accentuated by the fact that while most sectors of the economy operate in a competitive environment, in many sectors business remains concentrated among a small set of market players. the financial sector is no exception in this regard. furthermore, while the structure of the domestic financial sector has evolved considerably over time, its level of development still falls short of that of the more advanced eu member states. thus, for example, although in the past few years the number of players in the non - bank sector has increased in terms of both number and variety, financial intermediation in malta remains largely bank - based. within the domestic banking sector, moreover, two banks together account for around 90 % of total loans and deposits. a similar picture emerges in the capital market where the degree of capitalisation, the number of market participants and the volume of turnover are still relatively low. in 2003, for example, the ratio of stock market capitalisation to gdp stood at 37 %. while this was higher than in most of the other new member states, it was only around half of the euro area average. annual turnover was even lower, hovering around 4 % of gdp and 12 % of stock market capitalization. where, as in malta, the performance of the financial sector hinges crucially on the fate of a small number of players and where the lack of depth and liquidity in capital markets often causes the market value of a particular debt instrument to deviate from underlying fundamentals, the risk of contagion within the system, as well as, from other systems is accentuated. 3 this latter aspect might become less relevant as financial services providers in malta and in the eu respond to the introduction of the financial services action plan and the eventual establishment of a single market in financial services. on the positive side, such initiatives provide better income - earning and liquidity management opportunities, improve the efficiency with which the sector operates and enhance its capacity to weather sector - specific shocks. on the other hand, the advent of liberalisation and heightened levels of competition could well spur service providers domiciled in malta to take on new risks and venture into non - traditional lines of business. furthermore, as a result of passporting rights, competition is likely to become more acute. the ensuing interdependence between different sectors and countries could well expose the domestic system to new vulnerabilities, including possible contagion from systemic shocks. this will be especially the case upon malta ’ s entry in the euro area as such a move would

we maintain our reputation, and the credibility that goes with it, as a sound and well - regulated financial services centre. to this end, the institutional links between the bank, the mfsa and the ministry of finance could be strengthened further in the light of the experience provided by the global financial crisis. malta, moreover, is one of two euro area member states where the central bank is least involved in the conduct of banking supervision. although the means already exist for exchanging views and information, it could prove mutually beneficial for the bank and the supervisory authority to seek to deepen the level of existing cooperation. as for our capacity to manage any eventual financial crisis, the domestic standing group was set up in 2007, chaired by the deputy governor and comprising senior representatives from the bank, the mfsa and the ministry. as in other eu countries, a crisis simulation exercise was held soon after to test communications between the parties, co - ordinate decision making and manage potential conflicts of interest. useful lessons have been learnt. another important problem area highlighted by the crisis, and which is also relevant for malta, relates to cross - border issues. foremost among these is the co - operation between the home and host regulators. in this regard, the spirit underlying the memorandum of understanding on co - operation to safeguard cross - border financial stability signed last june by eu central banks, regulators and ministries of finance, now needs to be translated into clear modalities for effective cooperation. in particular, it is essential from malta ’ s point of view that the presence of subsidiaries of cross - border banks that are systemically important to a host country be given due weight in determining participation in the college of supervisors. international experience has also shown that state intervention may be necessary to resolve problems in the financial sector. the state is often the only entity in a democracy that has the political legitimacy, financial strength and credibility to support ailing institutions and, hence, restore confidence in the financial system as a whole. in extreme situations, which require the injection of public funds, the cost to the public purse can be very high. this is an additional reason why maintaining fiscal discipline in the shape of balanced budgets over the economic cycle is important. this would allow a buffer to be built up that could be used in exceptional situations if required, without jeopardising the sustainability of public finances. finally, safeguarding the health of the financial sector in these challenging times also calls for prudent behaviour on the part of the market players themselves