WORLD ENERGY INVESTMENT

WORLD ENERGY INVESTMENT 

More than $1 600 billion was invested in 2013 to provide the world’s consumers with energy, a figure that has more than doubled in real terms since 2000; and a further $130 billion to improve energy efficiency. A full picture of global energy investment trends – compiled for the first time in this special report – underlines the growing role played by renewable sources of energy, in which annual investment increased from $60 billion in 2000 to a high point approaching $300 billion in 2011, before falling back since to $250 billion. The largest share of current investment, more than $1 100 billion per year, is related to the extraction and transport of fossil fuels, oil refining and the construction of fossil fuel-fired power plants.
Over the period to 2035, the investment required each year to supply the world’s energy needs rises steadily towards $2 000 billion, while annual spending on energy efficiency increases to $550 billion. This amounts to a cumulative global investment bill of more than $48 trillion, consisting of around $40 trillion in energy supply and the remainder in energy efficiency. The main components of energy supply investment are the $23 trillion in fossil fuel extraction, transport and oil refining; almost $10 trillion in power generation, of which low-carbon technologies – renewables ($6 trillion) and nuclear ($1 trillion)1 – account for almost three-quarters, and a further $7 trillion in transmission and distribution. Nearly two-thirds of this investment takes place in emerging economies, with the focus for investment moving beyond China to other parts of Asia, Africa and Latin America; but ageing infrastructure and climate policies create large requirements also across the OECD.
Less than half of the $40 trillion investment in energy supply goes to meet growth in demand, the larger share is required to offset declining production from existing oil and gas fields and to replace power plants and other assets that reach the end of their productive life. Compensating for output declines absorbs more than 80% of upstream oil and gas spending. Replacing power plants that are retired triggers almost 60% of investment in electricity generation in OECD countries, although a much smaller share in emerging economies. These declines and retirements set a major re-investment challenge for policymakers and the industry, but they also represent a real opportunity to change the nature of the energy system by switching fuels or deploying more efficient technologies.
Of the $8 trillion investment in energy efficiency to 2035, 90% is spent in the transport and buildings sectors, reflecting policy ambitions and remaining efficiency potentials. The European Union, North America and China together account for two-thirds of the total, reflecting the size of their car markets and the vehicle efficiency standards in place or planned; efforts in the European Union and in North America to improve the efficiency of electrical appliances and the buildings stock; and China’s priority to upgrade the efficiency of its industry. In other emerging economies, the lack of targeted policies and access to finance, as well as the persistence in some countries of fossil-fuel subsidies, pose serious obstacles to investments in energy efficiency.
Decisions to commit capital to the energy sector are increasingly shaped by government policy measures and incentives, rather than by signals coming from competitive markets. In many countries, governments have direct influence over energy sector investment, for example, through retained ownership of more than 70% of global oil and gas reserves or control of nearly half of the world’s power generation capacity, via state-owned companies. Some governments, notably in the OECD, stepped back from direct influence when opening energy markets to competition, but many have now stepped back in, typically to promote the deployment of low-carbon sources of electricity. In the oil sector, reliance on countries with more restrictive terms of access to their resources is set to grow, as output from North America plateaus and then falls back from the mid-2020s onwards. In the electricity sector, administrative signals or regulated rates of return have become, by far, the most important drivers for investment: the share of investment in competitive parts of electricity markets has fallen from about one-third of the global total ten years ago to around 10% today. With current market designs, of the $16 trillion required in the power sector to 2035, investment in competitive parts of electricity markets would account for less than $1 trillion.
Private sector participation is essential to meet energy investment needs in full, but mobilising private investors and capital will require a concerted effort to reduce political and regulatory uncertainties. Even where states and state-owned companies take direct responsibility for energy investment, pressures on public funds and the need for new technology and expertise create room for greater private involvement. Yet conditions are often not conducive: the requirement for energy supply investment grows most quickly outside the OECD and outside China, in some cases in countries that have a higher incidence of political instability, weaker institutions and less robust legal frameworks. Throughout the world, policymakers, though they may recognise investors’ need for long-term policy consistency, are subject to various and sometimes conflicting pressures: demands for stronger action on climate change, but a backlash against the cost of subsidies to renewables; calls for lower energy prices, but public opposition of varying intensities to many new energy-supply projects. Against this backdrop, there is a risk that policymakers fail to provide clear and consistent signals to investors, with particular impacts on low-carbon technologies that depend, for the moment, on policy support.
New types of investors in the energy sector are emerging, but the supply of long-term finance on suitable terms is still far from guaranteed. Much of the dynamism in energy markets is coming from smaller market players or new entrants: the expansion of shale gas and tight oil production in North America has been driven by multiple, entrepreneurial companies; emerging state and private companies are taking an increasing share of investment in many non-OECD countries; and the expansion of distributed renewable energy capacities and of energy efficiency initiatives is turning more small businesses and households into energy investors. These players tend to share a reliance on external sources of financing. Even for efficiency projects, which we estimate are almost 60% self-financed today, the required scaling up of efforts is likely to depend on greater recourse to debt or equity. Outside North America (where external financing is more readily available), there is a need to unlock new sources of finance, via growth of bond, securitisation and equity markets and, potentially, by tapping into the large funds held by institutional investors, such as pension funds and insurers. This would help to diminish undue reliance on the relatively short maturity of loans available from the banking sector, which may themselves be further constrained by new capital adequacy requirements in the wake of the financial crisis.
