Jeremy Warner: Bankers' excesses require retribution, not reviews of pay

Alistair Darling, the Chancellor, seems to have hopelessly underestimated the public mood on bankers' pay. For Mr Darling, a Labour stalwart, to find himself outmanoeuvred on the issue by David Cameron, who as far as I can see is largely financed by the excesses of the City, almost defies belief. I've thought for a long time that Mr Darling is basically too measured and reasonable to be a career politician, and so it now appears. The mob is at the gates: it's time for executions, not civilised reviews.

Of course, we all know why Mr Darling is pulling his punches. Bankers may be despised and may be guilty of bringing the country to its knees, but the City is still an important part of the UK economy, and in reforming the system, you don't want entirely to kill off what until less than two years ago was widely thought an outstanding British success story.

Related articles

• 'Hint of arrogance' as bankers apologise
• Dismissed executive 'warned HBOS of risk'
• RBS to axe up to 2,300 jobs
• Oliver Wright: Failed bankers are Masters of the Universe compared to MPs
• Alistair Darling: The banks are to blame for this crisis
• Sarkozy says sorry to Brown over VAT cut comments
• 'This is the worst recession for over 100 years'
• Dominic Lawson: Bonuses are a political issue, not a moral one
• Steve Richards: Politicians vilify the bankers – but they don't dare to act
• Leading article: These bankers must explain their disastrous decisions
• Bank employees set to sue over cuts in bonuses
• Division of the spoils – how the bonus billions are carved up
• 'Deeper' recession will lead to financial crime wave
• House hunters 'returning to market'
• MPs demand apologies from fallen bank bosses
• Search the news archive for more stories

What's more, City bonuses have proved as important a cash cow to the Treasury as they were to wheeler dealing bankers. Don't forget that 40 per cent of the rewards go to financing the social security budget, new hospitals and schools, or used to anyway. When the Government took controlling stakes in three of the big banks, it said they would continue to be run on a fully commercial basis at arms length to the politicians. Is this principle now to be abandoned?

The public's anger is entirely understandable, but if it were followed to its logical conclusions, Royal Bank of Scotland and Lloyds Banking Group would end up as little more than competing versions of the Post Office, with their entire capital market functions disappearing to organisations still willing and able to pay. The world will always have capital markets and there will always be excessive levels of remuneration paid somewhere. I won't be popular with some readers for arguing this, but it would not benefit Britain in the least to see its entire talent pool in financial services disappear to Switzerland and the Far East.

Barclays has tried to avoid the inevitable backlash against bonuses by raising its new capital in the Middle East, where they are – how shall we put it? – rather less sensitive about public opinion on pay differentials, or anything else, for that matter, than here. None the less, even Barclays now faces a conundrum, with the UK Government promising to make its "asset protection scheme" (APS) dependent on entering into commitments both on pay and lending. John Varley, the chief exec-utive, insists pay as such won't figure in his decision on whether to tap the APS: his chief consideration will be whether the size of the premium makes use of the APS commercially advantageous. In any case, he insists the balance sheet is still capable of withstanding a severe recession with-out recourse to the facility. We'll see.

The Government's "review" of City bonuses is fine as far as it goes but does little to assuage growing public anger over banking excess and is rightly dismissed by many as just another way of playing an awkward political issue off into the long grass. New Labour is a dab hand at government reviews. Many of them are so long in the reviewing that everyone has plain forgotten their existence by the time ministers get round to publishing. Some reviews never publish at all, but rather get rolled up into something else.

In any case, the Government is not handling the bank-bashing issue well. The public mood requires something more immediate than a former City regulator wading into an already well understood debate, and rightly so. We don't need a public inquiry to tell us what went wrong or the part City bonuses played in it.

For what it is worth, here is my three-point prescription. First, a number of high-profile bankers need to be prosecuted and sent to jail. Only through retribution is public anger properly answered. Obviously, it would not be possible to prosecute bankers for plunging us into recession, though many might think it worth a try. Instead, we need to adopt the American approach, where prosecutors trawl the books and already burgeoning number of allegations of miscreant behaviour until there is suffic-ient evidence to bring a prosecution.

Eventually, some minor, or even major, example of deception will be found from which a case could be constructed. This might affront our British sense of fair play, but the mood is ugly and the mob won't be calmed until there are heads on stakes at Traitors Gate. There's no point in urging bankers to give up their contractual rights to bonuses, as impotently the Prime Minister did yesterday. Bang the worst of them up, then they might get the message.

Second, bankers need to be made personally liable for gambling with other people's capital, so that excessive pay and accumulated assets can be confiscated in the event of failure. Such action would both limit reckless risk-taking and introduce an element of "partnership" into the returns made by bankers.

Third, and most important, much more competition needs to be introduced into banking, which at both retail and wholesale level is dominated by a cosy cartel of self-interested skimmers. Right through the system, fees and charges are excessive, never mind the churning of risk that these excesses encouraged.

Interestingly, this powerful oligopoly of banking elites was encouraged by regulators in the mistaken belief that a small number of bigger players would be easier to regulate, could be more easily relied on to look after their own and their customers' interests, and would therefore be safer. Barriers to entry were kept deliberately high. How wrong can you be? In reforming capital and liquidity controls, it is most important that they are not made so onerous that it shuts out new entrants. More competition equals a safer and less extortionate system.