7  The figures are based on calculations using data from WFE, IMF, Datastream and Eurostat. 8  Financial Stability Board (2011), “Shadow Banking: Strengthening Oversight and Regulation”, October 2011. 9  See, e.g., Arcand, J.-L., Berkes, E. and Panizza, U. (2011), “Too much finance?”, on www.voxeu.org. BIS central bankers’ speeches  5  This applies in particular to our assessment of the years before the crisis. Beyond merely stating – somewhat bluntly – that “the financial sector had become too big”, I think that we can draw the more specific conclusion: “The financial sector had stepped out of its role of serving the real economy.” Let me explain in more detail what I mean by this. It has long been recognized that the financial sector does not exist in the economy “for its own sake”, but its role is one of servicing the real economy.
Or as Joseph Schumpeter put it in 1934: “He (the banker) stands between those who wish to form new combinations and the possessors of productive means… He is the ephor (the overseer) of the exchange economy.”10 In fact, all the elements that have been identified in the finance and economics literature as the key functions of the financial sector are eventually directed towards the support of the real economy:   providing information about investment projects and allocating capital;    monitoring investments and exerting corporate governance after providing finance;    facilitating trading, diversification and management of risk;    and mobilizing and pooling savings.11  In providing these services, the financial industry plays its role to contribute to sustainable economic growth. I would argue that, during the recent years, the financial sector has lost focus in playing this role. In a period characterized   by search-for-yield with inadequate risk assessment and pricing,    by weak underwriting standards,    by inadequate risk management practices,    by fragile short-term funding of long-term assets,    by a proliferation of opaque financial products,    and by excessive leverage,  the financial sector has become to some extent self-referential. Rather than helping with a proper diversification and management of risk, the financial sector itself created a huge tail risk for the rest of the economy.