The second defining element over the past decades has been the increase in financial innovation, notably in securitisation and market funding. Securitisation can have many positive effects, e.g. by increasing the supply of bank credit to the private sector thanks to greater bank liquidity. Some crucial segments of the economy, such as small and medium-sized firms, may also significantly benefit from the development of securitisation. At the same time, recent research has shown that securitisation may lead to a lowering of banking standards and ultimately weaken financial stability.5 Once a bank is no longer responsible for a loan that it has made, it has fewer incentives to monitor that loan. Besides, in periods of extensive securitisation, when the bank knows that new loans can be securitised – which in some countries can imply that the risk will be totally borne by investors outside the bank – the ex ante incentives for screening are notably reduced. All these important changes in the banking industry have taken place against an ostensibly benign but potential dangerous macroeconomic backdrop: the so-called Great Moderation. Indeed, the protracted period of high economic growth and low short and long-term interest rates contributed to giving the banking sector some very good years. However, that is precisely when risk builds up – and it can be excessive.6 Moreover, we should not overlook that macro fragilities emerged during the benign macroeconomic context: for example, both the current account deficit and the share of the real estate sector activity were around 10% of GDP in 2006.

  in improving the education system at all levels – it is critical to raising productivity over the medium term and, therefore, to improving welfare. I truly hope that when another book like this one is written in, say 50 or 100 years’ time, the authors will conclude that the steps taken in response to the crisis in the banking and in other key sectors of the Spanish economy were the right ones and, in particular, that they played a part in overcoming the crisis and increasing in a sustainable way the well-being of the citizens of this country. References Acharya and Richardson (eds.) (2009) Restoring Financial Stability: How to Repair a Failed System, John Wiley & Sons. Adrian, T. and H.S. Shin (2009), Money, liquidity and monetary policy, American Economic Review. Allen, F. and D. Gale (2000), Financial Contagion, Journal of Political Economy. Allen, F. and K. Rogoff (2011), Asset Prices, Financial Stability and Monetary Policy, Wharton Financial Institutions Centre WP #11–39. Altunbas, Y., Marqués, G. and L. Gambacorta (2010), Securitisation and the bank lending channel, European Economic Review. Brunnermeier, M. and L.H. Petersen (2009), Market liquidity and funding liquidity, Review of Financial Studies. Cuñat, V. and L. Garicano (2010), Did Good Cajas Extend Bad Loans? Governance, Human Capital and Loan Portfolios, LSE mimeo. Freixas, X. and J.C. Rochet (1997), Microeconomics of Banking, MIT Press. Hellmann, T., Murdock, K. and J. Stiglitz (2000), Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?, American Economic Review.