Britain is getting a bad deal from its banks. Our research has found that the five biggest UK banks enjoyed an indirect subsidy of £46bn in 2010 courtesy of the taxpayer. This was the reduction in borrowing costs that results from the implicit guarantee of their solvency by the government.
The 'too-big-to-fail' subsidy is in fact only one of a serious of financial privileges enjoyed by the banking industry. The Government is faced with an ongoing interest bill of £5bn just to finance the support given to RBS and Lloyds in particular. The industry is exempt from VAT. The deposit insurance provided by the state is also effectively subsidised, and the Bank of England acts as the 'lender of last resort' always ready to ride to the rescue if banks run out of cash.
What would the average small business give for the support of such a sugar daddy? Meanwhile the lack of effective competition in the industry allows banks to be relaxed about their costs, including bonuses, and customer service ratings - after all where else can you go in a country where 85% of current accounts are held by just five giant banks?
But these are now familiar arguments. The question is what should the Government do about it?
The Vickers Commission, due to deliver its final report on Monday, says that their proposals to ring-fence retail banking from the investment banking operations will reduce the too-big-to-fail subsidy, but not eliminate it.
This provides another compelling reason for a clean split between retail and investment banking. If any cheap borrowing is to be enjoyed at our expense, much better that it should be directed to the High Street and not to the City. These two very different activities need to be regulated very differently.
The stakes are high. Banking occupies a unique position. It is indispensible because it acts like the operating system for the whole economy - when it crashes it brings everything down with it.
Retail banking is more similar to a utility such as water and electricity, than competitive consumer markets for laptops and clothes. It is vital that there is universal access to low cost banking services, and good availability of affordable finance to small businesses. High street banking should not be considered a racy investment but should produce slow and steady moderate returns. We need to revert to the 7% or 8% that was the pre-1970 norm, not the fanciful 15% demanded by modern bank CEO's.
We need a much broader range of banking institutions, including local banks and mutual societies who can focus on serving particular areas of the economy. Having a greater number of smaller banks would not just introduce more competition and choice, but it would reduce the problems of 'too-big-too-fail' and make the system more resilient to financial market instability.
If the price of a safe and useful banking sector is size caps on banks, we should gladly pay it. The forced sale by Lloyds of some of its branches barely scratches the surface of over-concentration in the UK. Compare this with Germany where only 13% of banking assets are held by their large international banks and 70% of the sector is in the hands of local and mutual banks that are insulated from the absurdities of CDOs and toxic assets. Apart from the German banking system's much superior record at supporting its SMEs, this explains why the 'too-big-to-fail' subsidy in Germany is 38% lower than the UK even though the economy is much larger.
When it comes to investment banking, there is simply no good argument why a global investment bank needs to be combined with a domestic retail bank, other than for the benefit of the bank itself.
And here lies the nub of the issue.
The banking crisis proved beyond all reasonable doubt that we cannot rely on the red-blooded pursuit of private interests in the banking industry to deliver in the public interest. Greed is not good, but more to the point when it comes to banks it turns out to not even be particularly economically efficient. We have learnt to our immense cost that what is good for bankers is not necessarily good for the economy.
If the many privileges that the banking sector currently enjoys in comparison to other industries can't be removed, then we should ensure we get something in return - a quid pro quo. Joining Germany and France in calling for the introduction of the Robin Hood Tax on financial transactions would be a good place to start.
The current reform process is a straight fight between vested private interests and the public good. It rests with the Government to fight our corner for us. Let us hope that their negotiation skills can be the match of senior bankers and their formidable lobbyists.