, banks ’ domestic private lending as well as their total balance sheets had ballooned. the total assets of the eu banking sector were over three times the eu gdp in 2013. in several eu countries, the ratio is much bigger. as to the concentration, the report points out that since 2000, the share of the three largest domestic banks of the national banking system total assets had increased in all major eu countries except italy. the increase in leverage is illustrated by the decline in the median equity to assets ratio of the largest listed eu banks to only just over 3 % by 2008 from around 6 % in the late 1990 ’ s. the increases in bank sizes and bank lending were not matched by an equivalent increase in market - based financial intermediation. for example, the ratios of stock market capitalisation to bank credit decreased considerably in the 2000s in the biggest eu countries. as a result, the european financial structure became even more bank - based than before. the large reliance of european firms – especially the smes – on bank finance has recently been a bis central bankers ’ speeches drag on the recovery of the european economy as banks ’ ability to lend has been weak in many eu countries in the aftermath of the crises. it is now obvious that many of the developments in the european banking since the 1990 ’ s sowed the seeds of the banking and sovereign debt crisis : too - big - to - fail and too - big - to - save problems became more severe ; banks misallocated too much funds in asset markets fostering unsustainable bubbles ; weakly capitalised banks ’ resilience to shocks became poorer ; increased concentration of the banking system made banks more interdependent and vulnerable to contagion. what has been done to develop the financial sector? – lessons from the crisis with this background in the banking sector, europe faced the dramatic events of the financial crisis. a wide - ranging discussion emerged and has continued on the reasons and lessons of the crisis. one of the early, and one of the best accounts of the crisis was provided by nobel laureate jean tirole. 1 professor tirole accentuated the role of the inappropriate and poorly implemented regulation as one of the critical factors explaining the emergence of the crisis. in response to the crisis, a large number of international and eu wide regulatory reforms have been launched. i will focus on three key areas of reform. these are new prudential regulatory requirements for banks mainly following the standards set by the basel committee of banking supervision

erkki liikanen : on a sound and growth - enhancing financial sector in europe keynote speech by mr erkki liikanen, governor of the bank of finland, at the joint conference “ the comprehensive assessment, the ecb ’ s new role and limits of a common supervision in the eu ”, organised by the financial risk and stability network, deutsches institut fur wirtschaftsforschung ( diw berlin ), european school of management and technology ( esmt ), jacques delors institut berlin and bruegel, berlin, 30 october 2014. * * * the social costs of the financial crisis – such as the losses in the gdp and the increases in unemployment – have been very high. if policymakers – in central banks and in governments – had not learned from the policy mistakes made during the depression in the 1930s, the crisis could have been even more destructive. to avoid such crises in the future, or to at least limit their likelihood, we need a more stable and resilient banking and financial system in europe. to that end, we need better regulation and supervision of banks and other financial institutions than before. well - designed regulation provide banks with the right incentives to choose their business model, scope, and size efficiently to best serve the society. it is a key responsibility of our generation to make the financial system much safer than it has been. to be sure, we do not need to return to the repressive regulation of the post - war period, and we need to ensure that the financial system does not prevent the recovery from the global crisis. but we do need to find a better balance between rules and flexibility in regulation than we have had. the rest of this speech is organised as follows. first, i take a brief look at the european financial sector and especially the banking sector before the crisis. then i discuss the main building blocks of reforms to european financial system. finally, i provide views on the next steps : future developments in the financial sector and necessary policy actions. the european financial sector before the crisis the banking sector has traditionally been and still is the dominant component in the european financial sector, and developments in banking have also been of clear relevance to the emergence of the financial crises in europe. as the recent report by the advisory scientific committee of the european systemic risk board tells us, over the past 20 – 25 years banking systems in europe had become too leveraged, too concentrated, and sometimes also too big. as documented by the esrb report