s action plan for cmu has put forward many areas for further work, but each will take years to implement. what type of cmu will ultimately emerge therefore remains to be seen. i am sure commissioner hill will give us more guidance on this tomorrow. ryan, r., o ’ toole, c. and mccann, f. ( 2014 ), “ does bank market power affect sme financing constraints? ”, journal of banking and finance. ecb ( 2015 ), financial stability review, may 2015. bis central bankers ’ speeches 3. the regulatory challenge as i said, however, cmu is for the longer - term. for the medium - term, sme financing in the euro area will still mainly come from banks. so we need to make sure that there are no unnecessary obstacles to that process. and this brings me to the third challenge facing banks – the regulatory challenge. the regulatory agenda since the crisis has no doubt been essential. banks had too little capital, too much short - term funding, too high leverage, and created too great a cost for society when they failed. the reforms that have been introduced so far have increased resilience and, in extremis, made banks less costly to resolve. and there is no reason why this should, in principle, diminish the ability of banks to serve the real economy – research suggests, for example, that higher bank capital has no negative impact on lending. 5 but as new regulation accumulates, we know that it can also come with costs as well. in the economics jargon, policymakers always have to be watchful that, in attempting to internalise externalities, they do not inadvertently create new externalities. the possible risks can be summarised under the headings of complexity, clarity and consistency. as regulations have built up since 2009, they have tended to introduce more complexity, and with that comes an inevitable cost in terms of compliance. for example, a study from a few years ago estimated that to comply with basel iii for a midsize european bank would require up to 200 full - time jobs. 6 that is not per se a problem, but one has to look at it in the context of the current environment facing banks. if banks are simultaneously aiming to cut costs to restore profitability, while raising the resources they dedicate to compliance, there could be a consequence elsewhere : for instance, it resources may be diverted away from innovation. that would hinder the process of technological

forward, we should be careful to ensure that new regulations, for instance aimed at separating the banking and trading arms of universal banks, do not have negative consequences for market - making activities that are not justified by significant risks. likewise, we should be mindful about the fallouts of an ill - designed financial transaction law. conclusion let me draw to a close. the euro area banking sector is facing challenges on all sides : from new technologies, from new market players, from new rules of the game. those challenges, insofar as they lead to competition and innovation, are healthy. they are how a well - functioning market economy works. but we must also recognise that, in the euro area, we need sound banks. a weak banking sector means a weak economy. so i entreat banks to respond to the challenges of the new environment and reinvigorate their business models. and i entreat policymakers to create a fair, clear and consistent level playing field where that can happen. thank you for your attention. bis central bankers ’ speeches