Let me now turn to the case of the Icelandic banks, which highlights these issues in an extreme form and at the same time throws light on the flaws in the EU setup for cross-border banking. When its three cross-border banks failed in the first week of October 2008, Iceland was already on its way into a recession partly related to macroeconomic imbalances that accumulated during 2005–2007. The banking collapse and the associated wealth loss and further depreciation of the currency significantly deepened the ensuing recession. Before the collapse, the banking system had expanded very rapidly, growing in just five years from a combined balance sheet of less than 2 times GDP (at the end of 2003) to almost 10 times GDP (in mid-2008). Most of this expansion was cross-border, and a significant part of it was really off-border, having very little to do with Iceland, as both financing and investment took place abroad. In the panic that gripped global financial markets after the collapse of Lehman Brothers, these banks were faced with a wholesale run on their foreign currency liabilities and were therefore heading towards a default on those liabilities in the absence of LOLR assistance in foreign currency. However, given the size of the balance sheets involved (10 times GDP overall, nearly three-fourths of it in foreign currency), it was impossible for the Icelandic authorities to provide such assistance on their own and could have been catastrophic for the credit of the sovereign if they had made a full-scale attempt to do so.

Thus both the fiscal stimulus and the accommodative monetary environment are expected to improve demand conditions in the second half of the year. Malaysia also has diverse trading partners which contributes towards mitigating the full impact of the global slowdown on our domestic economy. Businesses in Malaysia have over the years continued to build trade and investment linkages with other emerging countries especially in Asia . Adequate access to financing is therefore vital not only for supporting domestic demand but also to ensure that Malaysian businesses are able to take advantage of the opportunities in the regional and global economy. BIS Review 47/2009  1  The strong domestic banking system, with its ample liquidity, has the potential capacity to provide the access to financing. Some SMEs however are experiencing stress from the current more difficult environment. Several preemptive measures have therefore been introduced to enhance the prospect for access to financing. The SME Assistance Guarantee Scheme that was launched on 3 February 2009 to provide SMEs with an 80% guarantee cover will enhance access to financing in addition to keeping the cost of financing low. As at 5 April 2009, more than 880 applicants have successfully obtained financing through this scheme and more than 790 applicants are still being evaluated. Two additional schemes, the Working Capital Guarantee Scheme and the Industry Restructuring Financing Guarantee Scheme, has been recently launched to enhance access to financing for working capital and to support long-term investments that will increase productivity and that will generate high value-added activities.