Mr. Volcker's plan is based on the principle that the government must protect those banks- commercial banks-responsible for the settlement system. In fact, all of his ideas start from the idea of protecting the settlement system.

When I worked at the New York Fed during Mr. Volcker's time as chairman, there were a number of events-including the Latin American debt crisis and the failure of Continental Illinois National Bank and Trust Company-that could easily have caused a financial system shock similar to that of the Lehman bankruptcy in 2008. But the problems were addressed with almost no damage to the real economy because of Mr. Volker's efforts to maintain the settlement system using every means at his disposal.

The Latin American debt crisis was triggered when US banks, ignoring four years of warnings from the authorities, continued to lend ever-larger sums to dictators in Central and South America. The problems at Continental Illinois were the result of energy-related speculation.

Either crisis could easily have damaged the real economy while starting an endless blame game. But Mr. Volcker addressed them both with a focus on sustaining the settlement functions of the banking system. The Latin American debt crisis was dealt with over a period lasting more than a decade, while Continental Illinois was nationalized within 48 hours, leaving its settlement functions intact. Mr. Volcker succeeded in minimizing the impact on the real economy by flexibly applying a wide range of measures to fit the crisis.

I suspect Mr. Volcker's latest proposal comes from having repeatedly witnessed reckless behavior in the US financial sector and from his own unpleasant experiences in dealing with the consequences of such behavior. He probably came to the conclusion that the financial sector will always err on the side of excess, so we need to think about minimizing in advance the eventual cost of addressing the resulting problems.

Eoin Treacy's view The monetary and regulatory authorities can be compared to chaperones at a teenage disco. If the dancers have anything good to say about them then something is going wrong and if, following their shift, the chaperones are received with open arms by the ranks of partygoers then again we need to ask questions about the situation that is being allowed to develop. The job of the financial authorities is not simply to take away the punchbowl before the party gets out of control but to keep an eye on it to make sure the contents are not spiked.

We have gone through a lengthy period when the Fed chairman was the darling of the financial community and where regulators' attitude to their job became increasingly permissive. The conflict of interest where ratings agencies' main source of income derives from the sell side rather than the buy side has been exposed during the subprime crisis and is also in need of oversight.

Regulation will always be a tug-of-war between those seeking looser versus tighter restrictions on financial activity. We can rely on bankers to work in their own interests and use every means available to circumvent restrictions to how they can profit. However, we must never forget again that it is the fundamental role of regulation to prevent rather than be complicit in financial market excesses. The current proposals are not perfect but they do signal that the era of soft touch regulation has probably ended and for the better.