provide further momentum to the pace of financial market integration. moreover, the eventual linkage of the domestic payment system with target will also facilitate the transmission of certain risks, not least those of an operational nature. conclusion there are clearly several good reasons why sound regulatory and oversight practices remain vital for the stability of our financial system and why, therefore, the central bank of malta and the mfsa must work more effectively together. it is also evident, however, that on their own these two institutions cannot provide full protection against systemic disturbances, and that the modalities for co - operation which are in place locally need to be strengthened further and extended to other bodies with comparable responsibilities at the international, and particularly at the eu level. ecb. 2002. financial sectors in eu accession countries.

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