While bankers are slipping away to the beaches, members of the Independent Commission on Banking will not be taking time off as they work flat out on the final report into the future structure of banking ahead of the September deadline.
Until recently, the ICB's conclusions appeared done and dusted; the interim report in April suggested that ring-fencing the retail parts of the UK's banks from their investment divisions was the preferred solution to prevent the banks ever again having to be rescued by the taxpayer. And, only a few weeks ago, the ring-fencing option – as opposed to a full separation – looked sewn up, particularly as it was given such support by George Osborne, the Chancellor, in his Mansion House speech.
But now the game could be changing; there are signs that the interim was really only an interim, a teaser to flesh out the some of the more strident views and criticisms. One politician who has picked up that the ICB may be having second thoughts is Lord Oakeshott, the former Liberal Democrat Treasury spokesman.
He says: "I hear vibrations coming from those around the commission that it's not done and dusted, that many of the commissioners are worried that ring-fencing isn't the most effective solution after all. They have heard many of the criticisms and misgivings that have been expressed – from the Treasury Select Committee among others – and they are still looking at all the options, including full separation."
Lord Oakeshott is not the only one to have picked up on a change in mood. In the City, banking analysts to whom I have spoken suggest there maybe up to two out of the five commissioners moving towards separation, including Clare Spottiswoode, the consumer advocate and former gas regulator, as well as Martin Taylor, ex-boss of Barclays, and Martin Wolf, FT writer and economist. The fourth member of the ICB, which is chaired by the economist, Sir John Vickers, is Bill Winters, ex-head of JP Morgan, who is unlikely to support a full separation, considering his investment banking background.
That's why Vince Cable's decision to throw down the gauntlet on banking reform in a big speech last week for a Which? conference was so fascinating. Cable called into question again whether the ICB's ring-fencing would work in practice and repeated his own backing for the nuclear option of full separation.
The Business Secretary's warning carried two clear messages – that Sir John and his team should be courageous when they make their recommendations – and a subtle hint that it's not too late to change them – as well as a reminder to the City that this is by no means a done deal.
He said: "The ring-fencing approach has been criticised for being insufficiently clear cut and too open to regulatory arbitrage by those arguing for full separation; and by the banks themselves for going too far – though the ICB discounts the threat of banks to relocate headquarters elsewhere."
After the speech, Cable elaborated, saying that if Vickers and his team go for ring-fencing, then they need to persuade the public that it will work in practice, and that it is not going to be too expensive. "If the ICB can't demonstrate that a ring-fenced form of separation works in practice, then they need to go the whole hog for full separation. At the moment, we have the minimum argument but need to hear the maximum."
These are his questions: "Would ring-fencing stop banks using deposits underwritten by the taxpayer to cross-subsidise their 'casinos'? Will the ring-fence be high enough and the 'Chinese walls' strong enough to eliminate regulatory arbitrage by the banks? Will the division between what is inside and outside the ring-fence ensure that nothing resembling a universal bank remains?"
But Cable added: "I'm sure that the Vickers team – which includes five of the brightest people in Britain – set up by me and George Osborne will come up with the right answers. I'm fairly optimistic that when they do decide, we will back the report and then move very quickly to get it into place.
"This is only the first step towards getting the fundamental structure of the banking system right, and is critical to the way we deal with the economy in the aftermath of the banking crash of two years ago. We've got to get more competition into the high street too, and more lending through to the SMEs."
Reforming the banking system is still top priority for the Lib Dems and it is the number one item in the coalition agreement. As Lord Oakeshott said: "Vince's speech last week was hugely important, as it reasserted his authority over the debate. It's been rather creepy over the last year watching two unelected but powerful groups – the Murdoch empire and the banks – go about their lobbying in Westminster; one has been dealt with, and now we have got the banks to deal with, and we are not backsliding, I can assure you.
"What the Lib Dems did over tuition fees and the NHS were a warm-up; this could be much bigger."
Expect a heated autumn start to Parliament. Sir John is due to deliver his final report to the Chancellor and Cable, the chairman and deputy chairman respectively of the Cabinet committee which set up the ICB, before publishing it on 12 September. They are then expected to consult on the report with fellow committee members, including Sir Stephen Green, the ex-HSBC boss and now Trade and Investment minister, before giving their backing – or not. It's likely to be a fiery week, as the Lib Dem party is holding its annual conference the following weekend and Cable is planning a big keynote speech on the Monday – on banking.
