has failed to live up to this ideal. all along, politicians have enjoyed having a stake in the game ; the landesbanken are just one example of this. but one thing became clear when the crisis began – if not before : the financial sector setting was only partially suited to ensuring a competitive environment that was consistent with market economy principles. in retrospect, a great deal of trust, probably too much at times, was invested in market forces and market discipline. after the crisis erupted, there was a sharp increase in government bis central bankers ’ speeches interventions to stabilise the financial system. in many countries, banks were propped up by the state or even taken into national ownership. this government response was motivated, among other things, by a distinctive feature of the financial sector. relative to other industries, players in the financial sector are very highly interconnected. this high degree of interconnectedness means that if one participant exits the market, it can potentially bring down others as well. in extremis, this might cause the entire market to collapse and endanger financial stability. what this means, therefore, is that the financial sector is lacking a key aspect of an effective competitive environment – the possibility of businesses exiting the market. a major financial institution exiting the market can ignite a systemic crisis, leaving the state with little choice but to intervene in order to prevent matters going from bad to worse. and then the taxpayer is left to foot the bill. the no bail - out principle has lost all effect. as walter eucken might have put it, those who benefited did not bear the costs. this very phenomenon has come into play during the crisis. the state no longer merely sets the rules, it has also joined the game, whether by choice or otherwise, because the markets anticipated that it would be forced to intervene in an emergency. naturally, this no longer fits the ideal of the state envisaged in our political order. if the state wants to get back off the playing field, it will have to adapt the rules of the game. what we need is improved financial sector regulation. 3. financial sector regulation however, as i see it, we should not go from occasionally placing too much trust in market forces to making excessive demands of state regulation. regulation is designed to prevent market failure, but it shouldn ’ t put market mechanisms out of action. our aim should still be to use regulation to create an appropriate setting which provides the right incentives for risk - aware behaviour. so the

has increased as the economic outlook has worsened and the share of triple - b ratings has grown. concerning the second vulnerability, in several countries debt in the public and / or nonfinancial private sectors is lingering at levels that are high by historical and international standards. this leaves public and private finances exposed to the risk of a sudden change in market sentiment or deteriorating macroeconomic conditions. third, parts of the banking sector continue to exhibit weak performance. banks have improved their capital positions and profitability since the euro area crisis, and the stock of non - performing loans continues to decline at a moderate pace. but further improvements are needed in parts of the banking sector if banks are to achieve sustainable rates of return. in particular, overcapacity and cost inefficiencies weigh on many banks ’ long - term profitability prospects. the better performance of some banks within the euro area, and in jurisdictions facing similar economic and financial conditions, illustrates the importance of addressing structural issues. the current interest rate environment has various implications for the resilience of the banking sector. banks have benefited, and will continue to benefit, from the lower credit risk for borrowers, and from the higher asset valuations associated with lower interest rates and 1 / 2 bis central bankers'speeches better macroeconomic outcomes. this has helped support bank profitability across the euro area since the deposit facility rate turned negative in 2014. however, the negative interest rate policy also entails costs for banks, and these could increase the longer negative rates are in place, the lower policy rates are set and the larger the amount of excess liquidity held by banks. these vulnerabilities could crystallize if economic growth is much weaker than expected, or if weak growth persists for longer than expected. we thus welcome the measures taken by the banking sector in recent years to improve resilience, and support efforts to further strengthen resilience while conditions are benign. there are also vulnerabilities in the non - bank financial sector, which has significantly expanded its role in financing the real economy in the euro area. total assets held by nonbanks have almost doubled over the last ten years, growing from €23 trillion in 2008 to €42 trillion in 2018, while the size of the banking sector stagnated over this period. non - banks currently account for around 55 % of the euro area financial sector. while a larger non - bank financial sector has the benefit of helping to diversify the funding sources available to the