experts and policy makers had – in addition to finance - led growth – a further dream ready : that of growth through openness to international capital flows. the dream suggested that developing and emerging economies should allow international finance to enter the country without restrictions. such a capital account liberalisation, as it is called, would lead to higher growth rates. the dream was constructed on the basis of state - of - the - art economic theory at that time. and most developing and emerging economies went along with it. … and the reality both dreams crumbled once they were hit by a financial crisis. the growth through capital liberalisation dream fell apart with the onset of the asian financial crisis in 1997. since then, studies have clearly shown that capital liberalisation has no direct positive effect on growth, and only rarely has an indirect one as a result of improving markets. rather, it seems that those countries grow faster that rely less, not more, on foreign capital. 2 most importantly, the studies suggest one crucial insight : whether capital liberalisation is a good thing for an economy depends heavily on its specific situation. for example, if a country r levine ( 2005 ), finance and growth : theory and evidence, handbook of economic growth. d rodrik & a. subramanian ( 2009 ). why did financial globalization disappoint? in : imf staff papers, 56 ( 1 ) : 112 – 138 ; es prasad & rg rajan ( 2008 ) a pragmatic approach to capital account liberalization. in : the journal of economic perspectives, 22 ( 3 ) 149 – 172. bis central bankers ’ speeches has insufficient savings, foreign capital might be the solution. if, however, there are not enough incentives or opportunities to invest in a country, additional capital won ’ t help. which brings me to the other dream, that of finance - led growth. this was not challenged until the financial crisis of 2007 hit. but this has changed thanks to more recent academic studies. they show that increased credit and a higher volume of financial transactions can have negative effects, too. there are two reasons why more finance can be negative. first, higher credit volumes lead to more frequent and more serious financial crises. 3 in other words, as more credit is granted and more financial transactions are carried out, a financial system becomes more crisis - prone. second : the larger the mountain of debt that has built up until a crisis erupts, the more severe the crisis typically is and the longer it

“ too big to fail ” could not be held accountable for their actions. looking ahead, there won ’ t just be recovery and resolution plans for credit institutions ; clearly defined liability cascades will be established, too, so as to ensure that the taxpayer really is last in line to foot the bill – that is to say, after shareholders and creditors have been bailed in, and then only in absolutely exceptional cases. but, to put this theoretical resolution model into practice, institutions will need to hold a certain amount of additional debt which, should the need arise, will be transformed into loss - absorbing capital. for global systemically important financial institutions, this will be achieved by way of the tlac standard, which the fsb will finalise this autumn. the same principle applies to the european institutions, but implementation here is based on what is known as the mrel standard, which differs in some respects from the tlac requirement. one difference is that all institutions will be required to satisfy the mrel requirements, not just the systemically important ones. another is that the minimum requirements will be set individually for each institution by the competent resolution authority. these new standards will have a transformative impact on the market for loss - absorbing debt capital. they will introduce attractive new instruments that offer high returns for investors, particularly for those outside the banking sector. and the disclosure requirements under these standards will give investors the transparency they need to make well - founded decisions. these reforms together with those that have already been accomplished will strengthen institutions ’ stability and systemic resilience. nevertheless, when speaking about regulatory reforms, we have to bear in mind that most of those which i have mentioned only affect the regulated banking sector. in the context of low interest rates and tougher regulation, there are incentives for regulatory arbitrage through the shifting of assets from the regulated banking sector to somewhere outside the regulatory perimeter. and we are seeing significant movement in this direction. that is why the g20 has agreed on a roadmap for regulating the shadow banking sector. work is being conducted simultaneously by the fsb, the basel committee and iosco. the objective is to ensure that shadow bank - like risks to financial stability emerging outside the regular banking system are subject to appropriate oversight and regulation. yet, we are careful not to inhibit sustainable market - based financing models that do not pose such risks. one good example of a well - designed instrument is the basel committee ’ s standard for measuring and controlling large exposures. while