jean - claude trichet : the financial crisis and the response of the ecb speech by mr jean - claude trichet, president of the european central bank, at the ceremony conferring the honorary title of doctor honoris causa at the university of national and world economy, sofia, 12 june 2009. * * * ladies and gentlemen, it is a great privilege for me to be here in sofia today to accept an honorary doctorate from the distinguished university of national and world economy ( unwe ), bulgaria ’ s most respected economics institute. to properly mark the occasion, i would like to talk about the global financial crisis and its roots, and the ecb ’ s response to the crisis. the global financial crisis and its roots let me start by briefly highlighting the origins and evolution of the current crisis. imagine a neutral observer who looked at the financial sector about a decade ago and then didn ’ t look at it again until the eve of the current financial crisis. he would have found a completely different financial industry, one which over the past decade has undergone a dramatic shift of focus. he would have discovered a financial system that had moved away from its traditional role of supporting trade and real investment. he would have found a financial system in which speculation and financial gambling had run rife. he would have encountered a system transformed – a system no longer managing genuine economic risks but one actually creating and assuming financial risks – risks resulting from arbitrage and intentional exposure to asset price changes. that same observer would have realised that financial liberalisation and innovation had made our economies more productive. the securitisation of assets, for example, had great potential to diversify economic risks and to manage them efficiently. but it also meant that financial institutions were able to sell loans or take them off the balance sheet, which weakened lenders ’ incentives to conduct prudent screening and constant monitoring of credit risk. so underwriting standards and lending oversight declined, and contributed to the excessive credit growth in the second half of the 1990s. in sum, the observer would have concluded that the factors that fuelled the credit and asset price boom of the past decade also created the conditions for a bust. in mid - 2007 we started to see the backlash. the start of the financial turmoil was sudden but not unexpected. the financial system as it worked over the past decade – with its flawed incentives and its overly complex products and with global imbalances as its macroeconomic backdrop – was no longer sustainable. the asset cycle turned

the consequences of this expansion have been disastrous and will perhaps be felt for years to come. given the obvious negative impact of an excessively large financial industry, we keep asking ourselves whether limits should be imposed on the size of the financial sector itself. i hope it is clear from the evidence i have presented that the answer to this question is yes. however, it is also essential to make sure that we do not repress financial markets to the point of jeopardising their contribution to growth. therefore, the measures i outlined are aimed at making the industry safer rather than weaker, and should not be considered “ punitive. ” their goal is to “ re - direct ” the financial sector so that it avoids embarking on unsustainable patterns. these actions are aimed at commercial banks as well as at non - traditional financial players to make sure that excessive risk - taking is not taking place outside the auspices of regulators. ensuring that the financial sector is large enough to strengthen the economy while not being “ too large ” is a task that we take very seriously. there is a clear trade - off between economic growth and financial stability, and it is a difficult but critical task to strike a good balance, ensuring that we end up neither with too little growth nor with too little stability. it is my firm belief that the recent reforms to the regulatory and supervisory process, as well the ecb ’ s new role in systemic risk management will contribute greatly to this process. thank you very much. the charts are also to be found on the website of the european central bank.