For example, the gross market value of the OTC derivative markets increased from USD 2 trillion in 1998 to USD 35 trillion at the end of 2008. The intensive use of complex and off-balance sheet products distanced the final borrower from the final investor. As underlined by a recent IMF study, 1/3  BIS central bankers' speeches  most of the pre-crisis financial globalisation had taken place through cross-border activities with little involvement from global banks in local retail activity. It ultimately led to a reduction in efforts from banks to monitor the creditworthiness of their borrowers and mitigate the associated default risks. These two levels of complexities were exacerbated during the European sovereign debt crisis as European banks were put under funding pressures by market participants concerned by the opaqueness of their portfolio composition and the lack of credibility of the previous resolution mechanism. B – A comprehensive and strong policy response: both on the regulatory and the supervisory sides However, I just want to convince you of how strong the regulatory and supervisory responses have been since then, in curbing the detrimental impacts that overly complex organisations or overly complex activities might produce. First, the new regulatory framework treats global and complex banks differently. Global Systemically Important Banks (aka GSIBs) are subject to higher capital requirements explicitly determined by the importance of their cross-jurisdictional claims and liabilities, their OTC derivatives, and their Level 3 assets exposure.

The true question is how to strike the right balance between the diversification benefits that arise from multiple businesses financing the real economy and the potential weaknesses in risk management caused by this increased complexity. This morning, I will start by quickly reminding you of some key features of the complexity of the global banking system before the financial crisis. Then, I will give a short overview of the strong regulatory and supervisory actions undertaken to reduce inefficient levels of complexity. Lastly, I will mention two important challenges we face today in shaping the global European banking system. A – Some stylised facts from the pre-financial crisis period: organisational complexities and complex activities Before the Great Financial Crisis, we observed a steady increase in the number of foreign banks, from 784 in 1995 to 1,301 in 2007, according to Claessens and Van Horen (2014). 1 At the same time, the number of domestic banks decreased and, as a result, the relative importance of foreign banks increased substantially, from a share of 19% in 1995 to 32% in 2007. This rise might be attributable to structural factors such as technological advancements, capital market liberalisations and economic integration.2 It was accompanied by the growing importance of wholesale funding markets in financing banking activities and it resulted in a high degree of interconnectedness between financial institutions. Beyond the potential complexity of global banking’s organisational structures, the financial crisis was also preceded by increasing complexity in banking activities and financial products.