could lengthen the life of the production cycle. a steady rise in the wealth of nations required a large injection of capital. 3 without access to credit, such large upfront payments of production resources simply would not have been possible. without credit, production processes are constrained to an economically inefficient scale. 4 the opportunity to borrow against future income streams reduced the constraints on the ability of entrepreneurs to invest in bigger machines and larger premises. today, access to external funding is no less important. it has the potential to spur economic innovation and allows production facilities to be operated efficiently through standing credit lines. access to credit is not only important for businesses. students can receive a loan in expectation of the higher income that they are likely to earn later in their lives. student loans permit the enjoyment of the benefits of a higher education at a time in life when income is low. credit makes promising projects possible – whether they are embodied in physical capital or in better education. for a similar classification of functions see levine ( 2005 ). see pollins ( 1954 ) or hudson ( 2002 ). see hicks ( 1969 ). see e. g. sirri and tufano ( 1995 ). the provision of screening and monitoring services is the second key function of finance. specialised screening of the quality of borrowers is an effective remedy against the problem of adverse selection in credit markets. financial intermediaries acquire, process and evaluate information about potential borrowers. in doing so, they help reduce the large costs that we – as individuals – would face if lending of savings were not intermediated. likewise, banks are more effective at monitoring the behaviour of borrowers after funds have been allocated. they can thereby reduce the costs associated with moral hazard – a situation in which asymmetric information can lead borrowers to take action that erodes the value of the loan. stock markets can also perform this duty. influential research literature claims that liquid stock markets help foster corporate governance and hence reduce moral hazard. 5 the basic intuition is straightforward. if managerial compensation is directly linked to stock market performance, either through contracts or stock ownership, managers have an incentive to select and implement actions that increase shareholder wealth. the transformation and management of risk – the third key function of financial institutions in modern societies – became the focus of attention during the recent financial crisis. i will turn to the dark side of this function later. for now, let me stress the potential value of risk management. financial markets provide savers with a large array of

area banks is at the 690 level, well below the range of 1000 to 1600 of acceptable concentration. naturally i expect this process of restructuring to be driven first and foremost by the incentives of the private sector to raise profitability and increase returns on assets. however, there may be collateral effects of the change in the institutional environment that may favour that movement. looking further ahead, a single resolution mechanism in europe will create more possibilities to use consolidation as a resolution strategy. we see this in the us where, of the approximately 500 banks that the fdic has taken into receivership since 2008, around 450 were resolved through “ purchase and assumption ” transactions – that is, selling parts of banks to other banks. bis central bankers ’ speeches that said, there are also frictions that create obstacles to closer bank market integration. these include different legal systems, corporate governance structures and tax regimes that exist in europe, as well as different insolvency procedures. further integration is needed in these areas if we are to gravitate towards a true single market in capital in the euro area. finally, the new ssm regulation introduced an important change a change in macroprudential policy - making, both in terms of instruments and decision - making. as part of the capital requirements directive iv / capital requirements regulation, the ecb / ssm will gain a series of new macro - prudential instruments. these include, among others, the counter - cyclical capital buffer, the systemic risk buffer and the macro - prudential elements from pillar 2. i am confident that they can play a role in curbing pro - cyclicality in credit developments where needed. in terms of decision - making, a european authority will be able, if necessary, to apply prudential measures to banks in both borrowing and lending countries. this is important because, to the extent that macro - prudential measures mitigate credit booms by raising banks ’ cost of equity, this effect can be offset if there are large inflows from abroad that lower banks ’ cost of debt. in other words, the ecb / ssm has the tools to address such situations as we saw before the crisis, where supervisors lacked the tools to tame domestic financial booms being largely financed from banks in other euro area countries. the future of intermediation in the euro area looking further ahead, i expect this period of structural change in the banking sector to also have a permanent effect on the structure of intermediation. in the