Consequently, I am afraid that my paper about improvements of the mechanisms of the financial and banking markets might turn out rather boring and conservative as I will only talk about some improvements, not about radical changes. But as we, bankers, have to put up with the stress test, I ask of you to be resilient during my presentation. The second reason is because peering into the future is based on our capacity to assess risks. We do this by using our inbred capacity to weigh probabilities, which is, in our modern times, supported by mathematical models. Nevertheless, our capacity to assess what lies ahead is impaired when facing uncertainty, as it was the case since the outbreak of the current crisis. However, we are fortunate. As Alan Greenspan noted, “there is a degree of historical continuity in the way democratic societies and market economies function.” This means that there is a “persistent stability” that can be used for inferring what the future might look like. All we have to do is learning the lessons of the past. II. Historical overview  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.
Confronted with against-efficiency regulations, financial markets started to seek ways out. This is a lesson we should keep in mind. II.2. The ‘70s and beyond  These ways out primarily took the form of the emergence of competitors to the US dollar as a settlement currency, the collapse of the Bretton Woods system and the establishment of international syndicate banks which began in 1964. Under the pressure of market forces, starting in the `80s, financial sector deregulation gained ground by loosening up legal and administrative restrictions. Almost all restrictions imposed up to the ‘60s were removed. A new era dawned, with markets enjoying more freedom. One important result worth mentioning is that lending was no longer constrained by the volume of deposits or holdings of liquid assets. Banks could borrow on the interbank market at any time. Under the new circumstances, capital became the only factor containing the size of banks’ books (Goodhart, 2010). Setting appropriate requirements for bank capital was challenging to regulators and it remained so. On the one hand, a strong capital base is associated with the soundness of a bank. On the other hand, that comes at a price in terms of profitability. Capital adequacy requirements were unified under the Basel I Accord, which set them at 8% and established risk coefficients. But they were quickly watered down by the Basel II Accord, which allowed banks to assess their own risks, through sophisticated models. 2  BIS central bankers’ speeches  Starting with the ‘80s, credit expansion was relatively rapid.