Osborne to let banks off the hook – for now

Vickers report to recommend separating retail from investment – but the Chancellor won't act yet

Britain's banks will get a fresh chance to delay the biggest shake-up of the industry, as proposals are announced today by Sir John Vickers' Independent Banking Commission.

An industry on the spot: click here to download full graphic (73k)

George Osborne will welcome the report – expected to recommend banks separate their retail arms from riskier investment functions – but the Chancellor will also pledge in a Commons statement to consult further with relevant "interested parties" before implementing the reforms.

The Independent understands that banks – including Royal Bank of Scotland, Barclays, HSBC and Lloyds – will be among those consulted by the Treasury. This opens the possibility that the banks, who argue that "ring-fencing" will jeopardise their ability to fund the recovery, will have another chance to persuade the Government to push back the timetable for the implementation of the reforms.

The Liberal Democrat peer Lord Oakeshott said: "It's time to move on from cosy consultations between the banks and the Treasury. The banks have already had every opportunity to make their case to both Vickers and the Treasury."

He also argued that the key test for the Treasury' s commitment to the Vickers report will be whether legislation to impose ring-fencing appears in the forthcoming Financial Services Regulation Bill, which is under pre-legislative scrutiny in Parliament. "Doing financial regulation without the banks would be like Hamlet without the prince," he said. Although Mr Osborne announced in his Mansion House speech in June that he was prepared to accept ring-fencing, there have been indications in recent weeks that David Cameron is sympathetic to the arguments of the banks that reform must be delayed so as not to jeopardise the recovery.

The Prime Minister's thinking is believed to have been influenced by Tim Luke, formerly of Lehman Brothers and Barclays Capital, who was appointed to advise Mr Cameron earlier this year on enterprise, trade and technology.

Ana Botín, chief executive of Santander, was photographed leaving Downing Street last week with a confidential document that stated: "It will take a significant amount of time before any changes [from the ICB report] are legislated."

The Vickers Commission was established to examine the case for structural reform of the banking sector after the formation of the Coalition in June 2010. The biggest champion of banking reform within Government has been the Business Secretary, Vince Cable. Vickers formally reports to the Cabinet Committee on Banking, which is chaired jointly by Mr Osborne and Mr Cable.

Sir John's committee ruled out a total separation of investment and retail banking in its interim report in April, and instead recommended ring-fencing. This means banks' retail and investment arms would have to be separately capitalised and there would be restrictions on their moving money between the two.

Some economists also believe a ring-fence would make it easier for a government to rescue a bank's retail arm in a financial crisis without having to save the investment operation. This would, in theory, reduce the ability of traders to gamble knowing they will be bailed out by taxpayers if bets go wrong.

Mr Cable argued in a newspaper article yesterday that: "Banks must be left under no illusions that reform is coming. The recession is not an excuse for postponing banking reform. Indeed our economic recovery depends on it."

The tensions between the Liberal Democrats and the Conservatives over banking reform have emerged repeatedly throughout the life of the Coalition Government.

The Business Secretary told two undercover reporters last December: "We have a big argument going on about the banks and that is party political, because I am arguing with Nick Clegg for a very tough approach and our Conservative friends don't want to do that."

Last month John Cridland, director general of the CBI, gave an interview in which he said that the Government would be "barking mad" to proceed with ring-fencing straight away.