Putting things right

The crisis also offers a good opportunity to learn lessons and to put things right. 'One of the unfortunate things is that after each crisis, people say 'we've learned the lessons and won't allow this to happen again' but the problem is that a couple of years go by and people forget the lessons.'

That's why changes must be made immediately, he says. And a crisis allows you to take tough steps that might not be possible in normal times.

'One of the things we need to do is to have international accounting standards. Right now, you have an International Accounting Standards Board in the UK which much of the world follows. But others have their own standards, including the US. So we must make sure we have similar accounting standards because otherwise, it's going to be very difficult to understand balance sheets and have the transparency you need,' he says.

'Second, I think regulators worldwide have to agree on a set of regulatory norms so again you won't have individual countries arbitraging against each other on regulatory norms. We are in a globalised world and we now see there isn't any decoupling because markets are so tied in one with the other.

'One thing that needs to come out of this is to make sure that, as much as possible, there is some sort of an early warning system.'

He also sees a move towards more centralised regulatory regimes. The likely model could be that in the UK, where there is one regulator for all financial institutions, to fulfil the need for a more centralised regulatory process.

'One of the things we have to be very careful about is that we don't have over-regulation. You need what I like to call smart regulation. So there's a happy median here and what you need is smart regulation, not over-regulation.'

For banks and bankers, this will be a sobering time of self-reflection. Banks and financial institutions will have to review their risk management mechanisms, and it is also important for them to seek views from outside the institution.

'You need to go back to basics, and good risk management is one of them. And if you see problems arise, do something about it in a timely fashion and learn from your mistakes.'

This article was first published in The Business Times on November 08, 2008.