Finally, addressing impediments to investment, increasing productivity and further improving the business environment remain key for strengthening potential growth. To conclude, my assessment is that significant progress has been made, but that ensuring prosperity on a lasting basis requires continuing the implementation of an ambitious reform agenda going forward. BANKING It is essential to complete the banking union. In this respect, the European summit on 28 and 29 June is very important. The European banking landscape is still characterised by one important feature: a strong exposure of banks to their national economy, including a high exposure to domestic public debt. The completion of the banking union will, over time, lead to a lower exposure to national economies. Regarding the situation of the banking sector, there is still a sizeable legacy of non-performing loans in some banks. An impressive effort has been made to reduce the level, but the situation has not yet been fully rectified. The banks are now much more capitalised. Their liquidity is much stronger. But, on the other hand, we have to be clear: for the large banks, the new regime under the Bank Recovery and Resolution Directive – BRRD, to use its English acronym – has still not been tested in the event of a crisis – luckily. The banks still have a strong national orientation: they have exposures to the public debt of their country and a strong focus on the domestic economy.
It was a risk about which bank management, investors, regulators and supervisors were all myopic. The socalled Fundamental Review of Trading Book Capital Requirements is, as Adair said, a very important opportunity to correct this. 5  See the Bank’s paper: “The role of macroprudential policy: A discussion paper”, November 2009 and Tucker P M W (2009e), “The debate on financial system resilience: Macroprudential instruments” at the Barclays Annual Lecture in London. 6  Tucker P M W (2010), “Shadow Banking, Financing Markets and Financial Stability”, Speech at a BCG Partners Seminar. BIS central bankers’ speeches  3  What that amounts to in practice is recognising that the degree of resilience of market liquidity matters a lot. I have been arguing that a market’s liquidity is unlikely to be resilient if demand is dominantly from leveraged investors and traders. They buy when prices are rising, but stop buying or even sell when the price stops going up, leaving prices without a firm underpinning – and often with prices perched on a precipice. That element of recent events is missing from Shleifer’s set up, but in the real world it is precisely what we might expect if one joins up his story about innovation induced by myopia with Hyun Shin’s earlier paper7 about the association of leverage and asset-prices fluctuations. If securities are fundamentally mispriced because of blindness to a type of risk and, further, are held dominantly by leveraged players, the adjustment when it comes will be all the greater.