Obviously, in practice, proper market functioning was distorted by perverse incentives and information asymmetry. A special role was played by implicit guarantees that regulators gave to market participants. These guarantees combined with the risk discounting usually associated with a prolonged bonanza and resulted in excessive risk-taking and leverage. In my view, the lesson is as follows: any good fix of the financial system should deal with the sources of market failure and not only try to prevent inconvenient outcomes. In doing so, I think it is better to avoid over-complex regulation, which may indeed be self-defeating in the long run. There has been a tendency to over-regulate in the aftermath of the crisis: as Haldane and Madouros (2012) observed, whereas the first Basel accord had only 30 pages, attempts to make it more flexible and fashionable turned it into a 347 pages document in its second iteration, on which the ink had barely dried when the financial crisis hit, and attempts to plug the gaping holes it revealed pushed the page count to no less than 616 pages in the case of the Basel III agreement. In the US, whereas the original Glass-Steagall act, perhaps the most influential piece of legislation of the 20th century, had a mere 37 pages, the new Dodd-Frank Act of 2010 has 848 pages, and that’s only the primary legislation – counting in the 400 pieces of detailed rule-making from various US regulatory agencies that are required for its implementation, the document risks topping 30,000 pages.

Regarding the size of financial institutions, let me go directly to the “too big to fail” institutions. Their contribution to systemic risk is more than proportional to their size. It is not possible for such institutions to be sold, merged or closed down without jeopardizing the economy as a whole. Standard bankruptcy legislation, providing protection from creditors, simply does not work. Given the systemic importance of such institutions, access to creditors is essential. A special resolution framework should be designed in such a way that market participants be confident that it can be activated without generating unacceptable risks for the economy. Finally, the cross-border aspect of financial activity poses some particular challenges arising from the fact that legislation and bankruptcy regimes differ across countries. Moreover, national regulators have, above all, the responsibility to ensure financial stability in their own country. The correct answer here lies with oversight mechanisms being adapted in order to be able to deal with the challenges of globalization, rather than attempting to restrict the functioning of the financial system in order to reflect the limitations in international cooperation. IV. The foreseeable future of the European banking systems: the banking union  Let me quote Tommaso Padoa-Schioppa once more. He wrote that the old way of thinking along the Westphalian concept of nation-states is no longer suited for policy action when dealing with problems that are transnational, such as the financial crisis. For instance, Europe as a whole does not have large external deficits, or a high indebtedness of the household sector.