which resulted in more interconnectedness in the financial network, thus creating contagion channels. 10 [ slide 4 : increased leverage as illustrated by shifts in funding structures ] another risk of a more systemic nature is that diversification along similar lines can make financial institutions more similar to one another by exposing them to the same risks. 11 and indeed, the benefits of diversification appear to have been offset by the greater risk banks were exposed to as the share of activities outside the traditional retail banking operations was increasing. 12 some potential benefits of diversification may also have been lost as implementing a diversification strategy is a big managerial challenge. 13 it is particularly challenging in a banking group because of the differences in management cultures and risk profiles of the different entities. the challenge at hand is to reform the financial sector and banks towards a more healthy structure and size in order to redirect banking activities to support the society and real sector in the best way possible. the key is to remove any perverse incentives, which could lead to an excessive growth of the financial sector. for example, the inevitable safety nets needed to protect depositors must not lead to moral hazard which would undermine the stability of the financial system and entire economies. how the hleg proposals address the identified challenges in the size, structure and conduct of the business of banks in the high - level expert group on reforming the structure of the eu banking sector, nominated by commissioner barnier about a year ago, we detailed the different phases of the crises, analysed the characteristics of the banking sector and identified a number of weaknesses, which we thought the ongoing regulatory reform would resolve only partially. shin ( 2010 ), macroprudential policies beyond basel iii, princeton university, policy memo. wagner ( 2010 ), diversification at financial institutions and systemic crises, journal of financial intermediation 19. stiroh and rumble ( 2006 ), the dark side of diversification : the case of us financial holding companies, journal of banking & finance 30 ; mercieca et al. ( 2007 ), small european banks : benefits from diversification? journal of banking & finance 31. stiroh ( 2004 ), new evidence on the determinants of bank risk. journal of financial services research 30 ; acharya et al. ( 2006 ), should banks be diversified? evidence from individual bank loan portfolios. journal of business 79. bis central bankers ’ speeches [ slide 5 : summary of the problems in the eu banking sector identified by hleg ]

. 2 percent, deposits by 8. 8 percent, loan portfolio by 2. 6 percent, and net profit by 35. 0 percent. moreover, non - performing loans remain manageable, capitalization stays above the regulatory requirement, and liquidity is ample. following the government ’ s recent shift in strategy to contain covid - 19 — from imposing widearea lockdowns to granular quarantines — there has been a substantial improvement in the country ’ s covid situation. 1 / 4 bis central bankers'speeches daily confirmed cases stood at 1, 297 last november 18, significantly down from the peak of 26, 303 last september 11. against this backdrop, we expect the economy ’ s recovery to gain more traction. now let me go back to f. i. r. e. first, f for flexibility. the importance of flexibility — the ability to adapt and evolve — has come to fore in efforts to survive and thrive in the crisis. as far as the bsp is concerned, we exhibited flexibility by implementing unorthodox measures to ensure ample liquidity and maintain financial stability at a critical time. we extended short - term loans and remitted dividends in advance to the national government to support its covid - relief measures. we started purchasing government securities in the secondary market. we were also flexible enough to temporarily relax some regulations. the relief afforded to banks encouraged them to help their hard - hit customers as well. for instance, the bsp ’ s move to count loans extended to micro, small, and medium enterprises ( msmes ) as part of banks ’ compliance to the reserve requirement, to lower risk weights for certain msme loans, and to allow staggered booking of loan losses gave incentive for banks to lend. as we recover from the crisis, focus will shift from trying to survive the crisis to navigating the uncertainties of the recovery and post - crisis periods. individuals, organizations, and economies that are able to seize opportunities from the crisis and adapt will be the champions of tomorrow. this is a solid example of flexibility. this brings me to bsp ’ s key agenda : the digital payments transformation roadmap that we launched last year. the roadmap envisions a cash - lite economy where 50 percent of financial transactions are done digitally by 2023. last year, we saw a leap in digital payments to 20 percent of total financial transactions in the country versus only 1 percent in 2013. let me proceed to the next