, ” federal reserve bank of dallas, staff papers, no. 20 ( july ), www. dallasfed. org / assets / documents / research / staff / staff1301. pdf. for an alternative view that finds lower effects of moderate crises, but that excludes the recent crisis, see christina d. romer and david h. romer ( 2015 ), “ new evidence on the impact of financial crises in advanced countries, ” nber working papers, no. 21021 ( cambridge, mass. : national bureau of economic research, march ), www. nber. org / papers / w21021. pdf. for estimates that predate the recent crisis, see stephen g. cecchetti, marion kohler, and christian upper ( 2009 ), “ financial crises and economic activity, ” in financial stability and macroeconomic policy ( kansas city : federal reserve bank of kansas city ), pp. 89 - 135. estimates of potential output are significantly below levels expected prior to the great recession. this may be due to the declines in investment, business dynamism, and labor force attachment brought about by the shortfall in aggregate demand through hysteresis effects. 4 as evidenced by a continuing stream of scholarship, many factors contributed to the unsustainability and fragility of the pre - crisis financial system. but the inadequacy of regulation and supervision was clearly among them. large banking firms had insufficient levels of highquality capital ; excessive amounts of short - term, wholesale funding ; too few high - quality, liquid assets ; and inadequate risk measurement and management systems. systemically important nonbank financial firms whose failure could threaten the stability of the financial system were effectively outside the regulatory perimeter. governments did not have resolution regimes that could provide for an orderly resolution of a systemically important financial firm. shadow banking - - which was funding long - term assets with short - term wholesale liabilities - - exposed the financial system to a systemwide liquidity run. although we all lived through the fall of 2008, let me dwell for a moment on that frightening period. six months had passed since the demise of bear stearns in march. over that summer, it may have appeared as though the fallout from this episode had been contained. but by the fall, it became clear that other large, non - prudentially regulated financial firms threatened financial stability. american international group ( aig ) received direct government support. two large freestanding investment banks

and that the share of cash transactions has been declining. as mentioned before, households have so far been shielded from negative rates. negative interest rates on deposit are, however, in wide - spread use for corporates and investment and pension funds. the increased spread between household deposit rates and other sectors might be due to sectoral differences in alternatives to deposits. for households, the alternative to deposits might be cash with a zero interest rate, but incurring the inconveniences of cash. on the other hand, for large corporates, investment and pension funds the alternative might be placement on money market - like terms. banks are continuously adjusting their business models. declining margins have – on average – lowered banks net interest income. interest income now constitutes less than half of their total income. banks are compensating for the falling net interest income by expanding new business areas such as wealth management and adjusting their fees. page 6 of 8 thus, to the worried banker, i can say that the fear of falling income in a world with negative interest rates have not materialized in denmark. but he needs to keep his eyes on the road and continuously make the needed adjustments. as described in the previous slides, the danish economy is in good condition and holds the highest possible credit rating with all major rating agencies. one reason is the low level of debt. central - government debt is currently 23 per cent of gdp, and the emu debt is among the lowest in europe. as you may know, issuance of central government debt is conducted by danmarks nationalbank on behalf of the danish government. the agreed framework includes two very central funding rules that support the separation of fiscal and monetary policy : the domestic and the foreign funding rule. under the domestic funding rule, the central government borrows in kroner to cover its current budget deficit and redemptions on the domestic debt. the krone - denominated bonds and bills are held by a broad investor base – including both danish and non - resident investors. the danish insurance and pension sector is the biggest investor segment with holdings of around 50 per cent of the bonds, while non - resident investors hold approximately 40 per cent. some of them are us dollar - based investors like you. foreign funding, on the other hand, is only used to maintain an adequate foreign - exchange reserve. this means that, as a general rule, the central government raises loans in foreign currency if it is deemed appropriate to support the foreign - exchange reserve. this has not