economy. the second – and quite popular – explanation argues that the increase in financial activity has merely been an exaggeration, as a consequence of which the financial system has, to a certain degree, uncoupled itself from the real economy and turned to unproductive activities. each line of argument obviously has important policy implications – for the scope and intensity of regulation and supervision, but also for other policy areas, including central banks. drawing the right lessons from the crisis requires first of all a clear understanding of the role the financial system plays for the real economy. in my short remarks i will therefore take a bis central bankers ’ speeches somewhat more general approach that goes beyond monetary policy issues. i will argue that, firstly, a highly developed and innovative financial system is indispensable for economic growth, but that there is also an inherent risk of exaggerations. secondly, regulatory efforts therefore have to strike a delicate balance between constraining such exaggerations without stifling innovation and thereby hampering economic growth. and finally, given that the crisis has laid bare serious gaps in our understanding of the financial system, i will conclude by outlining some fields of research that, at least from a central bank ’ s viewpoint, are of particular interest. 2. the role of the financial system the fundamental role of the financial system is to act as intermediary between borrowers and lenders. services such as the transformation of maturity, denomination and liquidity allow for efficient capital allocation, thereby promoting innovation and growth. furthermore, the financial system solves adverse selection and moral hazard problems between lenders and borrowers. this is of crucial importance for financing innovations and therefore for tfp - intensive growth which we depend on in aging highly developed economies. throughout history, this role of the financial system has never been static, but has become more and more complex in step with economic progress. in the process, the contemporary structure of the financial system has gradually evolved over the centuries. banks perform the tasks associated with money and credit, the bond market provides financing for governments and large corporations, the stock market provides equity financing of joint stock companies, venture capital the funding of nascent businesses – and a myriad of financial instruments allow us to trade and redistribute all kinds of risks. and it is a well - known fact that this process has, through history, been accompanied by the build - up and bursting of bubbles – usually at large, sometimes very large costs. prominent examples include

- performing loans are still unresolved in a number of countries, which means the risk situation differs strongly from one national banking system to the next. i will return to this particular point later in my statement today. while a recently published draft report by esther de lange at the european parliament does already address some of the criticism levelled at the commission proposal, that paper indicates that the proposed initial re - insurance phase starting in 2019 will still take place without any riskreduction measures whatsoever. that would be inacceptable in my view. my conclusion from this is that we should stick to the current system – harmonising the national deposit insurance schemes – as long as many outstanding issues remain unresolved. for all the progress that has been made towards deeper integration, european unity suffered something of a setback on 23 june this year. that was the day on which the uk electorate voted against the country ’ s continued membership of the european union. that brings us to the topic 1 / 5 bis central bankers'speeches of “ less europe ". i won ’ t wade into the political debate today, but focus instead on what brexit means for financial markets. five months on from the uk referendum, we can say that the european financial system has done a pretty good job overall of absorbing the outcome of the vote. apart from a bout of heightened financial market volatility, notable share price losses, particularly among bank stocks, and the sharp depreciation of sterling, the brexit vote did not unleash any turmoil in financial markets, nor, might i add, was there ever any risk of a financial crisis. there are two reasons for this. first, the good level of resilience that has now been achieved in the european financial system. second, and no less important, the response shown particularly by the bank of england. nonetheless, the long - run repercussions of the brexit vote will only really come into view when we get a better idea of the outcome of the forthcoming exit negotiations. the signals which the uk government is currently sending out would appear to suggest that a “ hard brexit ” might be in store – that is, the uk would leave not just the eu but also the european economic area. that would spell the end of the current eu passporting regime – an arrangement which presently enables financial institutions domiciled in the uk to offer their products and services across the entire european economic area. it also permits continental european institutions to