The Wall Street Crash of the 1930s led to the United States forcing a split between retail and investment banking under the Glass-Steagall act. It held for more than 60 years until the banks tore down the walls, partly as a result of the flurry of deals in the 1990s that made them too big to fail.
Under the influence of powerful lobbyists, with fat chequebooks, politicians passed the deals and allowed the holes that the banks dug in the Glass-Steagall dam to burst it. They even succeeded in persuading President Bill Clinton that it was a jolly good thing, and his own idea.
The Parliamentary Commission on Banking Standards is understandably concerned that the approach adopted by Britain (and Europe for that matter) to preventing a repeat of the most recent banking crisis could be endangered by a similar process in the future.
Its solution is to hand regulators a nuclear deterrent to prevent holes from being dug in the first place. That deterrent comes in the form of reserve powers to break up banks that try to break through a ring fence designed to protect retail depositors and small businesses.
The problem with a nuclear deterrent is that it can't be used. You can imagine the impact of the Bank of England pushing the button: howls of outrage, and claims that such a move would be bad for business and bad for Britain.
As a result the commission has carefully constructed a multi-step process, under the supervision of the Treasury Select Committee, to put miscreant banks "on watch" before the ultimate sanction is applied.
It's actually the sort of thing that might have served as a better wake-up call to Barclays than a few cross letters from Lord Turner at the time when the bank's relations with the Financial Services Authority reached their nadir.
This is not what the Chancellor, George Osborne, hoped he would get when he created the commission. He expected it to confine itself to professional standards and recommend some sort of professional body, perhaps a British Medical Association for bankers. As if a rap on the knuckles from a woolly watchdog would somehow prevent people like Kweku Adoboli from rolling the dice in pursuit of a million-dollar bonus. Or superiors of future Adobolis from turning a blind eye in pursuit of bonuses of their own.
Mr Osborne stocked the commission with people like Lord Lawson, the former chancellor, Lord Turnbull, the former cabinet secretary, and Justin Welby, a former oil executive before rejecting mammon in favour of a career in the church that has led to him becoming Archbishop of Canterbury. And he put Andrew Tyrie, the chairman of the Treasury Select Committee, in charge. If he's surprised that this lot has gone off and done something he didn't expect he's really rather naive.
The proposals are actually sensible, and likely to be supported by people such as Sir Mervyn King, the governor of the Bank of England. But the real problem for Mr Osborne is that the people who have made them have a great deal of credibility.
If he ignores their recommendations, or tries to "game" them himself by watering them down, he runs the risk of being seen as the bankers' poodle. That's not a happy place to be.Reuse content