exception of the united kingdom – is still predominantly bank - based, the us tradition is much more market - based. economists have debated which system is superior for decades, if not for centuries. 1 this is neither the time nor the place to repeat the whole debate about advantages and disadvantages of the respective systems. allow me, however, just to name some significant points of the discussion. there is empirical evidence to suggest that market - based systems react more procyclically than bank - based economies because of more pronounced asset levine, r ( 2002 ) : bank - based or market - based financial systems : which is better? in : journal of financial intermediation 11 ( 4 ), pp 398 – 428. bis central bankers ’ speeches price booms and busts. 2 however, bank - based systems are also beset by procyclicality. a study conducted by the bank for international settlements has shown that, while bank - based systems are more effective at smoothing the impact of business cycle fluctuations, marketbased economies recover more quickly after crises. 3 leaving aside the pros and cons of the two systems, it is my strong belief that the question of the proper financing source cannot be answered with “ either / or ” but has to be “ both ”. in the end, it comes down to the uncontested argument of diversification. and the answer is highly dependent on the context. in europe for instance, the bank - based system reflects the corporate structure of the economy – there are many small and medium - sized entities, the so called smes. and – like in the united states – the smes tend to favour bank - based financing, if only as necessity because there are barriers for small companies to obtain market financing. against this backdrop, i very much appreciate the european commission ’ s efforts to establish a european capital markets union. by making it easier for small and medium - sized enterprises to access the capital markets, we could open up a further source of funding for them. to make one point clear : referring to what i said before about “ either / or ”, the objective of the european capital markets union is not to abandon bank - based funding but to supplement it with capital markets - based funding. and in europe of all places there is plenty of scope to do so. the european stock market is only 60 % of the size of the us stock market as measured in relation to gdp. similarly, the european market for venture capital is

basel iii regime have been tackled in response to the financial crisis. let me discuss one example that i believe to be a very good illustration of the limits of capital as an all - purpose tool : the regulation of sovereign exposures. a problem that unfortunately became apparent during the european sovereign debt crisis was the close nexus between states and banks. under the current regime, banks do not need to hold capital against the risks associated with loans to sovereigns – unlike any other loans. this is based on the assumption that loans to governments are risk - free because states cannot default, rendering capital buffers unnecessary. all those who had trouble following this line of risk - free - debt argument saw their doubts confirmed by the sovereign debt crisis in europe. it became obvious that we need to rethink the assumption that loans to governments are risk - free. in actual fact, sovereign risk is a cluster risk because the default of a sovereign as single debtor can well cause bank insolvency. given the amount of home country sovereign debt that some banks hold – which sometimes exceeds their equity – a possible restructuring of sovereign debt may well threaten a whole national banking system. consequently, changing the rules appears imperative. if banks were required to hold capital against the risks of their government bond portfolios, they would be more resilient to fiscal distress. at the same time, banks would have less incentive to buy large volumes of government bonds if these were not privileged any longer. furthermore, this may incentivise governments to reduce their debt. 5 and this brings us to the second issue : capital alone is simply not sufficient. a crucial tool in risk management is diversification – as specified in the basel large exposure regime published in 2014 which will take effect from 1 january 2019. large exposure caps prevent banks from becoming overexposed to a single borrower and the risk of its default. currently, the regime is restricted to private borrowers, and sovereign bonds do not fall into its scope. to me, it is important to end this privilege and to create a level - playing field for private and sovereign borrowers alike. therefore, a cap on loans to an individual sovereign is needed and should also be introduced. let me be very clear on this issue : actually, i see no economic argument why banks should be the main source of funding for governments. unlike relations with private borrowers – where banks have significant informational advantages compared to other creditors – there is no privileged information on the debt of a nation. as a