but was the crisis really caused by financial markets that were “ out of control ” and then paid for by the real sector – and naturally also by the taxpayer? this frequently voiced assumption is not entirely wrong, but it is not entirely correct, either. it is true to say that the financial markets can sometimes tend to overexuberance, which can play a part in the emergence of crises. it is also correct to say that some players in the financial markets had been neglecting risk management. and, finally, it is correct to say that the financial markets had moved away from their original role as an intermediary and thus as a service provider for the real sector. false incentive structures in compensation performed their part in all these undesirable developments. explaining the crisis only in terms of “ out of control ” financial markets falls short of the mark, however. fundamentally, bank balance sheet mirrors what is happening in the economy. playing down excesses is certainly not the intention here. but, in the debate on the sovereign debt crisis, it should be remembered that debt is not a bad thing per se. enterprises are bis central bankers ’ speeches normally reliant on borrowed capital to fund investments and thus make growth possible. debt becomes harmful only if it grows on an excessive scale and capital flows into unprofitable areas. in the event of an asset price bubble, however, it is not only banks that have positioned themselves wrongly, but also investors and borrowers. 2. the ongoing deleveraging process after an asset price bubble has burst, a deleveraging process is necessary, such as we are witnessing at present in many parts of europe. you see, if an economy is facing a debt crisis as a result of a credit - financed bubble bursting, the value of the assets held by the private sector fall, while the value of the liabilities remains the same. households and enterprises are compelled to increase their saving in order to pay off their debts. however, saving more to reduce debt leads to a decline in investment, which has a negative impact on economic growth. as i have already mentioned, bank balance sheets mirror the real sector. as a result of the developments i have just described, banks, too, may also run into difficulties, however. despite greater efforts to save, some borrowers do not manage to service their debts properly, causing some loans to default. that drains the banks ’ capital. at the same time, there is a decline in the institutions ’ credit

have already played a major part in this. besides cutting policy rates to an all - time low, their non - standard monetary policy measures have enabled them to provide the banks with almost unlimited liquidity for a very long time. to do that, there was also a marked easing of the collateral requirements. equipping the banks with adequate capital, however, is a matter for the shareholders or, if need be, governments. recapitalisations should not have a stigma attached to them. when they are necessary, they should be carried out quickly and convincingly. to do that, an independent, credible and transparent asset quality review is of vital importance. still more has to happen for europe to return to sustainable growth, however. a functioning resolution mechanism benefits not just financial stability, but also growth. that is because it ensures that banks really do fulfil their allocation function and do not, as “ zombie banks ”, harm growth. this enhances the efficiency of the real sector. if we succeed in achieving such a milestone with a properly designed banking union, europe will return to sustainable growth. of that i am certain. bis central bankers ’ speeches