So far, this debate has not followed political lines. The Lib Dems, almost to a man and woman, want breaking up the banks as the first step towards fundamental reform. It's a view endorsed by the Governor of the Bank of England, Mervyn King, who has on many occasions said: "Of all the many ways of organising banking, the worst is the one we have today."
In a speech last week David Miles, one of the Monetary Policy Committee members of the Bank of England, raised the issue again when he questioned the assumption that it is too costly for banks to fund their assets through equity.
George Osborne is one the few senior Tory politicians to back ring-fencing, a stance seen within the Treasury as a elegant compromise which doesn't annoy the banks too much. But, at No 10 the mood is said to be more complex, with David Cameron and his advisers under heavyweight lobbying from the top bankers to stop any big-scale reform – Bob Diamond, head of Barclays, was on a recent trip with David Cameron to Nigeria. To date, the Labour Party has refused to say where it stands – although both Gordon Brown and Alistair Darling were always against reforms.
Banks such as Barclays and Royal Bank of Scotland are still lobbying against a big break-up, as is the British Bankers Association, worried by the costs of legal separation. As one insider said: "The ICB is in a tricky position because it must come up with reforms which are effective, but also a plan which is palatable, and it can get through Parliament."
It's also why the City economist Professor John Kay backed Vince Cable's dramatic intervention last week: "It was absolutely necessary for Dr Cable to throw down the gauntlet. It's hard to see how ring-fencing will work without really tough conditions. There are still too many big questions that the ICB hasn't answered but which are key to whether ring-fencing can work.
"We need to know what assets a retail bank can hold within the fence. It's got to be all government securities, all residential mortgages and all SME lending – if anything else fiddly or complicated gets included, then the game is up."
Professor Kay, who was one of the earliest proponents in favour of a full split between retail and investment banking as the safest way of protecting taxpayers from the future follies of bankers, added: "Banks like Barclays are absolutely opposed to any ring-fencing, and it's an open question whether BarCap would be viable without the retail assets of Barclays. Other banks like HSBC do, in effect, already operate their own form of ring-fence. I don't see any problem with the UK making a unilateral decision either."
The two banks he says that are the most vulnerable, and the most important to make watertight, are Barclays and Royal Bank of Scotland – the government-owned bank which still has a balance sheet bigger than the whole of the UK.
He also has the answer to introducing more competition into SME lending – "Break up Royal Bank of Scotland which has 40 per cent of all small business lending. The Government had the chance to do it a long time ago – when it was rescued. It's not late: it could still be broken up."
But Kay, who was one of the first proponents of breaking up the banks, has an interesting challenge for ICB to consider while making its decision – that the banks should be given the option to choose what they want to do voluntarily first. "Give them the option to decide how to break themselves up. They would then have to demonstrate that the method they chose would be fire-proof and that, in the event of failure, they would not resort to taxpayer subsidies."
As he says, break-ups worked, eventually, for British Gas and British Telecom, so why shouldn't the same principle be applied to banks? It's another good question and one which the banks might like to ponder themselves if they don't want to be forced to split.
The Commission: A brief to protect the public from future crises
The Independent Commission on Banking was set up following the 2008 crash to consider the structure of the UK banking sector, including the complex issue of how best to separate retail and investment banking functions, as well as promoting more competition.
The commission is trying to tackle several related issues: how to protect high-street banking operations if a bank collapses, how to make huge banking losses fall on the bank's investors and not on tax-payers via a publicly funded bail-out and how to introduce some more competition for basic banking services.
To date the ICB has recommended that setting up a legal 'ring-fence' or some form of 'subsidiarisation' between the two functions would be the most effective and the least costly solution but has stopped short of calling for a full break-up. All the UK's big banks such as Barclays and Royal Bank of Scotland are fighting the reforms, claiming that neither ring-fencing nor a full separation will reduce risk and warn that costs will go up. They have also threatened to move overseas if the Government were to go ahead, a threat which the ICB has been dismissed as unrealistic.