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The AIG bonus episode has sparked off populist anger in the US against bankers who rewarded themselves with millions even as they were bailed out by taxpayers. Recent attacks on financiers have a nasty edge: Brazilian President Luiz Inacio Lula da Silva said last week that “white, blue-eyed bankers have brought the world economy to its knees", a statement that brings back memories of Malaysian strongman Mahathir Mohamad’s attack on “Jewish financiers" during the Asian crisis of 1997.

Illustration: Jayachandran / Mint

That’s why two developments in the two main hubs of modern finance—London and New York—need attention. They give us some idea of what could happen in the months ahead in the area of financial sector regulation.

It’s an issue that also matters in India, which has in recent years seen heated (and at times nasty) debates on how the domestic financial sector should be regulated, be it the introduction of new financial tools such as derivatives, the regulation of hedge fund activity in the stock market or the degree of freedom that banks need to be given.

In London, Adair Turner, head of the British Financial Services Authority, has submitted a report to his Prime Minister, Gordon Brown. The Turner report recommends a new road to financial regulation, from bank capital and liquidity regulations to a closer watch on the so-called shadow banking system.

In New York, treasury secretary Timothy Geithner announced in a speech that “the days of light-touch regulation" were over. Stung by the current financial crisis, Geithner has suggested six measures to limit systemic risk. None of them would have been acceptable to the financial crowd till recently.

We do not wish to go into the details of the Turner report or Geithner’s speech in this editorial. But the US and Britain, as centres of modern finance, have been role models for many of our domestic crusaders for light regulation of the Indian financial sector.

Specifically, the Raghuram Rajan and Percy Mistry reports called for radical changes in the way the Indian financial sector is regulated. They borrowed heavily from the London-New York mental model that is being junked.

It is not our belief that financial sector regulation in India is perfect. But we need a new and more reasoned debate here as well.

How regulated should India’s financial sector be? Tell us at views@livemint.com

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