interests. but apart from all that, the ecb will receive information on every “ less significant institution ” ( lsi ) in annual reports produced by national supervisors. this approach upholds the principle of subsidiarity, which i believe to be the sensible and correct approach. for instance, most smaller banks apply regional, relatively low - risk business models which do not necessarily require european supervision. national supervisors will be able to appropriately supervise and classify the special features of these banks in future, too. nonetheless, smaller banks, too, are affected by the ssm. in future, these institutions are also to be supervised under harmonised european standards. in order to ensure such consistent supervision, the ecb can give national supervisors guidance on how to design the supervision of smaller institutions. for instance, it can set supervisory focal points or define principles for the assessment of certain issues. in individual cases, however, the ecb does bis central bankers ’ speeches not have the power to order national supervisors to take specific supervisory actions or to issue specific decisions. the ecb and the national supervisors are currently setting the relevant guidelines and revising the supervisory manual. the challenge here is to strike the right balance between harmonising supervisory practice, which is a desirable objective, and the principles of subsidiarity and proportionality. the harmonisation of supervisory practice in europe must not lead to supervision of materially different issues under the same standards. with regard to a bank ’ s risks, size does indeed matter. of course, small banks are also capable of entering into bad deals, of taking bad decisions and failing. however, if a small bank fails, the implications for the financial system are much less severe than if a bigger bank fails. in addition, they are likely for the most part to remain nationally or even regionally restricted. small banks are not “ too big to fail ” and thus do not have an implicit guarantee by the state that they will be rescued ; they therefore have from the outset less incentive to take particularly high risks. supervisors should address these differences in their requirements. the principle of proportionality needs to be upheld. 3. indirect impacts on smaller institutions however, subsidiarity and proportionality notwithstanding, smaller banks should not complacently assume that the direct impact of the ssm on them will remain contained. it is quite conceivable that the change in the structure of supervision will also have indirect effects across the entire banking landscape. the road is clearly leading towards greater harmonisation

system against shocks. on the other hand, onesize - fits - all treatments of heterogeneous financial institutions in designing prudential regulation, such as capital adequacy regulation and liquidity regulation, entail a risk of deteriorating the robustness of the financial system. if regulatory capital is set at the level above economic capital, pressures on financial institutions from equity holders to earn sufficient profits become all the more intense. as financial history tells, too much as well as too little capital has caused problems. that is, excess capital is likely to induce a pile - up of financial imbalances. if a risk measurement framework is inappropriate, and minimum capital requirements based on such a risk measurement framework are excessively high, that will produce perverse incentives for individual financial institutions, resulting in a trigger for macroeconomic instability. capital and liquidity positions for financial institutions depend crucially on the business model. a business model for financial institutions varies according to countries, or times, institutions. the issue here is the ability of regulatory authorities to assess the business model. given differences in business model, redesigning capital adequacy regulations is an important challenge, along with the conduct of monetary policy. closing remarks in closing, i ask myself what are the determinants of the amount of economy - wide risk - taking after all. there is no simple answer. yet, i believe both micro and macro approaches are needed for preventing a future crisis.