the financial sector not only plays a crucial role in capital accumulation but is also a part of the economy with a distinct value added that contributes to an economy ’ s growth. beyond that, however, the financial system performs another very important task with regard to economic growth : it not only funds innovations but also helps in identifying them. the financial system therefore helps to further the state of know - how and promotes technological progress. sound economic growth relies upon an efficient financial system. with each advancing stage of economic development, the financial system also refines and increases its complexity together with advancements in the real economy. the massive repercussions and enormous costs for the real economy during the current crisis have demonstrated impressively how important financial stability is for economic performance and welfare : the second phase of the crisis, that is after the lehman brothers bis central bankers ’ speeches insolvency in september 2008, not only marked the point of conversion to a systemic crisis, causing transactions on the interbank market to virtually ground to a halt, stock prices to plummet and investors to flee to the safety of government bonds. the disruptions of the financial system were also passed on to the real economy. financing conditions for enterprises and households tightened, and as consumers and firms feared what was still to come, expectations in the private sector as well as the outlook for the world economy deteriorated sharply. as a result, manufacturing and trade were at the heart of the crisis and suffered globally, and particularly in the advanced economies, output dropped at rates hitherto unseen in the post - war period. financial stability has therefore rightly become a top priority on the policy agenda, and the increasing role of the g20 testifies to the global dimension of this task. yet the objective is not to avoid financial crises completely. historically, these crises have occurred regularly over time and can be viewed as an element of market economies. in this context, attempts to increase financial market stability should therefore not be understood as an attempt to avoid crises altogether, but as an attempt to increase the system ’ s resilience and, by doing so, to limit the dire consequences. the usual fear is that stricter regulation may introduce additional frictions and hamper economic growth. the challenge policy makers face when reforming the regulatory framework of financial markets lies in striking the right balance between the stability of the financial system and its efficiency. luckily, both intentions are to a significant degree complementary, and the context is not that of a zero - sum game. well -

axel a weber : strong, sustainable and balanced growth – the contribution of financial market regulation speech by professor axel a weber, president of the deutsche bundesbank, at the 11th whu new year ’ s conference, vallendar, rhineland - palatinate, 14 january 2011. * 1. * * introduction ladies and gentlemen thank you for the invitation to be keynote speaker at your 11th new year ’ s conference. it is a pleasure to be here once again. the beginning of a new year lends itself to looking back and reflecting on the past year which turned out satisfactory – all the more so as the economic outlook has brightened considerably. this is not just true for germany but also for the euro area in general. hence, even though for the euro area risks for the economic outlook are still tilted slightly to the downside, the recovery should continue. against this background, the recent increase of inflation in the euro area above 2 % has attracted some attention. whilst this is largely the result of shortterm upward pressure on prices, mainly owing to energy prices, inflationary pressures over the policy - relevant medium term are expected to remain contained and in line with price stability. therefore, the governing council yesterday confirmed that the current key interest rates still remain appropriate. nevertheless, risks to the medium term outlook for inflation which are so far still broadly balanced could well move to the upside. thus, price developments have to be monitored very closely. in spite of the favourable economic outlook, the financial and economic crisis is not over yet, and even though germany fared much better during the crisis than many other advanced economies, the welfare losses have been huge. thus, one of our top concerns must be to ensure that measures are taken to prevent the occurrence of another crisis of this scale. but first, i would like to address the issue of regulatory reform on financial markets. so let us take a look back and cast a look at the interlinkages between the real economy and the financial system and at how the crisis originated. 2. the financial system – driver of growth, but also the origin of the worst crisis in the post - war period the state of the real economy and economic well - being are usually measured in terms of economic growth. as you will probably recall from your macroeconomic courses, simple textbook models basically identify three determining factors of economic growth : capital, labour and technological progress. of those three, the one most obviously affected by the financial sphere is the first – capital. considered on its own,