When George Osborne appeared before the Parliamentary Commission on Banking Standards last month, he told it not to "tear up" the coalition's proposed financial reforms. But while the commission, which published its first report  today, doesn't go that far, it does warn that plans to ring-fence banks' investment arms from their retail divisions "fall well short of what is required".
Appearing on the Today programme this morning, Conservative MP Andrew Tyrie, who chairs the commission, criticised Osborne for "watering down" the reforms proposed by the Vickers report. Tyrie is calling for the government to 'electrify' the ring-fence (one might call it the "Jurassic Park solution") by giving regulators the power to break up the banks if they try to evade the new rules. He said:
The proposals, as they stand, fall well short of what is required. Over time, the ring-fence will be tested and challenged by the banks. Politicians, too, could succumb to lobbying from banks and others, adding to pressure to put holes in the ringfence.
For the ring-fence to succeed, banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to. That's why we recommend electrification. The legislation needs to set out a reserve power for separation; the regulator needs to know he can use it.
Tyrie's words bring him into line with Labour, which has called for the government to hold out the threat of a full Glass-Steagall-style separation if the banks refuse to implement "the spirit and principle of Vickers". Unsurprisingly, then, Ed Balls has given a warm welcome to the commission's report. The shadow chancellor said this morning: "As Ed Miliband and I said at the Labour Conference this year, if the letter and spirit of the Vickers proposals are not delivered and we do not see cultural change in our banks, full separation will be necessary. The Commission is clearly right to say the jury is still out and to demand a reserve power for full separation of the banks.
"We need serious cultural change in our banks and the Commission's next report on the culture and practices of the banks will be just as important as these vital structural changes. Only then will we get the banking system our businesses and economy needs."
In a banal response, the Treasury has said that "the government is grateful to the Parliamentary Commission on Banking Standards for its scrutiny of the draft bill and notes that it, 'welcomes the government's action to bring forward legislation to implement a ring-fence'."
But this rather ignores the fact that the same commission believes that the ring-fence, as currently proposed, is seriously inadequate. Unless Osborne proves willing to toughen his reforms, he will stand accused of failing to learn the lessons from the crash.