Leading article: The official feebleness continues

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Sometimes distasteful measures need to be taken for the wider good. The 2008 bailout of the banks was one such measure. It was necessary to rescue the banks in order to avert an economic catastrophe. Ministers were faced with a choice between propping up HBOS and the Royal Bank of Scotland and witnessing a breakdown of the payments system that makes economic life in Britain possible.

But nothing can justify what has happened in the banking sector since then. Bankers took this unprecedented public assistance (along with government guarantees that drove down the cost of their funding) and used it to pay huge bonuses to their employees. In the midst of the worst global downturn since the 1930s, which the banks had played a leading part in bringing about through their recklessness and incompetence, thousands of already wealthy investment bankers enjoyed record payouts.

The blame for this scandal lies with the previous Government. Around £1trillion in public support was channelled to the banking sector without any meaningful reform demanded in return. Few of the executives who led their firms to the brink of bankruptcy were forced to resign. There was no enforced structural overhaul to make our financial system safer. Ministers imposed a 50 per cent tax on bank bonus pots to discourage payouts. But the banks chose to pay the bonuses anyway.

And so far the new coalition Government has been no improvement. The Treasury minister, Mark Hoban, sprayed around hopelessly conflicting messages at the British Bankers Association conference this week. On the one hand, Mr Hoban demanded "restraint" from bankers on their remuneration and talked of a Financial Activities Tax on bank profits and remuneration. But on the other hand, he confirmed that no new taxation will be imposed without international co-ordination. And Mr Hoban is also "consulting" with the banks on how the meagre bank balance sheet levy announced in the emergency Budget will be imposed.

Meanwhile, the question of whether to split up retail and investment banking – the kind of reform essential to begin tackling the problem of banks that are "too-big-to-fail" – has been farmed out by the Government for consideration by a committee which will not report back until next year. No wonder the banks feel free to reassert themselves once more. No wonder the spurious old arguments that new regulation and curbs on pay will drive banking "talent" abroad are beginning to be heard again.

Mr Hoban said of the banks this week that "their fate is in their hands". But if the past two years have taught us anything it is that the banking sector is fundamentally incapable of reforming itself on pay or anything else. Change will have to be imposed from outside. So this is, at heart, a challenge for the Government. In the run-up to the general election the Conservatives and the Liberal Democrats aligned themselves squarely with public anger about the behaviour of the banks. Yet we have seen scant evidence so far of them living up to their promises to reform finance. All Mr Hoban has given us is a continuation of the feebleness of the previous Government.

The political risks of this supine attitude should be plain enough. The Government has chosen a prescription of severe (and economically risky) austerity for this country over the coming years. The social consequences of those choices will soon begin to bite. If bankers feel under siege now over their remuneration practices, they should wait until the mass public sector lay-offs begin. And if the Government expects that it will not be severely punished by the public if it fails to bring these institutions into line, it is making a blunder as profound as any made by the banks at the height of the credit boom.

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