Some recent research suggests that an excessively large financial sector may even turn from being a driver of additional economic growth to being an impediment to growth.2 Surely, large-scale financial crises are very bad for the long-run accumulation of economic output, even if some crises might have a silver lining in the sense of promoting necessary “creative destruction”.3 It is essential that banks with unsustainable strategies are allowed to fail in an orderly fashion so that viable banks may compete and prosper on a level playing field.
Especially when the financial sector grows rapidly into large proportions, the risk of a serious crisis is heightened.4 [Slide 6 – Shifts in focus of operations as illustrated by shifts in assets structures] Focus on trading-related activities, the rise of new complicated financial products, and increasing reliance on short-term market funding by financial institutions are symptoms of growing risks, as we saw in the years before the crisis.