Leading article: Another enlightened call for reform

No sooner has the coalition Government established a commission to look into the British banking industry, than a different one delivers its findings. The Future of Banking Commission, set up last December by the consumer pressure group Which?, has produced a thorough piece of work and a long list of recommendations.

Some are familiar, or already being enacted, such as the proposals to require banks to make a "living will" for the event that they find themselves insolvent, or for all derivatives trading to be conducted on a transparent central exchange, or for executive remuneration to be dependent on the delivery of long-term, not short-term, value for shareholders.

Other proposals are more innovative, such as requiring bank boards to be made legally responsible for stability of the financial system as a whole, for retail banks to stop paying commission to front-line staff based on sales, and instead award bonuses based on metrics such as customer satisfaction. It also suggests the creation of "safe haven" savings accounts that would only invest in rock solid assets and thus deliver a lower rate of interest.

Some of the commission's ideas are better than others. The proposals to reform bank boards are rather flaky. And, disappointingly, the report stops just short of throwing its full weight behind the mandated separation of investment and retail banking activities.

But the core virtue of the report is that it recognises that the largest banks in this country – with their combined assets five times the value of our annual output – have become a privileged oligopoly. It understands that the heads of large banks too often ignore the needs of ordinary depositors, concentrating instead on the more lucrative business of investment banking. And, most important, the report makes it clear that the central illness of British banking is that it is dominated by institutions that are too big and too interconnected to fail.

This is something over which the previous government was in a state of denial. Gordon Brown and Alistair Darling took the view that all that was needed in terms of reform of the banking sector after the great 2008 meltdown was tighter regulation and higher capital requirements. They were oblivious to the fact that, historically, banks have been expert at finding ways around regulation and hiding the scale of their borrowing. And they were unable to grasp the reality that banks large enough to be able to count on a public rescue if they get into difficulties are able to borrow from wholesale financial markets artificially cheaply, thus encouraging both risk-taking and a dash for growth. Nor did they recognise the absurdity of allowing universal banks to use the publicly-underwritten deposits of ordinary savers to engage in high-risk speculation.

The previous government's official commission into the future of the financial services, which reported last year, was a manifesto for business as usual – not surprisingly given that it was led by the veteran banker and chairman of Lloyds, Sir Win Bischoff. This report summed up all that was wrong-headed about Labour's attitude towards high finance and its overly close relations with the City of London.

Have things changed? We shall see. The Liberal Democrats and the Conservatives both campaigned on a platform of pretty radical reform of the banks in the general election. But that radicalism has not, so far, been transferred into office. The coalition's commission on banking, which we are told will report within a year, will cover much of the same territory as the Which? report, probably interviewing many of the same expert witnesses. If it is to be taken seriously, it needs to come to the same enlightened conclusions.