to perform their intended function of delivering effective, efficient and innovative financing solutions to customers in the wider economy. Hence, the concern is that that the regulatory reforms would increase the cost of financial intermediation.