Banking reform has always been one of those issues that was going to test the unity of the coalition. Indeed, it was the subject of the very first inter-coalition wrangle when back in May 2010 George Osborne and Vince Cable tussled over who would chair the Cabinet committee on banking reform.
To date, these differences have been held in check by the fact that the coalition is waiting for the recommendations of the John Vickers-led Independent Commission on Banking. But with the final draft of the Vickers Report being published on 12 September, these splits are starting to open up again.
Cable and the Liberal Democrats would like, at the very least, a strict ringfencing within banks of the investment and retails arms. They want these new rules imposed as quickly as possible and, as Cable made clear in The Times (£) today, are not inclined to brook any reason for delay.
Cameron and Osborne are far more cautious. They are wary of a set of rules that are designed to deal with the last crisis rather than future threats and which end up harming the competitiveness of the British banking sector to no good purpose. They also fear that pushing reforms through now could lead to banks lending less and the recovery being slowed down even further; Cameron touched on these concerns earlier today.
The bad news for Cameron and Osborne is that Vickers looks set to come down on the Lib Dem side of the argument. I understand that Numbers 10 and 11 expect him to propose "draconian rules on ringfencing". To make matters worse for them, Sir John has told officials that he’ll publicly object if he thinks that his proposals are being watered down or kicked into the long grass. (There’s more on this tomorrow in The Spectator.)
So, Cameron and Osborne have a decision to make: are they prepared to expend the political capital necessary to beat off Cable and Vickers? Looking like the bankers’ friend is hardly an appealing political proposition at the moment. But if Cameron and Osborne let Vickers through, they could end up creating an even bigger economic headache for themselves in the medium term.
The choice on what to do will be Cameron’s. Osborne, his Chancellor and closest political confidant, has told him that the only chance they have of winning the argument on this subject is if the Prime Minister personally fronts it up.