The survey responses of many jurisdictions suggested that the financial crisis increased pressure on market integrity and, more broadly, the stability of the financial system. However, no jurisdiction appears to have succumbed to outright systemic failure, although some-in particular, those in East Asia-suffered severe stress. In most cases, stress to the system from the perspective of securities markets was most evident at the level of market intermediaries and their clients. The financial integrity of these participants was severely compromised by an onslaught of factors, many of which have been discussed above. It would be useful therefore to provide a summary of them within the context of their contribution to systemic instability.

The East Asian crisis increased the possibility of a collapse or default of key financial institutions or market intermediaries as a result of their exposure, directly or indirectly through clients, to capital markets and the broader financial system. Asset-specific and cross-asset volatility spill-over had an adverse impact on financial institutions and companies with large (often unhedged) exposures to currency and equity price-risks. Currency volatility also led to higher and more volatile interest rates as monetary authorities intervened to stabilise exchange rates. This in turn raised concerns over the integrity of the overall financial system.

Using the banking sector's involvement in the equity market as an example, banking exposure to stock markets rose in various forms. Credit was extended directly for the purchase of shares. Banks accepted shares as collateral for the credit extended-typically with a "haircut" (market risk adjustment) deemed appropriate under normal market circumstances-and extended credit facilities to brokerages.

Thus, in the face of significant adverse market movements, the banking sector experienced significant pressure as a large proportion of the credit extended for share-purchases proved to be unrecoverable. This increased the level of non-performing loans and, to that extent, reduced its earnings. Share collateral tended not to be dynamically risk-managed according to changing market conditions and sentiment. Hence, a sudden deterioration in prices forced some banks to liquidate collateral, thereby exacerbating the situation. Sharp movements in prices caused stockbrokers to activate their credit facilities at a time when banks were most likely either to reduce or withdraw these facilities for fear of being caught in a potential market meltdown.

It is worth noting that several factors heightened the risks described above. One was the presence of weak market intermediaries and financial institutions. The other, which compounded the problem of weak intermediaries, was tight liquidity. As mentioned in the introduction to the report, there is broad agreement that the relatively benign systemic effects of the stockmarket crash of October 1987 were largely due to the massive injection of liquidity by the Federal Reserve Board of the United States during and in the aftermath of the event. One result of this action was to enable cash-strapped market participants to meet their short-term financial obligations. An equally important result was that, at a time of great uncertainty, it provided an assurance to the market as a whole that the system would be able to fulfil their collective needs.

This points to a third factor which contributed to stress on the financial system as a whole during the period of crisis: a decline in market confidence. Aside from the "material" strengths discussed above, sustained confidence in the market is thought to be crucial in preserving the systemic integrity of capital markets. This is because faith in the well-being of the market can generate positive side-effects in the form of systemic stability. Thus, whether or not liquidity was actually available, or whether market structures were in fact fundamentally sound, and despite the repeated assurances on many aspects of the financial system and real economy by market authorities and policy-makers, the perception in several jurisdictions of financial distress was sufficient to threaten systemic stability.