Tough calls to make on clean-up of the banks

One doubts if Wednesday's speeches will be as prescient, but it is likely that current Chancellor Alistair Darling will take the opportunity to put some flesh on the Government's ideas for banking reform, and in particular the process by which banks that are likely to become an embarrassment will be identified by the authorities, and then taken over and closed down or otherwise made to mend their ways.

It won't happen, of course, but the best thing Darling could do is scrap the whole idea because while it may have sounded great at a late-night dinner party or wherever it was dreamt up, it will be hopeless in practice.

For a start, while it is conceivable the Government could move into a Northern Rock or Bradford & Bingley and decide that public interest demanded state appropriation of its assets, it is inconceivable it would move in and take over a Lehman or a UBS against the will of those banks - partly because they are too big but also because they are not British.

The idea the British Government can act unilaterally in these international markets is risible if the City wants to remain an international centre. But it is these big banks that are the threat to the system. Northern Rock was never a systemic threat - it only mattered because of the TV pictures of people queuing. All that is needed to sort that for the future is a decent and properly thought-through regime of protection for depositors.

The second issue is one of practicality. The Bank of England and the Financial services Authority are at loggerheads over which should have the right to assess the banks, and if necessary pull the trigger. If they cannot agree who is going to do it, how much harder will it be to agree on what constitutes a reason for action? The authorities have had great difficulty keeping up with the pace of innovation in banks, and no one has yet explained satisfactorily how they will keep up in the future - nor on what terms they will decide to move in.

The third thing is the rule of law. Banks are owned by shareholders, and it is the thin end of a pretty big wedge if those rights are to be overridden and rendered worthless by the diktat of a regulator who is under pressure to make sure Government ministers will not be embarrassed again by a Northern Rock. The implications of that go way beyond a bit of tidying-up in banking.