##ert a decreasing marginal contribution to growth. in extreme cases, as the size of financial systems exceeds some threshold, their effect on growth could even turn negative. in fact, when the financial system grows out of proportion with respect to economic fundamentals, this may go hand in hand with the creation of exceedingly complex financial products, herding behaviour, materialization of tail risks and it may attract more resources relative to its value added. the theoretical channels through which excessive finance may be detrimental for growth are still unclear. one possibility is that distorted incentives – deriving from the increasingly higher payoff coupled with limited downside risks – may lead managers to take hidden tail risks. that is, managers may have increasingly higher incentives to invest in assets offering generous compensation most of the time, but generating severe losses with small probability. these incentives may be further exacerbated by herding behaviour, as the performance of managers is often evaluated in comparison with that of peers. herding behaviour, in turn, generates bubbles and makes the loss associated to the unlikely bad outcome even more severe than it would have been otherwise. during financial bubbles, the search for yield intensifies, risk - taking increases, and leverage in the system reaches unsustainable levels. the exponentially rising volume of financial assets and transactions, especially by highly leveraged and interconnected institutions, leads to financial fragility. shocks to the system can lead to fire sales and asset price decreases, resulting in liquidity squeezes and solvency risks. another channel through which an exceedingly large financial sector may have a negative impact on the real economy is the brain drain of human capital from other sectors, owing to the high compensation schemes in the financial profession. the overexpansion of the financial sector has induced banks to increase their demand for highly skilled employees, driving up the average wage of the industry. the depletion of human capital from other – potentially more productive – sectors may have a long term effect on economic growth. although theoretical and empirical research on this channel has just started, i believe it is important for policy makers to have a better understanding of how financial excesses may produce significant macroeconomic distortions. and i have not mentioned the impact on fiscal balances yet. 3. improving the resilience of the financial system market economies are based on the simple principle that economic agents reap the benefits and bear the risks from their actions. it is this trade - off which leads to optimal decisionmaking, given the available opportunities

and the tolerance of risks. if, however, the costs of bad decisions are not entirely borne by the economic agent, significant distortions are introduced, leading to misallocation of resources. therefore, as a fundamental principle, one has to ensure that incentives of all agents are correctly aligned with the cost and benefits of their financial decisions. still, even when from an individual perspective agents seem to follow a sound behaviour, macro - financial factors, particularly related to the interconnectedness of financial markets and institutions, the interaction between finance and the macro - economy can contribute to the build - up and propagation of aggregate macro - systemic risks. these effects have been at the heart of the recent financial crisis and it has specifically highlighted the need for a macroprudential approach to regulation and supervision, focusing on the financial system as a whole, complementing the existing micro - prudential framework. macro - prudential policies aim to contain the build up of imbalances and ensure that the financial system is better able to withstand shocks. they will focus on regulatory and supervisory actions aimed at curbing the macro risks of financial market activity. in this regard, it is, of course, of utmost importance to have a close co - operation and exchange of information between the institutions in charge of macro - and micro - prudential supervision. in the eu, the ecofin council has agreed to establish a new independent body responsible for macro - prudential supervision, the european systemic risk board ( esrb ). the main task of the esrb – in which the european system of central banks, the supervisory agencies of the 27 member countries as well as the newly created european authorities will play a key role – is to identify and assess risks to the stability of the eu financial system and issue risk warnings if systemic risks appear to be significant. if deemed appropriate, the esrb can make explicit policy recommendation. however, the responsibility for the implementation of macro - prudential policies lies with national authorities. 4. conclusions we live in very challenging times. although the increased interconnectedness of global financial markets have facilitated the build up of imbalances and transmission of shocks, financially integrated markets have served europe well and remain a necessary pre - condition for the proper functioning of the euro area. the ecb will therefore continue its efforts to promote closer integration of our financial system. at the same time we should be aware of the opportunities, but also the challenges and risks that new developments in financial markets pose to financial stability