Britain 'powerless' to break up banks
The Banking Commission and the Treasury are in effect powerless to force through radical structural changes to the UK's banks, to break up the giant universal banks such as Royal Bank of Scotland, HSBC and Barclays, without agreement from the European Union.
Which may well turn into a great frustration for the Banking Commission's members, because my strong impression is that they are in favour of some kind of break-up of the largest universal banks - which would involve separating their retail banking and money transmission operations from supposedly riskier investment and wholesale banking.
To be clear, this break-up might not involve formal forced removal of investment and wholesale banking out of the likes of Barclays into wholly independent new organisations - which is broadly what the governor of the Bank of England, Mervyn King, seems to favour.
The preferred reform might consist of putting an impermeable legal wall between wholesale/investment banking and retail banking, so that if a bank ran into difficulties, the so-called resolution procedure would allow the regulator to hive off the precious retailing banking operation to protect savings and the money transmission network. This kind of internal resolution break-up is preferred option of Lord Turner and Hector Sants of the Financial Services Authority.
That said, right now the commission - which consists of former regulators and erstwhile bankers - seems to me to be leaning towards a definitive, physical break-up of the mega-banks.
However it turns out that neither of these major structural changes to our banks would be easy to do - in fact they might be impossible - without a decision by the European Union to force such reforms on all European banks.
"The UK's ability to force major structural changes on its banks is very very limited," said a source close to government.
The reason is that under EU law, any EU authorised bank has the right to set up a branch anywhere in the EU.
Which means, for example, that if Barclays did not wish to be broken up, it could move its head office to Luxembourg (for example) and then operate the whole of its retail banking and investment banking operations in the UK, as normal, in the form of a "branch" of the Luxembourg-based bank.
Also, any continental bank, such as Deutsche Bank or Santander, could operate both retail and investment/banking operations in the UK, even if Barclays, HSBC and Royal Bank of Scotland were somehow persuaded to comply with a British decision to break them up.
What does it all mean? "My own view is that the Commission may well recommend that the big universal banks should be broken up," said a well-placed British official. "But in practice, even if the chancellor accepts that recommendation, the Treasury would not be able implement it. Instead the chancellor would probably then have to persuade every other EU country to break up their giant banks".
So how likely is it that Germany would wish to break up Deutsche Bank, France would choose to dismantle BNP Paribas and SocGen, and so on?
Right now, that seems about as probable as France and Germany forcing all cars to drive on the British left-hand side of the road or to adopt British-gauge railway track: giant universal banks are part of the continental financial tradition: ingrained in European business culture, part of the structure of the state.
But that doesn't mean the European love affair with the mega universal bank is necessarily forever. As I have pointed out here on a number of occasions, the threat of a fracture of the eurozone stems as much from the potential liabilities of European taxpayers to the enormous risks that have been taken by some European banks relative to their smallish capital resources as from the unsustainable deficits of certain eurozone member states.
To put it another way, if the eurozone were to become the centre of another great banking crisis - not a completely absurd idea, given recent events in Ireland and Portugal - it is possible that the EU would decide that some form of break-up of the biggest banks was not some insane British obsession but was worthy of consideration.