The best that can be said of the Government's White Paper on banking reform is that it takes some small steps towards sanity. Its most welcome feature is the requirement for banks to hold more capital in credit booms. At the height of the lending mania of recent years many banks were terrifyingly over leveraged. When the bubble burst they had virtually no capital to cushion their losses and governments were forced to step in with emergency funds to prevent them going under.
There will also, henceforth, be greater oversight of banks by regulators with a mandate to step in where firms are believed to be under-pricing risk, rushing into poorly understood credit products or trying to circumvent regulations. The form and timing of such intervention will be hotly debated. But the case for a heavier touch is surely made. In the years leading up to 2007 regulators had become supine box tickers. They did not challenge managements as they drove their institutions to the edge of a cliff.
The moves in the White Paper to oversee pay incentives in banks are also justified. Another stark lesson of the crisis is that, when bankers' pay is not aligned with the long-term interests of shareholders, trouble follows.
But while elements of it are welcome, this reform package is also worryingly incomplete. The White Paper makes no attempt to untangle the crossed lines of authority in the tripartite financial regulation system. When the banking sector got into serious trouble last autumn neither the Bank of England, nor the Financial Services Authority, nor the Treasury appeared to be in charge. There will be a new Council for Financial Stability. But since it will be made up of the existing tripartite authorities this is merely an exercise in re-arranging the furniture. In times of crisis, one body needs to be unambiguously in charge. In the United States, the Federal Reserve has been given those powers. In Britain, it ought to be the Bank of England.
The Chancellor, Alistair Darling, proffered some unconvincing arguments yesterday to explain why he has rejected suggestions that universal banks, which take deposits from ordinary savers and also engage in casino-style trading operations, be broken up. Mr Darling says that it is not just large, complex banks that are a systemic risk to the financial system, citing the collapse of the relatively small Dunfermline Building Society and Northern Rock.
That is true, but it misses the point. The primary purpose of breaking up banking empires is not to ensure there will never need to be another bailout, but to prevent the management of banks believing they are "too big to fail" and thus behaving recklessly with ordinary depositors' money.
Those who argue that the banks have already learned their lesson are guilty of complacency. Short-term bonuses are already creeping back in the City of London. Questionable securitisation is making a return. And the financial system is more rife than ever with moral hazard thanks to last autumn's spate of rescues.
Last autumn the global financial system suffered its most destructive crash since the 1930s, plunging economies around the world into recession. Only unprecedented fiscal and monetary measures have prevented a repeat of the Great Depression. These are historic times. A historic reformation of the world's financial institutions - starting with the City of London - was called for. Yesterday's White Paper did not rise to the occasion.