Editor's Letter

As Credit went to press, the financial press was abuzz, yet again, with the question of regulation. Timothy Geithner, president of the New York Federal Reserve Bank, is the latest to enter the fray, insisting in a speech to the Economic Club of New York that "globally active" financial institutions must operate within a single framework providing "stronger consolidated supervision, with appropriate requirements for capital and liquidity".

Clearly some kind of regulatory change is required in the light of the turmoil in credit. This is especially evident in the UK given the debacle resulting from the tripartite regulatory system's failure to contain Northern Rock, and Geithner - whose awareness of the need for central banks to act decisively is matched by his concern about moral hazard - is well placed to suggest what forms it might take. Yet reform in the wake of obvious failings, however necessary, will not equip regulators to prevent, or even predict, the next crisis in the financial system.

No-one I've spoken to has ever suggested that regulators can ever be anything other than one step - at least - behind the markets. This is due to the nature of the system: bankers are, often, paid to innovate, while regulators are there to ensure they do so fairly. It's also a question of personnel: for example, many senior market participants believe some enhanced oversight of the rating agencies is desirable, but who would suggest that anyone at a regulator is capable of suggesting even the most basic methodology changes?

Tim Geithner's views are essential, but we need to hear more from the banks and their clients about how they want the rules of engagement to change in the wake of nearly a year of turmoil.

Unless they are more vocal, the initiative will remain with the regulators.

Matthew Attwood.