Investment in natural gas supply rises almost everywhere, but meeting long-term
growth in oil demand becomes steadily more reliant on investment in the Middle East.
Upstream oil and gas spending rises by a quarter to more than $850 billion per year by
2035, with gas accounting for most of the increase. North America has been at the centre
of the surge in global investment in recent years and this remains the region with the
largest overall oil and gas investment requirement to 2035. But, in the case of oil, the focus
for meeting incremental demand shifts towards the main conventional resource-holders
in the Middle East as the rise in non-OPEC supply starts to run out of steam in the 2020s.
The prospects for a timely increase in oil investment in the Middle East are uncertain:
there are competing government priorities for spending, as well as political, security and
logistical hurdles that could constrain production. If investment fails to pick up in time – a
case considered in this report – the resulting shortfall in supply would create tighter and
more volatile oil markets, with prices that are $15 per barrel higher on average in 2025.
Importers of fossil fuels rely for secure supply on the adequacy of investment in resourcerich
countries; the investment needed to supply India and China with imported oil and gas
over the period to 2035 is more than $2 trillion, a level that helps to explain the push by
their national oil companies to secure investment opportunities abroad.
Investment in liquefied natural gas (LNG) facilities creates new links between markets
and improves the security of gas supply; but high costs of gas transportation may dampen
the hopes of LNG buyers in Europe and Asia for much cheaper gas supplies. More than
$700 billion invested in LNG over the period to 2035 accelerates the integration of regional
gas markets, with exports from the United States playing a prominent role in stimulating
some convergence between gas prices, which vary widely today. However, the expectation
that a surge in new LNG supplies will totally transform gas markets needs to be tempered
by recognition of the high capital cost of LNG infrastructure, with transportation typically
accounting for at least half of the cost of gas delivered over long distances. Europe’s nearterm
perspective for expanding LNG purchases is constrained by the need to outbid Asian
consumers for available gas.
The investment required to maintain the reliability of Europe’s electricity system is
unlikely to materialise with the current design of power markets. Europe requires more
than $2 trillion in power sector investment to 2035 and, alongside vigorous continued
expansion in low-carbon generation, around 100 GW of new thermal capacity needs to
be added already in the decade to 2025. Despite public and political concern about high
prices to end-users, the wholesale price for electricity is too low at present, by more
than 20%, to incentivise the investment required in new thermal plants. If this situation
persists, the reliability of European electricity supply will be put at risk. Part of the solution
involves higher revenues to thermal generators, but this potentially means higher prices to
consumers, underlining the difficulties facing European policymakers as they seek to make
simultaneous progress towards ensuring energy security, environment sustainability and
economic competitiveness. Nonetheless, there is scope for a policy framework to combine a continued commitment to decarbonisation with lower import bills, while containing the impact on end-user prices.
For many emerging economies, keeping up with booming electricity demand is a huge investment challenge, and current investment trends provide some warning signs for the adequacy of power supply. We focus on India, where – despite achieving a doubling of power generation capacity since 2000 – current electricity output falls short of meeting demand. The incentives to invest in filling this gap are dimmed by high transmission and distribution losses and low end-user tariffs, which mean that many utilities are struggling to recover their costs. If network losses were 15%, rather than today’s 27%, an increase of only 5% in average end-user tariffs would have allowed for full cost recovery. More than $1.5 trillion is required in power sector investment to 2035. New coal-fired power plants are projected to dominate future investment in generation capacity in India, as in many other parts of Asia: this is the main driver for the $1 trillion in global coal-supply investment over the period to 2035.
The investment path that we trace in this report falls well short of reaching climate stabilisation goals, as today’s policies and market signals are not strong enough to switch investment to low-carbon sources and energy efficiency at the necessary scale and speed: a breakthrough at the Paris UN climate conference in 2015 is vital to open up a different investment landscape. We estimate that $53 trillion in cumulative investment in energy supply and in energy efficiency is required over the period to 2035 in order to get the world onto a 2 °C emissions path. Investment of $14 trillion in efficiency helps to lower energy consumption by almost 15% in 2035, compared with our main scenario. The $39.4 trillion of energy supply investment remains at a comparable level to our main scenario, but unit investment costs are higher as investment shifts away from fossil fuels (where investment is almost 20% lower on average and coal is hit hardest) and towards the power sector. Around $300 billion in fossil fuel investments is left stranded by stronger climate policies. A lack of clarity over policy would increase the risk of investments becoming stranded, although carbon capture and storage provides an increasingly important hedge for fossil-fuel assets against the possibility of under-utilisation or early retirement.
Consistent and credible policies and innovative financing vehicles can provide the bridge to a low-carbon energy system. By 2035, investment in low-carbon energy supply rises to almost $900 billion and spending on energy efficiency exceeds $1 trillion, double the respective amounts seen in 2035 in our main scenario. Dependable policy signals are essential to ensure that these investments offer a sufficiently attractive risk-adjusted return. Getting prices right is essential, both by phasing out existing distortions, in the form of fossil-fuel subsidies, and through carbon pricing. On the financing side, there is still much work to do to marry the available instruments with the specificities of low-carbon energy projects, notably their dispersed, diverse and small-scale nature. It will take time, realism and determination to harness the skills of the financial world to the ambition to reach climate change targets.

