##ert a decreasing marginal contribution to growth. in extreme cases, as the size of financial systems exceeds some threshold, their effect on growth could even turn negative. in fact, when the financial system grows out of proportion with respect to economic fundamentals, this may go hand in hand with the creation of exceedingly complex financial products, herding behaviour, materialization of tail risks and it may attract more resources relative to its value added. the theoretical channels through which excessive finance may be detrimental for growth are still unclear. one possibility is that distorted incentives – deriving from the increasingly higher payoff coupled with limited downside risks – may lead managers to take hidden tail risks. that is, managers may have increasingly higher incentives to invest in assets offering generous compensation most of the time, but generating severe losses with small probability. these incentives may be further exacerbated by herding behaviour, as the performance of managers is often evaluated in comparison with that of peers. herding behaviour, in turn, generates bubbles and makes the loss associated to the unlikely bad outcome even more severe than it would have been otherwise. during financial bubbles, the search for yield intensifies, risk - taking increases, and leverage in the system reaches unsustainable levels. the exponentially rising volume of financial assets and transactions, especially by highly leveraged and interconnected institutions, leads to financial fragility. shocks to the system can lead to fire sales and asset price decreases, resulting in liquidity squeezes and solvency risks. another channel through which an exceedingly large financial sector may have a negative impact on the real economy is the brain drain of human capital from other sectors, owing to the high compensation schemes in the financial profession. the overexpansion of the financial sector has induced banks to increase their demand for highly skilled employees, driving up the average wage of the industry. the depletion of human capital from other – potentially more productive – sectors may have a long term effect on economic growth. although theoretical and empirical research on this channel has just started, i believe it is important for policy makers to have a better understanding of how financial excesses may produce significant macroeconomic distortions. and i have not mentioned the impact on fiscal balances yet. 3. improving the resilience of the financial system market economies are based on the simple principle that economic agents reap the benefits and bear the risks from their actions. it is this trade - off which leads to optimal decisionmaking, given the available opportunities

sector at global level. more resources are needed to shoulder the costs of compliance, an area which has expanded considerably in recent years and whose legislative framework still requires work in order to make it more proportional. investment is required to exploit digital technology so as to improve the services provided to customers. to assist growth and make the allocation of resources more efficient, we need a more diversified financial system. the financial needs of firms that are innovative and active at international level cannot be met solely by banks. despite the progress made over the last few years, the role of capital markets is still too limited, also in comparison with the other large economies in continental europe. policies to support non - banking funding sources for firms should be pursued ; banks can accompany and benefit from these developments by expanding and innovating the range of services provided. looking ahead, the biggest challenge is that of technology, which is drastically lowering the cost of transmitting, processing and storing information and favouring the development of new forms of financial intermediation. entire areas in the financial industry, from payment services to credit supply, from trading in securities to risk management, have already been heavily affected in some countries by digitalization and the rapid growth in the market share of non - bank entities ( fintech ). additional competitive pressures will come from global firms at the cutting edge of technological innovation ( including the ‘ big tech ’ firms ), which can exploit their presence in very big markets. the authorities must ensure adequate forms of supervision for new intermediaries that take account of their potential and the risks associated with their activities. it is especially important to encourage both fintech companies and banks to pay due attention to the possible negative consequences of cyber - attacks in a system now steeped in digital technology. we are working alongside the other authorities and intermediaries on maintaining cyber security in the financial sector. we have also reorganized our supervisory department, creating dedicated structures for analysing fintech, with the aim of anticipating market developments and updating the methods and tools of intervention. * * * the prospects for the italian economy are less favourable today than they were a year ago. they are affected by downside risks, partly originating abroad, but which still primarily reflect italy ’ s own weaknesses, above all the uncertainty surrounding growth, the fiscal policy stance and the resumption of a credible path to reduce the burden of public debt on the economy. a high sovereign risk premium exacerbates the imbalance of the public accounts, undermines the capacity of