Economy: Break Up the Banks

A fully-functioning but reformed banking system is seen by all political parties as a key ingredient in economic recovery. The government's approach, outlined by Alistair Darling this week, is for the banks to be forced to meet their pledges to increase lending to homeowners and small businesses, with a beefed-up domestic regulatory regime for the banks that conduct both retail and investment business and support for better cross-border ­supervision of multinational organizations.

Until now, labor has been wary of the more radical proposals aired since the financial crisis began almost two years ago. Vince Cable, the Liberal Democrats' Treasury spokesman, has called for the state to direct lending at fully-nationalized banks and to break up banks seen as "too big to fail" into smaller units.

Darling and Adair Turner, the chairman of the Financial Services Authority, are wary of a British version of America's Glass-Stegall act, a reform brought in by Roosevelt in the 1930s to separate retail and investment banking.

Although Conservative reforms in the 1980s paved the way for building societies to turn themselves into banks, the shadow chancellor, George Osborne, said that a future Tory administration would encourage a new breed of mutual financial organizations, owned by their members.

The New Economics Foundation, a thinktank, has called for the government to adopt a US-style community reinvestment act, which would force the banks to offer services to poor communities in return for the capital injections they have received from the taxpayer.