How Europe's low inflation impedes fiscal and structural reform

ECB, heal thyself

Sep 8th 2014, 16:22 by G.I. | WASHINGTON, D.C.

Europe does not yet have its equivalent of Japan's Abenomics, but Mario Draghi, president of the European Central Bank, pretty much advocated it in his press conference last week. Europe, he said, needs fiscal, monetary and structural policy working together, the three arrows of Abenomics. He acknowledged the ECB's duty of getting inflation, now 0.3%, back up to its target of near 2%. But the ECB, he said, can't rescue Europe alone: it needs help from fiscal and structural reforms.
Of course, he's right that monetary policy can't initiate fiscal consolidation or liberalize product and labour markets, and that both those things are essential to Europe's long term health. But the ECB can help determine whether either of those things succeeds. For Europe's fiscal and regulatory policy makers to do their jobs, it will help immensely if the ECB does its own.
Let's start with fiscal consolidation. Mr Draghi's predecessor, Jean-Claude Trichet, used to extoll the stimulative benefits of fiscal consolidation; the confidence of investors and business would soar when they saw government finances put on a stable path. But in practice, fiscal consolidation was equated with austerity: near term cuts to spending or increases in taxes that pummeled demand at a time when the ECB, with interest rates close to zero, couldn't compensate. The result was to add to the disinflationary pressure on the region, making it harder for the ECB to do its job (as Mr Draghi now points out).
But the reverse is also true: low inflation makes fiscal consolidation harder. It automatically reduces the growth in nominal GDP and all else equal, raises the debt to GDP ratio. Debt dynamics would be left unchanged if nominal interest rates fall by the same magnitude as inflation. But that won't happen if interest rates are jammed against the zero nominal bound as they are in the euro zone, and pretty much the entire rich world. In that situation, falling inflation or deflation leads to rising real interest rates in the periphery, and makes it ever harder to reduce debt ratios . Indeed, if falling inflation causes investors to question the sustainability of the debt, it could lead to higher, not lower, nominal interest rates. In 2012 the International Monetary Fund examined six case studies over the last century of fiscal consolidation efforts when debt topped 100% of GDP. It concluded that a crucial element of successful consolidation was easy monetary policy. Lower real interest rates made it much easier to lower debt to GDP ratios. The most poignant example of the opposite was Britain in the 1920s which implemented both fiscal and monetary austerity in an effort to return sterling to its pre-war gold parity. The result was that nominal reductions in debt were frustrated by falling prices and high real interest rates. Britain ended the period with debt to GDP much higher than it started. The lesson for Europe is that if the ECB could get inflation back to 2%, fiscal consolidation would be easier.
Mr Draghi has tacked away from Mr Trichet's embrace of austerity. "It would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy," he said in Jackson Hole.  "The existing flexibility within the rules could be used to better address the weak recovery and to make room for the cost of needed structural reforms." He is not calling for the abandonment of debt stabilization; only that it be done in way that spares near-term demand.
But Mr Draghi has replaced Mr Trichet's preoccupation with austerity with an obsession of his own over structural reform. He said after last week's meeting of the governing council: "There is no fiscal or monetary stimulus that will produce any effect without ambitious and important and strong structural reforms." Yet, as with fiscal consolidation, the ECB needs to recognize its own role: getting inflation back to target would make structural reform much easier.
