developments and challenges that are shaping the calibration of the financial safety net in the current environment. prudential regulation and supervision sound risk management by banking institutions, which is reinforced by prudential regulation and supervision, remains the first line of defence against financial crisis. this recent decade has seen important strides being achieved at both the international and national levels towards strengthening the prudential regulatory and supervisory frameworks in response to the changing nature and scope of banking activities. while lending and deposit - taking remain the mainstay of commercial banking, the profile of credit markets has changed significantly. today, conventional credit products are being offered alongside the growing significance of asset securitisation and credit derivative activities. this has had a profound impact on the nature of banking. the rapid development of these synthetic credit markets, coupled with an extended period of ample liquidity in the global financial system, has expanded the avenues for banks to engage in more aggressive lending practices that are funded by borrowing from the wholesale money markets, and by repackaging and selling loans to other investors in the form of asset - backed securities. this represents a significant shift from the more traditional banking models where loans are predominantly funded by deposits. the increasing complexity in the way that debt is created and distributed in the financial system raises important implications for financial stability. the “ originate and distribute ” strategy that has been adopted by some institutions warrants addressing more comprehensively the full range of risks to which the banks are exposed. this includes the liquidity, foreign exchange and moral hazard risks in banking institutions. credit risk exposures have also taken on more complicated forms, including counterparty risks on derivatives and foreign exchange transactions. the valuation of such financial transactions and instruments are also often difficult to measure particularly under distressed market conditions. in addition, the correlations between credit and market risk, both within and across national borders, have become more complex. of concern has also been lack of adequate information on debt concentrations in the system partly due to the increasingly elaborate ways in which debt is passed on from originating institutions to different investors. the propensity to under - price credit risk, especially under conditions of excess liquidity, has also increased concerns over underwriting standards. the consequent sharp pricing corrections would in turn have the potential to result in broader economic disruptions. recent developments in the prudential regulatory and supervisory framework have, and will continue to play an important role in promoting sound risk management practices in the light of these changes. these of course, include

between central banks and other regulatory authorities, within and across borders. indeed, cooperation, coordination and goodwill have become essential in the increasingly integrated system. such arrangements could include the more formal institutional arrangements for cooperation in surveillance efforts and crisis management, as well as the home - host arrangements for the supervision of international financial institutions, in supporting the early identification of risks and the pre - emptive interventions that need to be made. cross border surveillance in the asian region in particular has now been enhanced to ensure that information gaps are identified and that the mechanisms to facilitate information sharing are put in place. achieving effective inter - agency coordination between financial safety net participants also needs to be considered carefully in the context of crisis management. inevitably, the task of managing a financial crisis particularly in the areas of timely decision making, coordination and communication become much more complex when the functions of lender of last resort, bank supervision and deposit insurance are allocated to separate agencies, as each respective agency is accountable for discharging its own mandate having regard to its own inherent priorities. consequently, issues relating to information sharing, allocation of powers, responsibilities, accountability and coordination among the various agencies must be clearly and explicitly addressed at the outset. the legislative mandates would need to provide clear roles and responsibilities for each relevant authority. this will form the foundation for the adoption of an integrated and coordinated approach. the need for such coordinated action becomes particularly important in conditions of an imminent financial crisis. having in place a crisis management framework would allow for its prompt and effective implementation. the issues relating to the effective management of the inter - relationships between the safety net participants were brought to the forefront recently in the united kingdom, testing the framework in which the functions of lender of the last resort and the supervisory function are placed in separate entities. in comparison, when a single agent such as the central bank is entrusted with these respective functions, the interrelationship issue, as well as potential conflicts and trade - offs become internal and would be resolved across the organisation. it would nevertheless still need to rely on an adequate accountability regime among the respective departments or divisions that are responsible for each mandate. malaysia's own experience during the asian financial crisis exactly ten years ago allowed the central bank as a single regulator, to promptly respond to the liquidity and solvency issues that were confronting the financial system. the preemptive action that was supported by a comprehensive resolution programme significantly reduced the cost of the crisis on the financial system and the overall economy. more recently, the central banks