looking carefully at the economic history, we see two sorts of changes. some legal and economic institutions change slowly enough to allow us to anticipate future outcomes fairly accurately. but from time to time, there are some very rapid or significant legal or institutional changes. such events usually emerge in the aftermath of a deep crisis. this seems to be the case these days. new legal provisions and new institutions are needed to build the banking union or the fiscal union. for more than two decades i have been one of those who promoted democracy and market economy in romania. therefore i have to believe that western civilization will continue to be democratic, applying the rule of law in market economies. with these institutions in place, we can look backwards to draw some lessons on the future of the banking sector. i will do this through the eyes of a central banker. a central banker is always interested in the way the banking system works. if the banking system moves away from being sound and shock - resilient, monetary policy becomes inefficient. when many changes are to be implemented, the risk of making mistakes cannot be ruled out. bis central bankers ’ speeches one way to look at the banking system is to see its history as a succession of financial crises. in a nutshell, from the great depression to this day, the banking system faced two major financial crises : the one in the ` 30s and the current one. in between, there were some more or less mild financial crises. from this perspective, as a central banker, i see two trends. first, some financial crises, whether major or not, have led to in - depth reassessments of the regulation paradigm over time. second, a cross - border approach to regulation policies has been developed gradually. however, it has recently accelerated as a prerequisite for the envisaged banking union. ii. 1. the experience until the ‘ 60s one of the main conclusions reached in the aftermath of the great depression was that competition in the banking sector could jeopardise financial stability. by putting downward pressures on profit margins, competition stimulates banks to take on new risks, thus reducing capital buffers. consequently, for the following four decades, until the late ‘ 60s, many measures were aimed at controlling competition. particularly, limits were imposed on lending and deposit rates, on loans to the private sector, on main monetary variables ( which are nowadays set by credit institutions ). likewise, worldwide restrictions were in place on cross - border

failure of governments and regulators. in my view, free markets work properly given a set of good rules. it is natural for human beings to make free choices. it is the regulators ` duty to design rules that always preserve this freedom while preventing, for as long as possible, the accumulation of problems from asymmetric information, perverse incentive and conflict of interests. the two approaches of regulation – the one up to the ` 60s and the one before the outbreak of the current crisis – are a proper basis for understanding what good rules might mean. iii. the financial system in the aftermath of the crisis the financial industry is supposed to be the lubricant of the economic engine and ensure its smooth and efficient functioning. to grasp the sheer scale of its task, just imagine the billions of savers and investors whose interests have to be matched by the financial system, each of them having a particular behaviour, often driven by emotions. in doing so, financial institutions use specialized resources to assess and manage risks, including complicated mathematical models. just think of the many nobel prizes that were awarded for achievements in this field. the complexity of financial intermediation explains some of the seemingly peculiar features of the financial system as, for instance, the fact that the volume of transactions on the forex market is many times larger than what would be required by the actual exchange of merchandise. bis central bankers ’ speeches the major positive contribution of the financial system is its ability to deal with asymmetric information problems. adverse selection and moral hazard are issues emerging from asymmetric information. they are a cost to society, as they hamper lending. financial system expansion has been the natural solution of the society in order to overcome asymmetric information problems. financial institutions put their capital at risk and derive income from the spread between lending and deposit rates. in doing so, they use specialized resources to assess credit risk and discipline the borrower. the fact that it has failed, triggering heavy costs to the society, leads to deep public anger and resentment. “ while anger and resentment may be useful spurs to action ” – to quote andrew crockett ( 2011 ) yet again – “ they are much less helpful in shaping a balanced response to the crisis that both safeguards society against financial fragility and preserves the contribution that the financial sector makes to high quality sustainable growth ”. indeed, the crisis response so far has perhaps focused too much on preventing future financial crises and neglected the fact that robust economic growth is simply not possible without