As the Chancellor reaches for the reset button, Richard Porritt asks the question on every banker’s lips

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A tough talking Chancellor appeared to herald a new dawn earlier this week by claiming 2013 would be the year the banking system was “reset”.

Talking to the financial sector as he outlined the Banking Reform Bill, Mr Osborne was not in the mood for cuddling up to the City. He demanded the Square Mile’s behemoths would be broken up if they did not ring-fence risky operations from savers’ deposits.

“2013 is the year when we re-set our banking system,” he vowed at a speech to JP Morgan. “So the banks work for their customers - and not the other way round.

“So that those who guard over the banks to keep our economy safe are the right people with the right weapons to do the job. And so that when mistakes are made, it’s the banks and not the taxpayer that picks up the bill.”

The Banking Reform Bill follows recommendations by the Independent Commission on Banking (ICB), led by Sir John Vickers in 2011, which came up with ways to make the sector safer and give greater protection to depositors in the wake of the financial crisis.

The Parliamentary Commission on Banking Standards (PCBS), set up in the wake of the Libor scandal, also called for reserve powers to break up the banks if they do not adhere to rules to separate investment and high street operations.

But the bankers are not happy. They claim that rather than protecting the customer the reforms are set to make it even more difficult for small businesses to get credit and it will create uncertainty for investors.

British Bankers Association chief executive Anthony Browne slammed the Government: “No other major economy is considering moving away from the universal model of banking because it undermines banks’ ability to provide all the services businesses need.

“Above all, what banks and business need is regulatory certainty so that banks can get on with what they want to do, which is help the economy grow.”

And Carla Antunes-Silva, analyst at Credit Suisse, said that tighter scrutiny to strictly implement a ring-fence could increase the overall costs of reform for the industry.

But Mr Osborne is adamant: “When the RBS failed, my predecessor Alistair Darling felt he had no option but to bail the entire thing out.

“Not just RBS on the high street, but the trading positions in Asia, the mortgage books in sub-prime America, the property punts in Dubai.

“I want to make sure that the next time a chancellor faces that decision, they have a choice. To keep the bank branches going, the cash machines operating, while letting the investment arm fail.”

Mr Osborne also confirmed plans to set up a new watchdog and hand back responsibility to the Bank of England to keep the banking system safe, which he said would be the “super cop” of the financial system.

He said: “The fire alarm was ringing, but no one was listening. And when the crisis hit, the fire was then so great that the whole economy was sacrificed to put it out. The British people need to know that lessons have been learnt. And they have.”

This is a tough one for the Chancellor – and he is far from comfortable with some of the things he is having to lob at the City. In some respects laissez-faire rules for banks have been good. People are too quick to forget the wealth creation of these financial giants since Margaret Thatcher’s Big Bang in 1986 - and it is not just for their own traders’.

The Government is looking to divide and rule. But politics - and especially politics wrapped in the pound notes of the City – is never that simple. Mr Osborne runs the very real risk of portraying the trading floors as the wild west of finance and the retail arms as cosy and safe. Yet Northern Rock did not have a trading arm.

Ring fencing retail operations is good politics but, as former Chancellor Alistair Darling pointed out after the speech, it will not stop organisations going to the wall.

The Financial Services Regulatory Guide Book has 1.5million paragraphs – is the Chancellor really suggesting this is an industry that does not have enough rules? The problem is the rules are not the right ones.

In the US banks are allowed to fail, and many have. The same has not been the case for the UK.

So when Mr Osborne says that no bank will be too big to go under does he really mean it? Would he have let those institutions – and those innocent savers’ money - go to the wall in 2008?

Governments need votes to stay in power but they also need to get the City on side. For many years Labour appeared to have got the balance right and Gordon Brown even declared “an end to boom and bust”. Those words must ring in his ears now like ignored air raid sirens.

This is how Mr Osborne wants to play it: In public, bash the banks, in private tell them you did not really mean it.

And it is probably the best solution.

Richard Porritt is on Twitter @Porritt.

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