Without prejudice to the answer, the crisis makes it legitimate to ask whether some separation or segmentation of financial activities between institutions with different legal status and abilities would be justified. While it is grossly exaggerated to argue that the abolition of Glass-Steagall is a cause of the present crisis, a case can be made for regulating activities that a same institution is allowed to engage into, thus limiting the potential interactions and feed back loops it can create or to which it would contribute . •  Finally, complexity can be limited through standardization of financial instruments. Such standardization would bring two benefits in: it would make products more transparent, hence their behavior more predictable and would reduce or eliminate uncertainty created by the loss of information. And, second, it would allow them to be traded and/or cleared in organized exchanges and clearing houses, thus reducing by a considerable scale the size and complexity of the network of bilateral counterparties. Current efforts to set up central counterparties and clearing houses for credit derivatives are clearly a major step in that direction. Obviously, there is a trade off since standardization could create obstacles to financial innovation. But it is also true that contemporary financial innovation, by creating enormous complexity in the financial system, all too often has contributed to conceal the true level of leverage and risk. It may be that, as in other economic activities, innovation in finance will inevitably entail increasing complexity.

To day I would like to reflect on that complexity and its consequences, drawing extensively on a recent illuminating paper by Andrew Haldane from the Bank of England as well as on previous work published by the Federal Reserve Bank of New York. Complexity comes in two forms. First, it appears in financial instruments themselves, as financial innovation has led, in recent years to a proliferation of so called structured – and, indeed, very complex – products. Second, complexity shows up in the structure of the financial systems, which are based on interdependence between multiple actors and counterparties. Transmissions of shocks occur through networks whose structure and architecture is constantly transformed by financial innovation and regulatory arbitrage. This potentially creates numerous feedback loops and amplification effects. Looking more specifically at the last decade, this increase in complexity had four main features and consequences: •  As techniques for managing and allocating risk became more sophisticated, the network of counterparties expanded in scale and in complexity. This was, truly, a systemic change that was properly understood but not fully captured by regulators at the time. Credit and market risk was supposedly more broadly spread. But counterparty risk increased. Overall, the overall impact on financial stability may well have been negative. •  Complexity led to loss of information, a point underlined by Gorton. Through the chain of tranching and distributing the risk, fundamental values and risk profiles of underlying assets became impossible to reconstruct, even for the most informed investors. There may be a deep paradox here.