sets of players – banks and sovereigns – have one thing in common. they were only subject to the key market economy principle of liability to a very limited degree in the past. both were considered to be systemically important. it was feared that if they got into problems, this might jeopardise the stability of the financial system. in the end, it wasn ’ t the decision makers who were liable. but this is something that undermines the incentives for responsible behaviour. in the midst of the crisis, the weakness of one set of players then became that of the other. banks that had run into difficulties on account of distressed property loans in their books, say, had to be propped up by the taxpayer. the rescue sums required in countries like ireland, cyprus and spain were so huge that sovereign solvency, too, began to be called into question by investors. this drove refinancing costs higher. but the negative feedback loop also works in the opposite direction. ailing states can bring down banks that have substantial holdings of sovereign bonds in their books. it is this strong link between sovereigns and banks that needs to be severed. separating the two is all the more important because the nexus between banks and sovereigns actually even increased at times during the crisis. studies1 [ 1 ] suggest that it was notably the poorly capitalised banks in the crisis - hit states which took advantage of central bank refinancing to invest increasingly in high - yield domestic government bonds during the crisis. for when the insolvency of the home country is highly likely to bring down the institution in question as well, it can actually be quite rational to ramp up risk levels further still. after all, this barely increases the bank ’ s risk of insolvency but distinctly boosts the prospective profits if the outcome turns out to be favourable. v acharya and s steffen ( 2013 ), the “ greatest ” carry trade ever? understanding eurozone bank risks, working paper, nyu stern school of business. bis central bankers ’ speeches hence, this strategy further intensified the negative feedback loop between banks and sovereigns during the crisis. several incisions will be needed if we are to sever these links. the first of these will be the single supervisory mechanism, which is tasked with preventing banks from getting into difficulties at an early stage. but these are problems that cannot be entirely ruled out in the future, nor would we want to do so. after all, the possibility of failure

claudia buch : finance and growth – guidelines for financial sector reform speech by prof claudia buch, deputy president of the deutsche bundesbank, at the frankfurt finance summit 2015 : “ the last word ”, frankfurt am main, 17 march 2015. * * * ladies and gentlemen it is my pleasure to share a few thoughts with you at the end of this year ’ s frankfurt finance summit. given the challenges that lie ahead, the summit ’ s key question : “ how to foster growth in a new regulatory framework? ” could not be more timely. at the moment, economies worldwide are still struggling with the adverse effects of the financial crisis. the average loss of potential output resulting from the financial crisis has been estimated at 8. 4 %. and these output effects can be very persistent. crises reduce an economy ’ s capital stock – and the catch - up process via investment takes time. constrained credit supply in times of financial crisis can lead to inefficient capital allocation. investment in innovations is postponed. this shrinks potential output and productivity, thereby slowing down long - run growth. in order to weaken the negative effects of financial crises on growth, many new regulations have been designed. in europe, the banking union and, more recently, the capital markets union feature prominently. at an international level, the regulation of globally significant financial institutions has been at the core. overall, these reforms are headed in the right direction. yet concerns are being raised that the regulatory system is becoming too complex and thus less transparent. this makes it necessary to focus on the key principles of regulatory reform. in the next 15 minutes, i would like to step back and ask • what is the relationship between finance and economic growth? • and is there a “ double dividend ” in the sense that financial systems which are conducive to growth are also more stable? to answer these questions, we can draw on a large body of empirical ( and theoretical ) evidence that can give us guidance for financial sector reform. let me start with the evidence we have on the link between financial development and growth. 1. financial development and growth in the 1990s, there was a widespread consensus that financial development fosters economic growth. developed financial sectors stimulate entrepreneurship, innovation, investment, and productivity. many of these beneficial features of financial markets arise through equity finance. through venture capital finance, for instance, new start - ups obtain not only financial resources but also management expertise. yet, in much of the academic and policy debates,