David Prosser: Basel allows the banks to breathe a little easier

Outlook: While the G20 will no doubt embrace Basel III with great enthusiasm, many of its members have yet to fully implement Basel II, unveiled in 2004

Is it really only two years since the collapse of Lehman Brothers brought the world's financial system close to meltdown? A visitor from Mars might not think so from a casual reading of the latest developments in the banking sector. Last week, we saw Bob Diamond, the bête noire of those who blame investment bankers for the credit crisis, get the top job at Barclays, and yesterday we watched as bank shares soared following the Basel III agreement. So much for the regulatory backlash that bankers have feared ever since Lehman closed its doors.

It seems memories are short. Share prices rose yesterday because investors think the banks got away more lightly from Basel than they once feared. Those who worry that to give in to the banks' appeals for restraint is to store up trouble for the future are clearly in the minority. The prevailing view in the market is closer to that of the prominent banking analyst who has just published a long note bemoaning the "over-capitalisation" of Lloyds Banking Group these days.

There is plenty in the accord to admire. Plainly, the higher tier one capital requirements are to be welcomed – though note that just four of 50-odd decent-sized European banks do not already pass muster – as is the "liquidity coverage ratio", which will act as a brake on gearing.

Moreover, while the Basel Committee's statement makes no mention of the ongoing debate about universal banking, the different weightings attached to bank assets go to the heart of that argument. Broadly speaking, banks will now have to set much more capital aside, both absolutely and proportionally, against their investment banking operations than for more run-of-the-mill retail business.

No enforced break-up of the banks, then, but a more demanding regime for those that want to maintain the universal model.

That sort of pragmatic approach to the too-big-to-fail question was always going to be the sort of consensus outcome arrived at by a committee with representatives from 27 different countries. It will not be enough, however, to satisfy those who continue to demand a more explicit separation of banking activities.

That question remains a matter for national regulators and countries. The danger, however, is that many states will duck the issue, in the fear that acting unilaterally might prompt a departure of financial institutions. That's also the risk with the issue of counter-cyclical requirements where, for now at least, national regulators seem to have been given the job of deciding when banks should be asked to bolster their capital even further in order to tackle problems such as credit bubbles.

Indeed, it is worth remembering that Basel III, across the board, is not quite the unbreakable law some would have you believe. The Basel Committee has no power to actually implement its new rules, or to sanction those banks which break them. And while the next G20 meeting in November will no doubt adopt the regulations with great enthusiasm, many of the countries sending delegates to that summit have yet to implement all the conclusions of Basel II, which were made in the summer of 2004.

Is Basel III a disappointment? Probably not, unless you had unrealistic expectations of an arcane group of banking bureaucrats who have been the subject of sophisticated lobbying from a variety of interested parties since the moment they began their deliberations. It does, however, put the ball back in the court of individual countries, who all now face some difficult dilemmas, both political and economic.

Meanwhile, time continues to fly – every day that goes past without a final blueprint for banking regulation in all those countries where it matters is a day on which memories fade a little further of just how close the world came to the financial abyss.

The Chancellor's allies go native

They are two institutions whose names are synonymous with a hawkish focus on deficit reduction. So when the International Monetary Fund and the Organisation for Economic Co-operation and Development execute the same sharp about-turn in the space of a week, it's worth taking notice.

First came the OECD, which last week said it was so concerned about the sustainability of the recoveries in many of its member countries that it now thought many of them should reconsider the pull-back from fiscal and monetary support for their economies. And yesterday, we heard from the IMF, whose managing director, Dominic Strauss-Kahn, now thinks joblessness is the greatest challenge facing policymakers. The cost of mass unemployment, in both the short and the long term, might outweigh the cost of not tackling the deficit quite so aggressively, the IMF warned.

Nowhere do these warnings have more resonance than in the UK, where the Coalition is more determined than almost any other Western government to get debt down dramatically and quickly.

But will the arguments of the IMF and the OECD carry more weight with George Osborne than the expressions of anger we heard yesterday from the TUC, a more predictable source of dissatisfaction about public-sector spending cuts? Not if the resolute interviews given yesterday by the Business Secretary, Vince Cable, and Chief Secretary to the Treasury, Danny Alexander, are anything to go by.

Once critics of Mr Osborne's proposal to go a little further on debt repayment than the Labour government planned, the Damascene conversion these two Liberal Democrats went through on being offered ministerial jobs is unlikely to be reversed by the likes of the IMF and the OECD, even if the Chancellor's austerity measures have turned out to be far more severe than he suggested was necessary prior to the election.

Still, as they hunt for affirmation of their deficit reduction plans, Messrs Osborne, Cable and Alexander are starting to run out of options. If they can't be sure of the support of the IMF and the OECD, who can they count on?