2 we therefore don ’ t have to argue about whether the likelihood of crises has to be reduced as far as is humanly possible. that much is obvious. for this reason, it was absolutely correct to revise and improve the regulatory framework in response to the crisis. basel iii and the further reform components are thus the foundation of a more stable financial system. at the present juncture, it is quite possible to say that the reforms were successful and have indeed contributed to a stabilisation of the banking sector. this is revealed, for example, when looking at the bank balance sheets : between 2008 and 2015, the banks of the euro area reduced the volume of their balance sheets by roughly 15 % and increased their capital ratios by more than five percentage points to around 15 %. 3 in germany, the balance sheet volume during the same period was reduced by as much as 23 % – and the capital ratios went up from about 9 % to more than 15 %. 4. myths, platitudes and constructive criticism – good regulation is relatively cheap time and again, i hear credit institutions complain that regulatory reform has gone too far. one of their main arguments is that higher capital requirements constrain banks ’ lending and thus constrict growth. they are asserting, therefore, that regulation takes a heavy financial toll on them. that, ladies and gentlemen, is a myth. empirical studies suggest that tighter capital requirements are in fact beneficial, and not just for stability reasons. they reveal that higher imf world economic outlook database. a similarly high level had been reached only once before since 1800 : between 1942 and 1949 ( see p 11 of s a abbas, n belhocine, a elganainy and m horton ( 2010 ) a historical public debt database. imf working paper wp / 10 / 245 ). c m reinhart & k s rogoff ( 2013 ), banking crises : an equal opportunity menace, journal of banking & finance 37 ( 11 ), 4557 – 4573. ecb data. bis central bankers ’ speeches levels of equity capital are correlated with higher lending volumes – so in fact, the number of loans goes up, not down. 4 at the same time, one could also argue that the quality of loans improves as well. the reason for this is quite straightforward : the better a credit institution is capitalised, the more its owners stand to lose if loans default and cause losses. so the more equity a bank or savings bank has

between banks and sovereign is that banks tend to overinvest into bonds issued by the home government compared to a well - diversiﬁed international bond portfolio ( de marco and macchiavelli 2016, horvath, huizinga, and ioannidou 2015 ). to what extent this pattern reﬂects a “ home bias ” in banks ’ investment portfolios is hard to assess, given that investment patterns depend on preferences, incentives, regulations, and transaction costs. the regulatory treatment of sovereign debt certainly affects portfolio choices of banks ( deutsche bundesbank 2014, 2017 ; kirschenmann, korte and steffen 2017 ). under current bank capital regulations, exposures of banks to sovereign debtors in the country ’ s own currency are assigned a risk weight of zero. in addition, these claims are exempted from limits on large exposures that would otherwise apply to large exposures to non - sovereign entities. similar exemptions apply to liquidity regulations. yet, claims on governments are not immune to the risk of default or of illiquidity. c ) implicit subsidies and systemic risk implicit guarantees for liabilities of ﬁnancial institutions are a key channel through which private and public debt are linked. they are contingent liabilities for the government which can turn into explicit payment obligations in times of crisis. quantifying this implicit subsidy and thus the expected bailout that debt holders expect to receive is not an easy task. funding costs advantages of banks which are deemed “ too big to fail ” ( tbtf ) may serve as a proxy ( siegert and willison 2015 ). the size of the funding cost advantage for a bank depends on the expected probability of default, the loss given that a default has occurred, and the expected recapitalization through the government. the probability of being bailed out, in turn, is inﬂuenced by factors such as the resolution regime and the ﬁscal capacity necessary to make the implicit guarantee credible. financial institutions that are deemed “ too - big - to - fail ” are indeed a recurrent theme in the history of ﬁnancial crises. individual banks can become too big, too interconnected with the rest of the ﬁnancial system, or too complex to disorderly exit the market. in 2011, g20 members thus agreed on reforms addressing the “ systemic and moral hazard risks associated with systemically important ﬁnancial institutions ” ( fsb 2011 ). three sets of policies have been implemented