But undoubtedly, finance without rules could be the ruin of the economy. To be sure, financial regulation is necessary particularly because financial crises often have considerable economic and social costs, with serious and lasting repercussions. A study by Laeven and Valencia 8 in 2013, which considers 147 banking crises between 1970 and 2011, estimates the median output loss between the peak of activity before the crisis and the three years after at around 23% of GDP, and the median increase in public debt over the same period at 12% of GDP, while total government bailout spending amounts to almost 7 percentage points of GDP. Moreover, beyond the immediate effects, financial crises reduce the economy’s longterm potential: companies cut back on their R&D, capital and infrastructure investment, which results in a decline in productivity and a slowdown in technological progress. The 2007–2009 crisis is unfortunately an illustration of this; it was the worst crisis since that of the 1930s. The financial imbalances generated by the bursting of the subprime bubble in the United States spread rapidly to the global economy. The crisis affected both the level and trend of GDP, leading to a permanent loss in wealth. Cumulative GDP losses compared to the pre-crisis trend are estimated at a quarter of global GDP. 9 In a number of countries, in particular in southern Europe, GDP has still not returned to its pre-crisis level. II.
The new regulations have increased the solidity of the financial sector, without weighing to any notable extent on economic growth The exorbitant costs of the 2007–2009 crisis highlighted the urgent need to reinforce financial stability, and the response was unequivocal. In 2009, at their meetings in London and then Pittsburgh, the G20 leaders rose to the challenge of their historical mission, setting an ambitious agenda for global cooperation. The opening words of the communiqué from the London summit still merit repeating today: “A global crisis requires a global solution […]. We believe that the only sure foundation for sustainable globalisation and rising prosperity for all is an open world 2/7  BIS central bankers' speeches  economy based on market principles, effective regulation and strong global institutions. We have today therefore pledged to do whatever is necessary to: restore confidence, growth and jobs; repair the financial system to restore lending; strengthen financial regulation to rebuild trust." This unprecedented regulatory effort concerned all financial system participants. Four main objectives were set: (i) to make financial institutions more “resilient", that is increase their soundness and their ability to withstand crises; (ii) to put an end to the problem of “too-big-to-fail” institutions – which benefited from an implicit guarantee that they would be bailed out by the government; (iii) to make over-the-counter derivatives markets more secure, notably through central clearing; and (iv) to transform unregulated market activities – shadow banking – into a sound form of market financing.