Regulators from around the world convened in Chicago last week to debate the proper response to global financial crises.

Their host, Federal Reserve Bank of Chicago President Michael H. Moskow, set the stage. "What are the most effective means of preventing such crises?" he asked. "Do we need to develop a new regulatory architecture for banking?"

Answers generally fell into one of two categories during the Chicago Fed's 35th annual Conference on Bank Structure and Competition: improve bank regulation or change the incentives influencing financial companies' behavior.

The regulatory camp was personified by John G. Heimann, who rose to the top ranks of Merrill Lynch & Co. after stints as both a federal and state bank regulator. Today, Mr. Heimann is chairman of the Financial Stability Institute, recently created by the Bank for International Settlements to help developing countries improve their financial regulatory systems.

"Every effort must be made to improve the quality of financial supervision in developing nations," Mr. Heimann argued in prepared remarks. (A family emergency kept Mr. Heimann from delivering his speech in person.)

The market camp was represented by Allan H. Meltzer, who holds an endowed chair-named for him-at Carnegie Mellon University. "Incentives are far more powerful than exhortation," he said, "and diversification is more effective at reducing risk than any system of regulations and supervision that has been devised."

Mr. Heimann would not argue against giving the private sector the right incentives to forestall a financial crisis, and Mr. Meltzer would agree that strong bank regulators are better than weak ones. The difference in the two positions is one of emphasis.

Mr. Heimann said he wants the Financial Stability Institute, working with the Toronto International Leadership Centre for Financial Sector Supervision, to help developing countries strengthen their bank regulation. Banks need strong credit cultures, skilled risk managers, fairly valued assets, and increased capital, he said. Some of these countries lack these fundamentals because their regulators are not independent and often have no power to discipline banks or the resources to train examiners, he said.

International regulators, Mr. Heimann argued, must agree to:

Common accounting standards that accurately portray the condition of financial institutions.

Transparency and disclosure so information about financial institutions can be shared and compared.

More cooperation so dangerous trends can be detected.

More communication with financial institutions, which are "more familiar with and knowledgeable about the rapid changes revolutionizing financial markets."

Finally, Mr. Heimann argued that the International Monetary Fund must assess the effectiveness of a country's supervisory system. "This is a critically important activity," he said. "This information along with the activities of the institute and the centre should be of considerable help in upgrading and increasing the sophistication of the supervisory and regulatory process."

He may have anticipated criticism from more free-market-oriented speakers like Mr. Meltzer. "Some envisage a grand scheme to restructure the roles of the World Bank and the IMF," Mr. Heimann said. "Others believe in the need for a supranational regulator or insurance company to regulate financial institutions and financial markets. "I do not share that view."

That may be, but Mr. Heimann's answers still rely too heavily on government officials for Mr. Meltzer's taste.

The professor, who founded the Shadow Open Market Committee to comment on the government's doings, argued that emerging markets should be opened to foreign banks to reduce risk by diversification.

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