doubled across the euro area over the past decade. 5 so market - based finance has been growing in europe, a trend that is also mirrored internationally, with potential benefits for the economy as a whole. the need for resilience in markets for those benefits to be realised fully, however, a critical precondition is that markets are resilient in the face of adverse shocks. if market financing is there in good times only, and disappears or gets disrupted when shocks hit, that can adversely affect the rest of the financial system or, increasingly, the broader economy. in fact, in recent years, we have seen incidents – at a global level – where external shocks resulted in a significant disruption in core markets. for example, in march 2020, amid a sudden ‘ dash for cash ’, there was severe disruption in a range of global markets, including short - term funding markets, longer - term corporate debt markets and even sovereign debt markets. 6 and, last year, we saw an abrupt disruption in the gilt market in the uk, with evaporating market liquidity and a sharp spike in gilt yields. this episode had significant and persistent adverse spillovers for other market participants and the broader uk economy. 7 of course, in both of these instances, what triggered the stresses were exogenous events. in the former case, the onset of a global pandemic, which the world had not experienced in about a century. in the latter case, market perceptions of a shift in fiscal policy in the uk. but these exogenous events were amplified by vulnerabilities within the financial system. indeed, a common thread in both of these episodes was a spike in demand for liquidity due to asset sales by non - bank financial intermediaries in light of underlying financial vulnerabilities, including liquidity mismatch and leverage. and, in both of these cases, returning to functioning markets required significant central bank interventions. in essence, what these stresses demonstrated was insufficient resilience in segments of the financial system, or – put differently – insufficient private self - insurance ex ante. and the eventual outcome was a need for public interventions ex post. this is not an optimal outcome from a public policy perspective. central bank interventions are not cost free. depending on their design, they can interact with the monetary policy stance. they can also entail risks to central bank balance sheets. and any market expectations of central bank interventions ex post can distort incentives of

be right, quarterly journal of economics 108 ; king and levine ( 1993 ), finance, entrepreneurship and growth, journal of monetary economics 32 cecchetti and kharoubi ( 2012 ), reassessing the impact of finance on growth, bis working paper 381 bis central bankers ’ speeches heavy output losses. moreover, returns to scale may have accrued to bankers in the form of high compensation rather than to the stakeholders with “ skin in the game ”, i. e. a bank ’ s owners. 4 a too large and a very well paid financial sector may also have deprived other sectors of some of the most productive human resources. 5 what makes the financial sector grow too big? researchers have suggested reasons ranging from banks ’ failure to internalize systemic risks that stem from growth of leverage and ballooning balance sheets to rent - extraction in opaque otc markets. 6 however, the most natural explanation may be the explicit and implicit public guarantees which have led to lower funding costs to the largest institutions which the markets expect to be too - big - to - fail. pursuing such a status in the eyes of the market, and the ensuing cheaper funding, can give a strong incentive to grow. given the size of the largest banks ’ balance sheets, even a relatively small advantage in the funding spread means a big hidden flow of subsidy from the taxpayers to those banks. 7 recent research suggests that the increasing returns to scale in banking, beyond a certain size range, may largely result from the cheaper funding costs of the presumedly too - big - tofail banks. 8 an interesting aspect of the research is also that the social cost of too - big - to - fail banks, due to increased systemic risk, appears to be significantly higher than the benefits from the economies of scale. 9 however, not only the size of the financial sector and that of the banks is important, but also what the sector actually does. in the run - up to the crisis there was a trend among the biggest banks to move their focus towards investment banking, including trading operations. [ page 3 : shifts in focus of operations as illustrated by shifts in assets structures ] part of this trend was driven by the growing demand by corporate customers for risk management services. to a significant extent, however, the growth in investment banking activities was driven by the banks themselves in search for new revenue streams and higher profitability. in many banks the proportion of trading assets in the balance sheet increased substantially as securities and derivatives trading provided a relatively fast and