There is no shortage of debate about the future of the global regulatory system that oversees our financial markets. The creative departments of finance ministries across the globe are churning out bright ideas about early warning systems and new regulatory architecture. No doubt something will emerge from this burst of creativity, although it may need a new American President to exercise some leadership before a consensus solution emerges.

The market turmoil, and governmental attempts to stave off meltdown, have brought about some dramatic changes in the structure of financial institutions.

Many of our old assumptions have been discarded. Far from breaking up the financial hypermarkets, the crisis has resulted in elements being added. Even in the enormous American market, we have a concentration of deposits in a few huge groups. In Britain, Lloyds Banking Group - the union of Lloyds TSB and HBOS - will hold almost 40 per cent of current accounts, an unhealthy degree of consolidation.

May the independent investment banks rest in peace. Of the five significant broker-dealers in the first half of 2007, Bear Stearns has disappeared into JPMorgan, Merrill Lynch into Bank of America and Lehman Brothers into oblivion. Goldman Sachs and Morgan Stanley march on, but in a new guise as bank holding companies tucked under the Federal Reserve's protective wing. The general assumption is that they will acquire a larger deposit base and begin to look more like universal banks.

The competition authorities, in the UK and the US, should scour the new landscape for particular regional concentrations of power that are disadvantageous for consumers. And the boards of the mega-banks might consider pre-emptive disposals when there is once again a market for banking assets.

There is a particular issue in Europe. Regulators have often been anxious about very large banks headquartered in small countries. If they run into trouble, would the country's authorities have the resources and the credibility to stand by them? In the case of Iceland, the answer was “no”.

This is not an easy problem to resolve. Within the European economic area, a bank that is authorised to do business in one country is automatically able to take deposits from elsewhere, without approval from the host regulator.

The answer should be a single regulatory authority of some kind, at least for the purposes of authorising banks and determining the rules under which they operate. That will be politically extremely difficult and the UK Government, for one, will certainly resist it. So, at the very least, there will need to be some self-denying ordinances in place in smaller countries, which will have to prevent their banks from becoming overstretched in other countries. Certainly, we should rule out the possibility of a bank from a small country pitching aggressively for deposits elsewhere to fund its aggressive lending ambitions.

We must ensure lively competition in the future. That competition should be on a level playing field and be underpinned by credible regulators and central banks. In the long run, the competitive structure should no longer be dictated by governments. we need to begin to design an exit strategy for the public authorities, so that the process of market and institutional redesign can begin as quickly as possible.

The de Larosière review

The “de Larosière” review is a European Commission expert group that is looking at the future of financial supervision and regulation.

It is named after its chairman Jacques de Larosière, a senior French civil servant and former managing director of the International Monetary Fund.

The group has the task of recommending how European supervisory arrangements can be strengthened across all financial sectors. Initial findings are due to be published this month.

In its submission to de Larosière, the City of London Corporation stopped short of backing a single European regulatory authority, but called for the colleges of supervisors to be reinforced, for colleges to be established for all leading cross-border financial institutions and for a lead supervisor role to be established across Europe.

Stuart Fraser, the chairman of the policy and resources committee at the Corporation, said that it was prepared to consider a more integrated EU approach but warned that outcomes were more important than structures.

— Sir Howard Davies is director of the London School of Economics and former head of the Financial Services Authority. A longer version of this article appeared in Quantum - Finance in Perspective

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