improves risk diversification and can make markets more resilient, but when contagion is actually set off, an interlinked financial system heightens the risk that it may spread more widely. but the negative perception of banking and finance should not lead to a blind backlash. as amartya sen argued, “ finance plays an important part in the prosperity and well - being of nations ”. 3 it is crucial for sharing and allocating risk, especially for poorer societies and people, insofar as risk aversion decreases with wealth. it is crucial for transferring resources over time and removing the liquidity constraints that hamper the economy and the exploitation of ideas. it is very important in promoting economic growth, especially by fostering innovation. indeed, we have countless historical examples of good financial innovations. think, for example, of the “ letters of exchange ” introduced by italian merchants in the middle ages : they were probably the first fiduciary money, and trade benefited enormously from this financial instrument. more recently, consider the development of “ micro - finance ” in the 1970s : an innovation that has enhanced financial inclusion, helping poor borrowers to smooth their income and cope with illness or other temporary shocks. and, in the last two decades, recall the role of the “ venture capital ” industry in the promotion of successful innovative corporations such as apple, intel and google. some countries are now increasingly investing in efforts to improve the financial literacy of the public, and this too is important. on the one hand, it helps to build the demand side of a more inclusive finance. on the other, financially literate citizens are better able to understand the efforts of regulators and policy makers to improve supervision and regulation, and less likely to subscribe to the simplistic view that “ finance is evil ”. but we should realise that – as a. sen, ibidem, p. 28. bis central bankers ’ speeches the case of bernard madoff and others in the us and elsewhere clearly show – this is no panacea ( madoff ’ s customers were surely much better educated than average ). therefore, for purposes of consumer protection in the financial services industry, financial regulation and good supervision are the necessary complements to financial education and inclusion. complexity was also used, somewhat perversely, as an argument in favour of a sort of benign neglect on the part of regulators. the big financial players argued successfully that financial innovation was too complex and too opaque for the regulators to get

expansion of international trade after the end of the cold war fuelled a protracted process of financial deregulation that was halted only by the financial crisis that broke out in 2007. the latter triggered a move toward re - regulation – or better regulation – that is still under way. the pendulum keeps swinging and will certainly continue to do so. the global financial crisis, with its huge costs for the whole society, has caused a further deep erosion of the trust in financial institutions. witness to this are the widespread protests against the financial industry, from the occupy wall street movement to the “ indignados ” in spain and their counterparts in other european countries. anger has been fuelled not only by the discovery of wrongdoings and perverse incentives, but also by a perceived lack of action against those responsible, in a context of exceptionally high remunerations. the integrity of financial intermediaries ’ codes of conduct has been called into question under many dimensions : honesty, the ability to manage financial risks and the commitment to take care of the interests of their clients. in the first place, public attention was caught by cases of investment fraud, in which ponzi schemes or other types of malpractice and malfeasance led many people to lose their savings. feelings were exacerbated by the generous severance packages paid to top managers after distressed financial institutions were rescued with taxpayer money. dubious practices were found in key junctures of the financial systems, such as credit ratings and interbank reference rates, not to mention the allegations of financial institutions ’ involvement in activities related to money laundering and other fraudulent practices. most importantly, the crisis has shown that market participants were not capable of mastering the inherent complexity of the system that they themselves had contributed to develop over the course of the last two decades. favoured by the breakthroughs in information technology and telecommunications, the securitization of banks ’ assets expanded considerably, together with the supply of so - called structured financial instruments ( abss, cdos, etc. ). the traditional model of credit intermediation gave way, especially but not only in the united states, to a system in which loans granted were rapidly transformed into other financial products having these loans as collateral and sold on the market : the socalled originate - to - distribute model ( otd ). to the inherent difficulty of evaluating the quality of loans, these developments added the problem of fully understanding the effective role of structured financial products. structured finance products and the