Structural reform is a catch-all phrase for a wide variety of policies, from reducing judicial backlogs to increased competition for professional services. But where it matters most is labour markets. High nominal wages and poor productivity caused peripheral countries to lose competitiveness vis a vis Germany during the 2000s, leading to large current account deficits. Restoring competitiveness requires reducing wages relative to Germany. But in most of peripheral Europe, wages are difficult to cut and permanent workers difficult to fire. This is due both to institutions such as collective bargaining and to the fact that nominal wages are downward sticky. Even in flexible labour markets like America's, workers resist nominal wage cuts and firms are reluctant to impose them. Positive inflation makes it possible for firms to reduce real wages by simply holding nominal wages constant. In the absence of real wage declines, the alternative is fire workers instead, which of course raises unemployment and squeezes demand. Mr Draghi has contrasted the experience of Ireland, where real wages fell, with Spain, where they rose, in the wake of their respective debt busts. This, he explains, is why unemployment rose less in Ireland.
So peripheral countries face a dilemma: they need lower real wages to regain competitiveness, but lower wages reduce nominal GDP which makes fiscal consolidation harder. That's why getting inflation higher throughout the euro zone is critical. If the region's inflation rate were to return to 2%, or even a bit higher, it would imply prices and wages running well ahead of 2% in Germany, and behind it in the periphery, making real wage adjustment far easier, but without outright deflation or job cuts, which undermine nominal output and thus fiscal consolidation. Zsolt Darvas of Bruegel, a think tank, calculated a year ago that if Italy and Spain must reduce inflation by 1 percentage point because euro-area inflation has undershot the ECB's 2% target, their primary surpluses must be higher, by 1.3% and 1% of GDP, respectively, to achieve the same fiscal consolidation.
Of course, even if the ECB were to undertake quantitative easing by buying government bonds to get inflation back to target, that is no guarantee that governments would do their part by implementing long-run fiscal consolidation or structural reforms. That is why many in Germany would like any QE to be contingent on France and Italy committing to reforms. Without that quid pro quo, the ECB simply takes the pressure off recalcitrant governments to act, much as they frittered away the time bought with Mr Draghi's pledge to "do whatever it takes" to save the euro.
Despite the appeal of that logic, it's the wrong course to take. Structural reforms will never be politically popular. For governments nonetheless that wish to pursue them, as Italy and France claim to, higher inflation and thus higher nominal growth will lessen the pain, and thus the political price, making it likelier the reforms can pass, and will stick. And when governments won't do their job? That's unfortunate, but it can't be a reason for the ECB to fail at its own.

 

On the optimal size of the financial sector

Speech by Benoît Cœuré, Member of the Executive Board of the ECB,at the ECB Conference “The optimal size of the financial sector”
Frankfurt, 2 September 2014

Ladies and gentlemen ,
Thank you very much for giving me the opportunity to speak here today.
The recent global financial crisis has made us rethink the contribution of the financial sector to the real economy. Today, I will talk about how our understanding of the finance and growth nexus has changed over the past years, and how policy-makers in Europe ‒ in particular, here at the European Central Bank (ECB) ‒ have used this knowledge.

