. the composition of output might change as well. i would not be surprised if the financial sector, the car industry and the construction sector were to shrink regionally. the economies that will be affected the most are those where the financial sector has expanded significantly in the last 20 years. especially in those countries the financial sector will obviously have to become smaller, because it has decoupled too much from the real economy and because experience suggests that banks may have become too big to fail, too complex to be managed and even too big to be rescued. • third, the simple statement that “ if banks are too big to fail, they are probably too big to exist ” is a reasonable rule. in any case, for large banks the capital should increase more than they increase in size. the post - crisis financial system should be more riskaverse, less leveraged, less complex. the prevailing business model will probably place greater emphasis on traditional banking activities, which tend to produce lower margins, but are also more robust, less risky and less volatile. in this respect, the crisis may well turn out to be a catalyst for a paradigm shift, transforming the global financial landscape for the better. • fourth, the process of globalisation that we have experienced in recent decades has been driven by an increase in global trade following the integration of emerging market economies into the world economy and the liberalisation of financial markets. this high degree of global economic integration has also been a major factor in the global financial turmoil and the highly synchronised downturn that we have been experiencing. this experience must not lead to protectionism. although protectionist measures may seem attractive in the short run, they will only exacerbate the downturn, delay the recovery and reduce income potential for everyone. • fifth, the government ’ s role in the economy and the question of what should be left to the markets will be key. the crisis has given governments a more prominent role in the economy. governments have become heavily involved in the banking sectors of a number of countries, and in some countries they have also taken on a significant role in other sectors, such as the car industry. summing up : have the parties involved learnt their lesson? • the swift action taken by governments to rescue the banking sector and stimulate the economy has been key in stabilising the financial system and the economy. but exit strategies from this support need to be developed and consistently implemented to contain moral hazard, to forestall a rise in long - term

estimate the total losses over the period 2007 - 2010 to be around usd 650 bn. write - downs on securities have so far amounted to over usd 200 billion. banks have provisioned and written off over usd 150 bn of their loan exposure. therefore we estimate further potential losses to be a little below usd 300 bn. half of the losses worldwide are estimated to be borne by us banks, a quarter by euro area banks, and another quarter by banks located in switzerland and the uk. • if we want to re - establish economic and financial stability, we need to develop the lessons from the crisis. to this end it is important to recall what triggered the crisis. low inflation rates and robust growth in the context of global imbalances, as well as abundant liquidity, were the main drivers at the macroeconomic level. at the level of the financial system it was regulatory arbitrage, deterioration in credit standards and increased reliance of banks to fund their assets in short - term markets. • thus, the crisis is a consequence of a combination of failures both in financial markets and on the part of regulatory authorities. despite market failure having been one factor, we must not forget that market participants have simply behaved in line with the incentives provided by regulatory authorities. in this respect, improved regulation and oversight of financial markets will be crucial to ensure economic and financial stability. in particular, sound balance sheets, solid risk management and transparent and robust business models are key in strengthening the financial soundness of banks and their resilience to shocks. the first line of defence of financial stability is with market participants. to provide for the right incentives, market participants must be liable for their actions. this is an essential condition for sustainable economic growth and financial stability. • at the same time, we need to develop the financial system further. to enhance transparency, we need to reduce the complexity of the financial system, institutions and products. • the crisis has painfully shown that ensuring solvency of individual financial institutions does not ensure stability of the financial system as a whole. when funding markets shut down, both solvent and insolvent institutions are hit. neglecting such wider systemic issues has been one of the glaring inefficiencies of prudential regulation. too great an emphasis has been placed on micro - prudential rather than macro - prudential aspects. initiatives are now being taken to close the gap that exists in this respect, especially in europe, where cross - border supervision is still a challenge. where do we