The credibility of Chancellor George Osborne's banking reform plans will be dealt a body blow this morning in a sharply critical report by the Parliamentary Commission on Banking Standards that he set up.
The Commission will repeat its demand that watchdogs be handed reserve powers to break up the entire British banking industry, dismissing government arguments against this as "insubstantial".
And it will say the Government has "wrongly suggested" that the power would be handed to regulators without sufficient safeguards.
The report also attacks inadequate provisions for an independent review of the planned ring fence to protect retail depositers and small businesses and accuses ministers of "siding with the industry" over leverage ratios – which govern capital and the amount of risky activities banks can undertake. The report concludes: "There is still a long way to go if the legislation now before the House of Commons is to provide legislative impetus for a transformation of the UK banking system."
It contains several proposed amendments to the Bill – the second reading of which is slated for March 11 – designed to make it tougher on banks. Ministers have so far only been prepared to give watchdogs the power to break up individual banks that seek to flout or "game" the ring fence, if they can prove the problems are severe.
Mr Osborne has argued that this makes handing regulators the power to split the entire industry unnecessary and that such a draconian sanction should require a Government to bring forward a new law before Parliament.
But the report blasts his arguments saying: "The Government has been at pains to make the case against the provision for full separation being implemented on the say so of the regulator. The Government has erected a straw man which it has then successfully demolished, because we made no such recommendation in our first report.
"Instead, we envisaged that the legislative provisions would be brought into force only in the light of the recommendations of [an] independent review [of the ring fence]."
The report will also say that Mr Osborne has "failed to adequately address" the Commission's call for an independent review of the ring fence, which has been vocally supported by the Bank of England although it concedes that there have been signs that ministers are moving in this direction.
It describes Mr Osborne's reluctance to ban banks from certain corporate structures that might put the ring fence at risk as "curious".
And the Commission attacks the Government on the question of banking leverage – or the amount of lending and other activities banks are allowed to undertake compared with the capital they hold.
"The Commission remains wholly unconvinced by the case made by the Government against a higher leverage ratio for UK banks by reference to international requirements," the report says. "As the Governor of the Bank of England [Sir Mervyn King] told the Commission, the banks have lobbied very successfully in this area.
"To date, the Government has sided with the industry in resisting calls for a higher leverage ratio."
The Commission's chairman Andrew Tyrie does concede that the Bill is "much improved". But he says: "The Government rejected a number of important recommendations. The Commission has examined these again, alongside the Government's explanations for rejecting them. We have concluded that the Government's arguments are insubstantial."
Read more on this topic: Millions don’t trust their banks
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