The problem with bringing in stricter laws to fix the banking system is that it turns good behavior into a matter of compliance. As economist John Kay writes, that stricter rules can never replace integrity and that they only result in people finding ways to circumvent them. "Regulation by rules invites compliance with the rules rather than the objective of the rules, and the more extensive the rules the easier it is to lose sight of the objective ... The Basel directives can be seen, in retrospect, probably to have done more harm than good. Banks took the view that capital sufficient to comply with the regulations was sufficient for their business needs. Surplus capital was for wimps."

Kay says that a better way would be to expose under handed activities like, for example, shifting banking business to off-balance sheet vehicles.

It's a point I discussed the other week with Simon Longstaff, the executive director of the St James Ethics Centre in Sydney. Longstaff says there is a need for regulation, but not too much. He warns that the experience in America with Sarbanes-Oxley showed that harsh laws could backfire and produce something far worse. Over-regulation stops people from thinking. Longstaff says: "The notion of regulation and surveillance as a way of controlling risk can be appropriate but at a certain point it becomes entirely misconceived and has the perverse effect of increasing systemic risk."

If you have a system where no one can choose to do anything wrong, then inadvertently you create a system where no one can do anything right. You don't choose at all, you just comply.

"What history teaches us is that on a very large scale, such as what happened in the Soviet Union, if people don't practice making responsible decisions, then they lose their capacity to do so. It's like any skill, particularly a skill of judgement, it can fall away for want of use."