and further evolution is required. in the same way that the financial system as a whole and its component parts continues to change, so the regulatory regime needs to adapt and evolve. however, significant easing should be resisted. ‘ complexity theory ’ may provide a useful metaphor in this regard 10. the essence of complexity theory is that rather than view the system as in equilibrium, it views the economy as a complex adaptive system perpetually constructing itself. and in this context, it is worth asking why have we got to this circumstance, and how the system will continue to reconstruct itself, either by accident or design? if we look back to the ‘ light touch ’ regulation of yesteryear, while there was an extensive rulebook, there was a catastrophic over reliance on banks, their management and the market as whole to act in a certain way that would avoid the build - up of undue risk. as an aside, one could argue about whether banks ’ behaviour was actually rational or not, given the implicit taxpayer support. roll forward 10 years and there is now a very heavy reliance on rules, thousands upon thousands of pages of rules. the construction of today ’ s system has, therefore, clearly been driven by the lessons of these last 10 years. regulation has been successful in improving the safety and soundness of banks, governance and risk management arrangements, and reducing ( but not yet removing ) contingent taxpayer liabilities connected with failure. regulation has also driven greater transparency, disclosure and consistency in product design and literature, and some enhancements in suitability assessments. moreover, these drivers should not be viewed in isolation. for example, the current macrofinancial environment outlined above, masks how certain regulatory changes will really alter firms ’ incentives over the medium term. our ability to fully assess the resilience and effectiveness of basel iii developments such as the liquidity coverage ratio ( lcr ), net stable funding ratio ( nsfr ) and high quality liquid assets 4 / 7 bis central bankers'speeches ( hqla ) for example, or indeed liquidity risk in the non - bank sector, will really only become apparent when there is a normalisation in the monetary environment. 11 culture nonetheless, i would strongly argue that the enhanced regulatory environment has made the banking system safer, particularly from a prudential strength perspective. however, there is a common failure at both ends of this spectrum. neither has delivered an appropriate culture. leading up to the onset of the crisis, the prevailing culture in the banking system

financial stress, given the remaining by markets regarding whether the fiscal adjustment and financial support measures announced in europe will be feasible and large enough. the magnitude and reach of the effects of a scenario in which the weak fiscal and / or financial situation in europe intensifies or spreads to other regions materializes, are highly uncertain, but potentially substantial. stress tests reported in the ief show that current levels of capitalization of the banking industry allow it to absorb the probable consequences of this scenario of increased global financial instability. meanwhile, banks have high levels of liquidity. despite these strengths, banks must pay special attention to the management of their liquidity positions in foreign currencies and take any necessary actions to ensure smooth access to foreign markets. this consideration is especially important due to the fact that the european commercial banks account for a major fraction of chilean banks ’ external financing. in addition, in the risk scenario, other forms of contagion cannot be ruled out, considering the presence of foreign banks in chile. certainly, the deteriorated external financial conditions and the world deceleration that would be created in this risk scenario could have a negative impact on the chilean economy. however, as it did at the end of 2008, the chilean financial system is prepared to adequately deal with this tighter external scenario, and the central bank has the necessary tools to mitigate these effects on the liquidity and proper functioning of local monetary markets. the materialization of some of these risks would have direct consequences for the projected scenarios for national growth and inflation. after considering all the above elements, the board estimates that the risk balance for output and inflation are unbiased. in any case, as it has done before, the board will adopt all measures necessary to address any events reshaping the macroeconomic scenario and inflationary forecasts. let me share with you some final thoughts before i finish. final thoughts in the past few years we have faced several external shocks that have required us to act flexibly, even changing abruptly the direction of monetary policy. for that we have relied on our policy system designed to accommodate to changes in the economy within the framework of a price stability objective. it is enough to recall that in 2007 – 2008 we lived through a period of high and very complex inflationary upsurge. the causes were essentially external, aggravated by an unusual propagation to other domestic prices. then, at the end of 2008 and at the beginning of 2009, we endured a severe economic downturn and disinflation,