As part of this essential restructuring, all institutions, according to their individual characteristics and circumstances, must strengthen their solvency, resizing and improving their efficiency in the medium term. In short, the challenge consists in adapting to the new reality in which the financial sector will have to operate in the future. The Spanish banking system is generally in a sound position from which to approach this restructuring process. But the present situation is complicated. On the one hand, the need for loan loss provisions will continue to dent profit and loss accounts, as defaults persist against a continuing weak economic backdrop. And on the other, the competition to secure retail funding pushes up the cost of borrowing and drives down margins. Strains in the wholesale funding markets add further pressure. They also entail higher risk premia and, if they persist and intensify, could make access to the wholesale markets more difficult. BIS Review 86/2010  7  Moreover, the sector must absorb the internal imbalances that built up in the years of strong growth in the economy and in banking activity. These imbalances, which are greater in some Spanish deposit institutions than in others, are essentially threefold. The first imbalance derives from their over-reliance on wholesale market funding. Although the term structure of Spain’s financial institutions’ debt is mostly medium and long-term, the severity of the crisis and investor flight in view of a widespread loss in confidence put pressure on institutions, which responded by stepping up their efforts to attract deposits.
This reflects the growing relevance of Islamic banking and is testimony to its acceptance as the embodiment of ethical banking and finance. Other threats to the financial system Financial institutions also face increasing challenges from other non-financial risks associated with the extensive use of technology and the potential outbreak of epidemics. Therefore it is vital then that the state of preparedness of BCP/BCM contingency measures is constantly ready to address any possibilities and not be blind sided by financial risks alone. Closing It is neither by accident nor coincidence that the Malaysian financial system is currently at a position of considerable strength, depth and resilience. Rather it is through the combined efforts of both industry players and the regulator as well as the support of all our  2  BIS Review 58/2009  stakeholders. I believe that this spirit of cooperation and mutual respect is entrenched and will serve us once again as we look forward to safely ride out the impact of the current global financial crisis. BIS Review 58/2009  3