Appropriate grandfathering arrangements will be put in place in order to ensure a smooth transition. A further point highlighted by the crisis is the availability of resolution schemes that allow for speedy and decisive interventions in the event of bank failures or near-failures, averting deposit runs and limiting contagion effects on the wider banking system. Several initiatives in this area are under way both at the European and global levels. 14  12  The potential role of capital regulation (Basel II) in amplifying credit cycles is being investigated by a number of authorities and institutions, including the Basel Committee and the ECB. The consultative document issued by the Basel Committee on 17 December 2009 already includes proposals on: (i) mitigating the cyclicality of the minimum requirement; (ii) introducing forward-looking provisioning; (iii) building buffers through capital conservation; and (iv) mitigating excessive credit growth. The latter would imply the introduction of a countercyclical buffer requirement, which would come into effect during periods of excessive credit growth. The Basel Committee’s proposal is currently at an early stage of development and a fully-fledged version will be developed by the Committee in time for its June 2010 meeting. 13  See, for instance, F. Panetta and P. Angelini (coordinators), U. Albertazzi, F. Colomba, W. Cornacchia, A. Di Cesare, A. Pilati, C. Salleo and G. Santini, “Financial sector pro-cyclicality – lessons from the crisis”, Questioni di Economia e Finanza, No 44, Banca d’Italia, 2009.

The effects are more pronounced among lower income groups and micro- and small businesses that are disproportionately impacted by events such as the death or incapacitation of a breadwinner, or business disruptions. Insurance and takaful therefore play a critical role in reducing inequality. This is key and growing risk can be seen in economies that are becoming more prosperous, and at the same time more divided. A well-developed insurance sector also contributes to wider economic efficiency and resilience. At a time where global developments can have a far greater impact on domestic economic performance, it is important for countries including Malaysia, to continue to develop our growth potential through further diversification into new and higher value-added economic activities. Insurance facilitates this by allowing businesses to take risks, without which we cannot have innovation. It also enhances access to financing. This is possible because insurance has the ability to pool, assess and assume risks that are outside the expertise and capacity of banks or businesses themselves to bear. Such examples would be weather-related crop and property insurance, key people risks or product liabilities. Premiums that are paid for insurance also act as strong incentives for businesses to improve risk management, which in turn, increases business resilience. Of course, insurance also plays a key role in the development and resilience of our financial markets. In these recent episodes of heightened market volatility, insurance and takaful companies, alongside banks, have had an important stabilising effect on markets.