The IFSB which was established in 2002 has been instrumental in developing and issuing global prudential standards and guiding principles for the industry. The IFSB has also contributed to the harmonisation in the development of Islamic finance across different jurisdictions. Apart from the implementation of these prudential standards, there is also a need to ensure the supervisory and legal infrastructure remains relevant to the rapidly changing Islamic financial landscape. In Malaysia, these efforts are also supported by a comprehensive financial safety net that includes a deposit insurance scheme and a resolution mechanism, so that not only are depositors protected, but it also allows for prompt, effective and least cost resolution of the financial system that can facilitate recapitalization of Islamic financial institutions as well as institute programme to remove troubled assets from the books of financial institutions. Greater collective effort by international community to strengthen global financial stability In the reform of the international financial architecture, the G20 has launched an ambitious agenda to reform financial regulations, which include key main areas namely, (1) the strengthening of international frameworks for prudential regulation, (2) the review of the scope of regulation, (3) the revision of accounting standards; and (4) more effective oversight of the credit rating agencies as well as strengthening risk management. 1 These areas should  1  2  Declaration on Strengthening the Financial System by Leaders of the G20, London 2 April 2009.

Vulnerability - a quick survey Ensuring that companies, consumers and investors have confidence in their ability to effect transactions and access their funds, securities, and other financial assets is of the highest importance in times of crisis. Therefore it is clearly in the private and public interest to ensure that, in the event of any large-scale disruption, systemic consequences are minimized. However, minimizing systemic consequences requires knowing the major vulnerabilities of the financial system. With this knowledge the responsible parties in the private sector as well as in central banks and government can in principle take adequate precautions and remedies. Three sources of vulnerability can be identified. A first source of vulnerability is economic concentration among large and complex financial institutions. This may strike you as odd. But size is a potential source of vulnerability and industrial consolidation usually increases size. The financial industry has been experiencing numerous mergers and acquisitions. This has resulted in financial services offered by an increasingly small number of large and dominant players. Even if only one of these players were to stop functioning well the financial system as a whole might suffer. The second source of vulnerability is geographical clustering. Financial institutions are heavily clustered in a limited number of important international financial centers. Economic concentration and  2  BIS Review 55/2002  geographical clustering tend to add up. A huge number of firms, among them the industry’s giants, may be affected in one and the same location by one and the same disruptive event.