Data on activity in the repo market are limited. But we know the volumes are large. The business model of the hedge fund industry relies on financing their highly-leveraged activities via the repo market. Repo activity will therefore exceed their already substantial leverage positions. Moreover, as reflected in the recent analysis of Gorton and Metrick (2009), 1 information can also be gleaned from the balance sheets of broker dealers and investment banks. For example, approximately 80% of the balance sheet of investment banks such as Lehman Brothers and Bear Stearns in 2007 – that is, before the crisis – was funded by volatile, short-term instruments. It was this balance sheet structure that, in the end, made these two banks extraordinarily vulnerable to a sudden withdrawal of liquidity in the wholesale funding market and which ultimately led to their demise. Note that more than onethird of this short-term debt was collateralised, that is acquired in the repo market. To sum up, we have seen the relentless rise of collateralised finance. Any reflections on the future of the monetary policy transmission mechanism have to start from there. 2. Collateralisation and the money market  The crisis that started in August 2007 has highlighted the key role of collateralised finance in two ways: first, as a vehicle of distress; second, as a possible instrument of repair. 1  See: G.B. Gorton and A. Metrick (2009), “Securitized Banking and the Run on Repo,” Yale ICF Working Paper No. 09-14.

This includes adequate powers and instruments to mitigate losses to the system in the event of a crisis, restore stability and ensure the continuity of the financial intermediation process. The second is the lender of last resort facility that is provided by central banks to address liquidity stresses faced by financial institutions. Thirdly, is the deposit insurance scheme that provides a guarantee on deposits to protect the savings of small depositors and reduce the prospects for disruptions that could threaten the stability of the financial system. The effectiveness of the financial safety net depends on several factors. They include the capacity of central banks and supervisory authorities to assess risks, the effective coordination between the different components of the safety net, clear communication strategies and a strong and comprehensive legal framework that supports the operation of the safety net. In Malaysia, the Malaysia Deposit Insurance Corporation Act (MDIC Act) which establishes the Malaysian Deposit Insurance Corporation (MDIC) provides comprehensive intervention powers for the protection of depositors. This is complemented by an extensive operating framework developed between the Central Bank and the MDIC which clearly sets out the responsibilities and obligations of both agencies in promoting financial stability and in financial resolution. In the area of consumer protection, amendments to Malaysia's financial services legislation are also being put in place to provide for the establishment, roles and functions of a financial ombudsman to deal expediently and efficiently with disputes concerning financial services between consumers and the financial institutions.