Introduction

In the years prior to the financial crisis, the empirical literature on finance and growth accumulated a substantial body of evidence suggesting that financial sector deepening is a key component of the economic development process. This appeared to be true, both in respect of emerging markets and industrialised economies.  Encouraged by such evidence, policy-makers did not question the ability of the financial sector to innovate and channel funds to their most socially productive uses. In the words of the Federal Reserve’s then Chairman Alan Greenspan: “[…] our financial system, whose job it is to ensure the productive use of physical capital, has been such a crucial part of our overall economy, especially over the past two decades. It is the signals reflected in financial asset prices, interest rates, and risk spreads that have altered the structure of our output in recent decades towards a different view of what consumers judge as value.”
Yet, economies with large, dynamic, and complex financial sectors are not immune to severe macroeconomic contractions. In fact, the banking crises literature provided some evidence on a causal link between rapid credit growth and systemic banking distress long before the emergence of the global financial crisis . Furthermore, the output costs of severe banking crises have been found to be of a large magnitude. 
Are these two observations contradictory? Not necessarily ‒ both are related to well-understood economic mechanisms. On the one hand, mature financial industries ensure the efficient allocation of productive resources, supporting long-term growth. On the other hand, excessive leverage can throw the financial system into a crisis resulting in deep and abrupt economic downturns. 
The crisis has made us understand that the size of the financial sector can exacerbate the trade-off between economic efficiency and financial stability. While finance per se is necessary for growth, an oversized financial industry can be detrimental to real economic activity. Of course, the question of what constitutes an “oversized” financial sector is a complex one, and the collection of papers on the programme of this conference makes great progress towards providing an answer.
Recent changes to the global regulatory architecture, particularly regarding the banking union in Europe, are in part aimed at mitigating the negative effects that a large and complex modern financial industry can have. These changes should be implemented in a way that avoids eliminating the positive impact of financial services on growth and tackling financial complexity with overly complicated and excessive regulatory interventions. In addition, policy-makers should be increasingly aware of the importance of overcoming fragmentation in European capital markets and of achieving a single market for capital.

Identifying the problem

As regards the link between finance and growth, for a long time, it was common to say that finance affects growth in a positive, monotonic way, as if more is always better. Recent empirical evidence, however, has qualified this conventional wisdom. The analysis has now been refined to show that, beyond a threshold size, the effect of finance on long-term economic growth can weaken and even become negative.
Why is the effect of finance on growth non-linear? Recent academic research puts forward at least five possible explanations.
First, the financial sector has gradually extended its scope beyond the traditional activity of intermediation towards so-called “non-intermediation” financial activities, such as trading. The evidence strongly suggests that banking strategies which are heavily geared towards generating non-interest income are riskier. This change in focus is naturally associated with a higher potential for systemic crisis. Moreover, as a result, it has become increasingly more difficult to come up with empirical measures of financial services that are consistent with what modern-day finance actually does. This is especially true for high-income economies whose financial sectors are particularly sophisticated.
Second, the financial system can grow too large relative to the real economy because it can extract excessively high informational rents and pay excessively high wages. For example, while in the wake of World War II the financial sector accounted for less than 2.5% of total labour income, in 2006, this share was 8.3%. As a result, too much young talent can be reallocated towards the financial industry. To put it more bluntly: the world before the crisis was one where there were too many bankers and too few engineers. This particular type of “brain drain” can harm the overall productivity of the real economy. It can be highly inefficient if the social returns to financial services are lower than their private returns, which is probably the case when the financial sector is very large to begin with.
Third, an expansion in the financial sector can signal a misallocation of credit to less productive economic activities. Textbook models of financial intermediation usually assume the mobilisation of savings for entrepreneurial credit. However, much of the spike in financial intermediation before the crisis was associated with household credit, and mostly with mortgage credit. In fact, in a number of countries (e.g. Canada, Denmark and the Netherlands), loans to households accounted for more than 80% of overall bank lending. In most cases, an additional euro of mortgage lending contributes less to overall economic growth than an additional euro of credit to a young innovative company.
Fourth, an oversized financial sector can reflect increased risk-taking. For example, it has been argued that increased bank competition can erode individual banks’ franchise values. This, in turn, can encourage banks to engage in imprudent behaviour. Competitive behaviour can increase the resilience of the system, while a competitive market structure can weaken it.  A similar logic applies to an environment where liquidity is abundant. This can result from a very accommodative monetary policy (as outlined in the “risk-taking” view of monetary policy transmission  from a leveraged financial system with high inside money creation , or from a combination of both. Such an environment exacerbates moral hazard problems in the banking sector, increasing banks’ appetite for risk. Meanwhile, increased risk-taking makes both individual banks and the banking sector as a whole more fragile, increasing the probability of a systemic meltdown and thereby harming long-term growth.
Last but not least, there is a link between the size of the financial sector and its complexity. It is likely that the complexity and interconnectedness of financial institutions increases (presumably in a non-linear way) with the size of the overall financial system, making it more difficult for regulators to understand what is going on within its bounds. Policy-makers have allowed the financial system to balloon without availing themselves of the instruments to understand its complexity and monitor the propagations of shocks . We cannot afford to be caught off guard again, simply guessing where the real problems may lie.

