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  1. Politics
8 April 2011

How radical will the coalition be on banking reform?

Vince Cable wants to see “fundamental surgery”, but will Osborne give way?

By George Eaton

The Lib Dems have been in an assertive mood recently. There was Chris Huhne’s attack on Baroness Warsi’s “Goebbels-like campaign”, Vince Cable’s revival of the “mansion tax” and Nick Clegg’s suggestion that nuclear power might not have a future in Britain.

The next opportunity for Clegg’s party to put clear yellow water between themselves and the Tories will come on Monday when the interim report of the Vickers commission on banking is published. The commission has been looking at whether retail and investment banking should be split in order to ensure that institutions are no longer “too big to fail”.

As Mervyn King recently pointed out in an interview with the Daily Telegraph, it is the knowledge that the state will bail them out “on the downside” that allows banks to pay their staff such extravagant bonuses.

Both Clegg and Cable have made it clear that they favour deep structural reform. The Business Secretary has called for “fundamental surgery” and the Deputy PM, who recently said of the bankers, “I want to wring the neck of these wretched people,” is of a similar view. Lord Oakeshott, a key Cable ally who resigned as a Lib Dem Treasury spokesman after accurately describing the Project Merlin deal on bankers’ bonuses as “pitiful”, summed up his party’s view yesterday:

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Unless we implement Vickers fast and in full, the question will be: “Who runs Britain, the government or the banks?” When you see the banks’ power network operating at the heart of government, you understand why Labour bottled out of radical action to reform our broken banking system, but we must do it.

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However, rather than recommending a full split, Vickers is likely to propose that high-risk investment arms should be ring-fenced from retail operations. This solution, endorsed by the Commons Treasury select committee last week, would allow investment banks to fail without needing to be bailed out by the state.

The Conservatives, wary of anything that threatens London’s status as a global financial centre, are likely to accept this compromise as the price of keeping Cable onside.

The banks, however, as Robert Peston notes, “are bitterly opposed to the idea of putting their investment and retail arms in separately capitalised subsidiaries, fearing that would lead to a massive increase in their costs”. Vickers won’t deliver his final report to Osborne until September but we’ll get an idea of how bold the coalition intends to be on Monday.