Overall, complexity may have resulted in more fragility, an evolution already foretold by Minsky who saw structural changes in financial systems over time as an essential cause of their vulnerability Complexity has deep implications for public policy and the future of financial regulation. •  First, about transparency. Improving transparency is the first item on the G20 international agenda, for financial regulation reform. Transparency is normally considered as a prerequisite to the existence of efficient financial markets. More recently, full transparency on aggregate positions and exposures by main financial intermediaries tends to be seen by financial supervisors as necessary to assess potential systemic risk. However, when the system is constantly morphing into new structures, and permanently changing networks, a comprehensive, but static vision may prove inadequate, because it will not eliminate the uncertainty stemming from the potential discontinuities embedded in market dynamics. What is needed, at least,  2  BIS Review 95/2009  is an overall understanding of the complex dynamics at work, which may be better reached through a permanent reexamination of their structure and constantly testing against very adverse circumstances. •  Second, robustness. A natural reaction to financial fragility is to strengthen the ability of financial institutions to withstand shocks by increasing their capital and liquidity requirements. While necessary, it is doubtful whether this "buffer" approach will help when uncertainty settles in. Then, the net demand for both liquidity and capital becomes infinite, because gross demand is unknown and hoarding creates little or no supply.

In most cases, whether we think of the pharmaceutical industry or big utility networks, the risks attached to this complexity have been identified and mastered. This may be more difficult when human behavior is directly involved, as in financial or epidemiological systems, thus adding another, and different layer of complexity. Both the industry and regulators will have to rise up to this formidable intellectual and operational challenge and I am convinced that your conference to day will provide invaluable help in this regard. Thank you. BIS Review 95/2009  3  References Caballero, Krishnamurty "Collective Risk Management in a Flight To Quality Episode" The Journal of Finance VOL. LXIII, NO. 5, October 2008. Caballero, Simsek: Complexity and Financial Panics, NBER Working Paper 14997, May 2009 Federal Reserve Bank of New York "New Directions For Understanding Systemic Risk" Economic Policy Review Volume 13, number 2, November 2007. Gorton: The panic of 2007. Paper presented at the Economic Symposium of the Federal Reserve Bank of Kansas City. Jackson Hole. August 2008. Haldane Andrew: "Rethinking The Financial Network", Speech delivered at the Financial Student Association, Amsterdam, April 2009 (available on the BOE website). Kashyap, Rajan, Stein: "Rethinking Capital Regulation", Paper prepared for Federal Reserve Bank of Kansas City symposium on “Maintaining Stability in a Changing Financial System”, Jackson Hole, Wyoming, August 21-23, 2008. Landau: “Extreme events in finance: some reflexions”, Remarks at the Conference on Extreme Events jointly organised by the Banque de France and Toulouse School of Economics (TSE), September 3, 2008. 4  BIS Review 95/2009