confidence crisis not only as highly serious, but also as a window of opportunity for reform. in march, the bundesbank ’ s executive board took the unprecedented step of publishing a staff paper entitled “ ways out of the crisis ”. the paper which is posted on our website - contains analyses of the key areas of reform : public finances, social security systems and labour market issues. it spells out which reforms need to be enacted. we stress the need for a consistent overall reform package. the key is to strengthen the willingness among individuals to take risks, to perform and to develop initiative. only then will the fundamentally strong german economy regain momentum. we must not forget that german reunification in 1990 was a once - in - a - lifetime opportunity. reunification is a boon for us. but germany is still suffering from economic policy mistakes made during the unification process. for example, a considerable portion of the recent weak german growth performance is due to the boom - bust scenario that was triggered in the construction sector. early in the reunification process, building activity was boosted by overly generous tax incentives ; now this sector needs to shrink back to normalcy. for seven years in a row this trend has shaved our growth rate. insolvencies have been on the rise, not only in the construction sector. the economy at large is also affected, as overall demand is weak in the low - confidence environment. as companies go bust and loans turn sour, is the german banking sector now in crisis? german banks are well capitalised ( overall capital ratio of 12. 6 % ; large banks 14. 6 % ), and german banking supervision is highly efficient. there has been only one single bank collapse in the post - war era ( herstatt ) - many other industrialised countries have since seen outright banking crises. in japan, as you may recall, financial supervision in the early stages of the banking crisis tolerated the banks ’ procrastination, eroding capital bases and misclassification of bad loans and therefore laying the foundation for deep trouble. the second important difference between the german and the japanese banking sector is the real estate bubble that still plagues japanese banks, but never existed in germany in the first place. a major portion of japanese collateral diminished to virtual non - existence and thus accounts for the bulk of bad loans in japan, but not in germany. during the strong financial market stretch in the late nineties, german banks were able to generate returns to match the high costs of maintaining their extensive branch networks

structural improvement. the foundations for economic growth in the euro area have improved in step. to safeguard the soundness of a financial system is a rather complicated task. effective financial regulation and financial supervision are key to financial stability. as financial products become ever more complex, financial regulators and supervisors need to keep pace with developments in the capital markets. they have to strike a fine balance. their core task is to make sure that financial institutions are capitalised commensurate to their respective risk profiles, not least in order to contain systemic risk. on the other hand, they do not want to hinder the development and the use of new instruments and will therefore try to permit as much room as possible so as not to hinder growth. in the aftermath of the late nineties ’ financial market boom, new questions arose. the role of market integrity has been highlighted by a series of financial scandals. cases of insider trading, of investment banks recommending clients ’ stocks against their better judgement, and even some spectacular cases of outright accounting fraud have shaken financial markets to the core. trust has been lost on a grand scale. it needs to be rebuilt by improving the framework of the markets. financial markets must be trustworthy ; only then will investors be willing to provide finance. let me cite one last aspect of sound financial systems. it is also a matter of trust. the infrastructure of the markets needs to be stable and able to withstand shocks. 9 / 11 was a shock not least to the world financial system. it put payment systems to the test. with a little help from the central banks - we stood ready to provide liquidity - the international financial system proved resilient. disruptions in the world financial net might easily have a severe negative impact on the world economy. hence the robustness of the market infra - structure is a major factor in steady and sustainable growth. 3. concluding remarks ladies and gentlemen, uncertainty currently weighs on all debates on economic issues. we cannot abolish uncertainty. it is a feature we will have to live with for some more time, as its causes are many. we can and we should, however, work to improve the resilience of the world economy. world economic growth needs to become better balanced. for this to happen, each of the world ’ s major economic zones has some homework to do. let me again point out how happy i am to be able to be here with you this afternoon to discuss some important issues of the world economy. trans -