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, regulation and good supervision are the necessary complements to education and inclusion. complexity was 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 innovation was too complex and too opaque for the regulators to get their heads around. indeed, they said, to safeguard the international financial system from systemic risk, the main priority was promoting an “ industry - led ” effort to improve internal risk management and related systems. this, in a nutshell, was the view espoused by the group of thirty report following the outbreak of the asian crisis. 3 but this thesis was often accompanied by the argument to the effect that “ you, regulators and supervisors, will always be behind financial innovation ; it would be better to allow us, the big financial international players, to selfregulate ; we are grown - ups, we can take care of ourselves ”. and, after all, “ if someone makes mistakes some will gain what others lose ; why can ’ t we be left alone to play this zerosum game of ours? ” the regulators did not, in fact, have either the ability, or the right incentives to acquire the necessary information to deal with complexity, for two reasons. first, the big financial players are global, and national regulators had powers too narrow to be able to confront them. the difficulties in coordinating the regulators ’ actions, in the face of a natural tendency to preserve each one ’ s particular sphere of influence, was a powerful drag on the ability to rise to the challenge posed by a finance gone global. second, the phenomenon of regulatory capture was a definite reality. powerful political and economic influences were at play, and in some cases prevailed. accepting the idea that benign neglect was the right course of action was, however, a critical mistake. the global financial crisis has highlighted the limits of the idea that self - regulation and market discipline are sufficient to ensure stable financial systems. regulation and supervision have to keep pace with developments in the industry. national authorities need to be aware of the risk that their powers become narrow compared to the sphere of influence of the global players ; the coordination of supervision across borders and across sectors is a key condition for the stability of

ignazio visco : the aftermath of the crisis – regulation, supervision and the role of central banks lecture by mr ignazio visco, governor of the bank of italy, at harvard kennedy school, cambridge ( usa ), 16 october 2013. * * * previous versions of this text were used for lectures at the imperial college in london and at the accademia dei lincei in rome in march 2013. i wish to thank for useful discussions and help fabrizio balassone, paolo del giovane, alessio de vincenzo and giuseppe grande. introduction the financial crisis has brought to the fore a number of issues. it has been severe and widespread, and has affected many economies in different and long - lasting ways. maintaining financial stability has once again become a major concern of policy makers ; central banks are being heavily involved in this endeavour. a clear need has emerged for a substantial overhaul in financial regulation and supervision, also considering that the financial system of tomorrow will most likely be rather different from the one that has developed over the last two decades. scepticism has grown about the role of finance in the economic system, and especially its apparent separation from, if not conflict with, the real economy. we should take stock of what has gone wrong, and in so doing reflect on the way forward, as it is already taking shape, as well as on how to better link our theories to real world developments. in the decade before the crisis both the size of the financial system and its role and pervasiveness in the economy increased dramatically. the process has only slowed down with the crisis. in the euro area, the overall amount of financial resources collected by the private sector ( bank credit, bonds issued domestically and stock market capitalization ) rose from 140 per cent of gdp in 1996 to 210 in 2007, to further increase to 240 in 2012. broadly similar patterns are found for the united states, where the ratio rose from 230 per cent in 1996 to 360 in 2007 and then declined to 310 in 2012, and for the uk, where the ratio increased from 280 to 440 per cent and then remained stable. the total outstanding notional amount of over - the - counter ( otc ) and exchange - traded derivatives has risen from less than 100 trillion us dollars at the end of 1998 to around 500 trillion at the end of 2006, 700 at the end of 2007 and still 700 trillion in december 2012. financial deepening, by allowing greater diversification of risk and