liberalisation and financial innovation. banking liberalisation has produced a notable increase in competition among institutions and in financial integration. for example, the cajas ( savings banks ) have started to compete geographically and in different business segments. the increased competition has also led, at different times during these 20 years, to strong competition for bank deposits ( e. g. la “ guerra del pasivo ” at the end of the 80s ). in general, banking competition brings very positive aspects for the real economy and to welfare, and there is no doubt that liberalisation of the banking sector in spain has been very positive for the country. however, we should bear in mind, as some chapters of the book point out, that too much competition may significantly increase bank risk - taking and that this may have negative implications and that bis central bankers ’ speeches this may undermine financial stability. 1 the recent very intense competition for retail deposits may also be a notable example in this regard. another important aspect of liberalisation has been the internationalisation of the banking sector, which is very well explained in the book. i would like to stress two aspects of this phenomenon : i ) the foreign expansion by spanish banks ( particularly santander and bbva ), and ii ) the significant dependence on foreign liquidity ( mainly through international wholesale markets ), especially after the introduction of the euro. 2 expansion abroad, when it is well executed, definitely brings benefits in terms of geographical diversification, which have become clear during the crisis, however a reliance on funding from abroad may bring some fragility if that source of liquidity dries up, as the crisis has shown. 3 in previous banking crises, banks typically suffered from runs on retail deposits, whereas nowadays these runs are wholesale - based. 4 in the light of this, the sector should aim to diversify its sources of funding liquidity. the second defining element over the past decades has been the increase in financial innovation, notably in securitisation and market funding. securitisation can have many positive effects, e. g. by increasing the supply of bank credit to the private sector thanks to greater bank liquidity. some crucial segments of the economy, such as small and medium - sized firms, may also significantly benefit from the development of securitisation. at the same time, recent research has shown that securitisation may lead to a lowering of banking standards and ultimately weaken financial stability. 5 once a bank is no longer responsible for a loan that it

credit availability. the crisis calls for change some key features of the recent crisis have been, in my view, the fragility both on the liability and asset sides of banks, coupled with a densely interlinked global financial sector. banks ’ capital reserves, transparency, funding, risk management, corporate governance and both micro and, especially, macro supervision and regulation need to be adjusted. let me start with the fragile liabilities. we have experienced since august 2007 a funding liquidity dry - up. as i said before, in the run - up to the crisis, spanish banks were highly dependent on foreign wholesale funding. as a result, the sector as a whole ended up suffering and some of the more dependent banks have been hit very badly. but bank liquidity also depends crucially on bank capital and, hence, banks with stronger balance sheets suffer much less from a lack of liquidity. 8 the liquidity provided by the eurosystem has been vital to minimise the liquidity shortages, but bank capital needs to be stronger so that all banks have access to private funding liquidity. fragile assets were an important factor too, as very high volumes of credit ( and risk ) were granted during the good years. some banks took more risk than others in the real estate bubble, and some banks recorded substantially lower profits and higher ( realized and potential ) loan losses during the current crisis. hence, bank capital significantly decreased, especially for some groups of cajas ; they, moreover, cannot easily raise capital because of their specific structure. the availability of bank capital is essential for two additional reasons : first, a bank capital crunch may lead to a credit crunch. thus, in order to help the real economy recover, some weak banks need to be recapitalised. this is why the recent regulatory changes on capital in spain are crucial. 9 banking assets are however opaque, which – combined with the high leverage – make recapitalisation in private markets difficult, especially in crisis periods. 10 therefore, to reduce these problems, high transparency is extremely important : the stress tests and bank of spain ’ s publications on key bank variables are thus indispensable. if, after these exercises to promote transparency, some small groups of banks cannot fulfill the capital requirements, restructuring may be the only solution. banks are still too highly exposed to real estate assets in their balance sheets and so the new haircuts introduced by the bank of spain go in the right direction. geographical diversification ( notably the international