financial system more stable without cutting into sustainable growth. but the constant evolution of the financial system and the emergence of new instruments and players also imply that the regulatory framework will never be finalised once and for all. 4. unresolved questions prudent regulation and supervision crucially depend on a sound understanding of the financial system. research efforts of institutions around the globe, including central banks which also have a keen interest in these issues, have been remarkable. however, a deeper understanding is still required of those trends in financial markets that led to financial instability – and monetary policy measures that sometimes took central banks to the limits of their mandate. i do not want to offer a research agenda, but let me pick out some areas that are particularly interesting for central banks : securitisation, for example, is not a new technique, but it has experienced an enormous upswing in recent decades. it is intended to disperse credit risk to those who are better able to assume such risks and absorb the corresponding losses, and as such it increases welfare. we know by now that securitisation can also increase risk - taking and thus the fragility of the financial system as a whole. some elements of regulatory reform already address this problem. but the question remains whether we have done enough to reduce the drawbacks without sacrificing the benefits. another important reason for financial instability with potentially serious macroeconomic costs continues to be overextension in balance sheets in boom periods, which is often an indication of excessive risk - taking. we have learned that this can be masked by a vigorous economy. it is therefore vital that we extend our knowledge of how to make disguised risks more transparent. turning from the prevention of exaggerations to more direct countermeasures, we still do not know enough about the desirability of different forms of policy interventions. the search for the optimal mix of measures of ex - post and ex - ante interventions is still ongoing. further work needs to be done in order to establish whether macro - prudential regulation can solve the time consistency problems associated with ex - post interventions. this is a particularly relevant issue for central banks. since the crisis began, functions have been added, especially in the field of macro - prudential policy. as you are well aware, the bundesbank, too, stands ready and looks forward to assuming more responsibilities in this field. the challenge will then be to integrate these new tasks seamlessly with the functions central banks already perform.

economy. the second – and quite popular – explanation argues that the increase in financial activity has merely been an exaggeration, as a consequence of which the financial system has, to a certain degree, uncoupled itself from the real economy and turned to unproductive activities. each line of argument obviously has important policy implications – for the scope and intensity of regulation and supervision, but also for other policy areas, including central banks. drawing the right lessons from the crisis requires first of all a clear understanding of the role the financial system plays for the real economy. in my short remarks i will therefore take a bis central bankers ’ speeches somewhat more general approach that goes beyond monetary policy issues. i will argue that, firstly, a highly developed and innovative financial system is indispensable for economic growth, but that there is also an inherent risk of exaggerations. secondly, regulatory efforts therefore have to strike a delicate balance between constraining such exaggerations without stifling innovation and thereby hampering economic growth. and finally, given that the crisis has laid bare serious gaps in our understanding of the financial system, i will conclude by outlining some fields of research that, at least from a central bank ’ s viewpoint, are of particular interest. 2. the role of the financial system the fundamental role of the financial system is to act as intermediary between borrowers and lenders. services such as the transformation of maturity, denomination and liquidity allow for efficient capital allocation, thereby promoting innovation and growth. furthermore, the financial system solves adverse selection and moral hazard problems between lenders and borrowers. this is of crucial importance for financing innovations and therefore for tfp - intensive growth which we depend on in aging highly developed economies. throughout history, this role of the financial system has never been static, but has become more and more complex in step with economic progress. in the process, the contemporary structure of the financial system has gradually evolved over the centuries. banks perform the tasks associated with money and credit, the bond market provides financing for governments and large corporations, the stock market provides equity financing of joint stock companies, venture capital the funding of nascent businesses – and a myriad of financial instruments allow us to trade and redistribute all kinds of risks. and it is a well - known fact that this process has, through history, been accompanied by the build - up and bursting of bubbles – usually at large, sometimes very large costs. prominent examples include