1 Firms became over-confident in their ability to hedge or exit positions if conditions changed, failing to recognise that many participants would be attempting to do the same and that market liquidity would then evaporate. Indeed, given a change in sentiment, the increased integration of financial markets transmits risks just as much as it disperses them. 1  2  See Bank of England Financial Stability Reports July 2006 and April 2007. BIS Review 50/2008  Banks’ funding thus became increasingly vulnerable to a sudden shift in financial market conditions. As covered extensively elsewhere, 2 the crystallisation of this risk in August 2007 led to a sharp decline in liquidity across a wide range of markets (as shown in Chart 3). Funding pressures intensified as asset managers lowered demand for asset-backed securities and complex products more broadly, to lower risks and to guard against pressures from their investors for early redemption. And as banks attempted to fund contingent claims, liquidity in wholesale term markets dried up – adding to the strain. A number of institutions across the globe, such as Northern Rock, IKB and Bear Stearns have succumbed to the pressure, necessitating public sector intervention to support financial stability. Section III: Defences against liquidity risks Banks have a range of defences to a sudden decline in the availability of wholesale funds. Recent developments have highlighted a number of limitations in these defences in addressing the recent system-wide liquidity shock. One potential counter-measure to liquidity pressures is to transform illiquid assets into cash.
Zeti Akhtar Aziz: Islamic finance – constant evolution and emerging opportunities Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Nikkei Islamic Finance Symposium 2008: "Islamic Finance: Constant Evolution and Emerging Opportunities", Tokyo, 23 February 2008. *  *  *  It is my great honour and pleasure to be here in Tokyo to speak at this Islamic Finance Symposium organised by the NIKKEI. This is an important forum that provides the opportunity to foster a greater understanding and appreciation of Islamic finance and its increasing role in the international financial system. We are also very honoured by the presence and participation of Governor Fukui from the Bank of Japan at this Symposium. My remarks today will focus on the evolution and new emerging opportunities in Islamic finance as its growth and development in the global financial system gains further momentum. My presentation will also touch on our experience in the development of an Islamic financial system in Malaysia which operates side by side with the conventional financial system and in which the international dimension has now become increasingly significant. Evolution of Islamic finance Modern Islamic finance was initially developed as an intermediation channel for Muslims to conduct their savings and investment activities in accordance with the Islamic principles. As recent as five years ago, however, Islamic finance has experienced major transformations. Its rapid evolution is particularly evident in five dimensions of its development.