The policy response

Now that we have identified the problem, what is the solution? In the wake of the financial crisis, the global regulatory architecture has evolved to meet the challenge posed by the financial sector’s potential to generate economic distress. For one, we have proceeded towards a more integrated governance of the banking sector in Europe. The first components of a genuine banking union – the Single Supervisory Mechanism and the Single Resolution Mechanism – are already being implemented. By aiming to make the banking activities conducted in Europe safer, the banking union implicitly touches on some of the aspects of “oversized finance” in general, and “overbanking” in particular.
We need to be mindful of the fact that the macro problem (the financial sector being “too big”) and the micro problem (individual financial institutions being “too big”) are not necessarily identical. Even if the financial sector is small relative to the real economy, it may be comprised of banks whose incentives are misaligned due to “too big to fail” considerations. This can lead to excessive risk-taking and inefficient credit growth and has inspired recent changes to regulation and prudential policy. For example, Basel III includes a revised leverage ratio framework that has the goal of preventing banks from operating with excessive leverage. This should reduce the discrepancy between social and private returns in banking and limit the rents extracted by the financial sector. A similar role is envisaged for recent rules on liquidity coverage. The size of individual banks is also a relevant consideration (albeit not the primary one) when it comes to measuring their importance in terms of systemic risk and determining their contribution to the Single Resolution Fund. Finally, some recent suggestions for regulatory reform propose separating activities that are currently implemented by commercial banks under “one roof”, limiting the size of individual banks and at the same time increasing the relative importance of traditional financial intermediation activities.
Timely data reporting is another critical issue because policy-makers need to know in real time what is going on inside the system. The Financial Stability Board’s work on data harmonisation and on filling data gaps is critical in this respect.
Finally, Europe needs to move towards the re-creation of a genuine single market for capital. By this, I do not mean the convergence of prices for euro-denominated financial assets. The crisis provided a painful reminder of the limitations of such measures of financial integration. What I have in mind instead is “genuine” integration, whereby financial resources are allocated with reference to the risk-return relationship and not to location ‒ a process which would improve economic diversification in that it would cushion both entrepreneurs and households against local shocks ^. This should naturally reduce the negative impact of an overextended financial sector by decreasing the probability of inefficient booms and severe busts.
How can a single market for capital be realised? In addition to the better integration of governance that I have just talked about, the process rests on the improved integration of retail banking and capital markets. As regards retail banking, even before the crisis, we at the ECB acknowledged that this is one of the least integrated markets in the euro area . The crisis undermined the process of integration by prompting a further retrenching of retail banking services within national borders. The new regulatory and supervisory framework has the potential to steer us towards deeper cross-border integration, and, in the process, to address Europe’s over-reliance on large banks. Evidence before the crisis suggested that the integration of retail lending markets may be a more efficient mechanism for cross-border risk-sharing than secured or unsecured interbank markets. It is important that the banking union and the regulation against the “too big to fail” problem effectively encourage banks to reach an optimal size relative to the European market – that is, large enough to operate across borders and diversify risks, but small enough to be resolved with the resources of the Single Resolution Fund. This would be Europe's best contribution in terms of improving the trade-off between financial stability and economic efficiency.
Regarding capital market integration, things can only improve in the future, given Europe’s high reliance on bank funding. It is likely that the ongoing deleveraging of the global banking sector will stimulate the development of non-bank financial intermediation in Europe. As a sign of things to come, the decline in bank credit is already to some extent compensated for by an increased issuance of corporate bonds. And the recent initiatives to create an active market for high-quality securitisation  will help further in this direction.

Conclusion

Let me conclude.
The global financial crisis was, to a large extent, driven by an oversized and overleveraged financial sector whose risk-creating capacity was left unchecked by regulators and supervisors. We believe that we have learned our lesson and the recent flurry of policy initiatives reflect, in large measure, our new understanding of the destabilizing role of an oversized financial sector.
The academic literature, as well as our own experience in the crisis, has proven that the size of the financial sector can exacerbate the trade-off between economic efficiency and financial stability. I hope that the regulatory reforms that are now being enacted and the recent changes in the European supervisory architecture, combined with the renewed push for a single market for capital in Europe, will go some way in addressing this trade-off.
Thank you very much for your kind attention.