Three years ago this week, the onset of the credit crunch proved that Britain's banks were too big to be allowed to fail. Now, they have just posted collective profits of £15bn – evidence that has kicked started the arguments about whether it is time to cut them down to size. But last week's interim results are food for both sides of the "too big to fail" debate. The "casino" investment banking businesses generated the bulk of the profits at both Barclays and Royal Bank of Scotland, allowing John Varley and Stephen Hester, their respective chief executives, to argue the merits of the strength of diversification.
For those who believe investment banking business should be hived off from the high street bank branches, it shows that the "casinos" are out of control and should be broken off. Of any of the political parties to make the thorny issue its own in the run up to the election it was the Liberal Democrats. Vince Cable, now the business secretary, was one of the first to coin the phrase – so hated by the City – of "casino" investment bankers and make the case for separating these outfits from the high street operations, as the scale of profits in investment banking businesses could be mirrored in sudden losses.
Let's be clear. Now they are in government, the Lib Dems still have every intention of breaking up Britain's banks. This weekend, the party's treasury spokesman Lord Oakeshott went so far as to say that "breaking up the banks and making them lend is a critical part of why the Liberal Democrats are in the coalition".
Reforming banks is number one on the coalition's agreement to govern and after all the shouting ahead of the election, the Lib Dems would find themselves in a difficult position if the banks remain intact by the time this parliament ends.
While the Lib Dems would have most likely torn the banks to shreds on immediately taking office, being part of a coalition means that they have to wait for the year-long commission into banking to report back. The Lib Dems were influential in helping to select the members of the crucial commission, chaired by the respected Sir John Vickers, but the creation of the commission has allowed the Conservatives to kick the issue into the long grass for at least 12 months.
But amid the Lib Dem's clamour to break up the banks, the commission's remit is crucial. The Treasury insists that the scope of the commission's investigation is about "whether" to break up banks rather than "how" to carve them up. This distinction will prove crucial for the banks most at risk of break up – Barclays, HSBC and RBS – as they try to convince Vickers and his team that they are not a risk to the financial system in the next 12 months.
Varley, Hester et al are also having to make their case for so-called "universal banking" to the Bank of England's governor, Mervyn King, who has also argued for a break up of the big banks. While the Conservatives in the coalition have been more measured in their comments on breaking up banks since the creation of the government, one of the clearest signals they may have sent to the banks is handing to the Bank oversight of the system in its shake up of regulation. Banks have to convince not just Vickers, but also King, that the status quo should be maintained.
The commission's remit is also to look at competition, something that should concern Lloyds Banking Group, which could only be created because Labour tore up the competition rule book to allow the rescue of HBOS in the days after Lehman's demise. This weekend, Lloyd's chief executive, Eric Daniels, claimed that he had "assurances" his empire would not be carved up, a risk not because of his casino investment banking business – he does not have one – but because of his dominance on the high street.
It appears that these assurances are the words uttered by Lord Mandelson when he was business secretary at the height of the banking crisis. Whether Cable feels able to honour Mandelson's pledge remains to be seen. The words used by the Labour peer are worth repeating. "It is not that the merged bank would be sheltered, if the merger goes ahead, from competition law. Were there to be any evidence of market abuse at some future time – not that I expect any such behaviour – the normal powers will be available to the competition authorities to protect consumers," he told the Lords on 16 October 2008.
Arguably, that competition investigation is now under way. Daniels has already insisted that being forced by the EU to sell 600 branches in return for the taxpayer bailout will have no material impact on his enlarged business, suggesting, perhaps, that if the EU remedies were intended to address competition concerns, rather than punish the bank for state aid, they might have been tougher.
With a year to go before the commission reports, the banks seem to be losing the propaganda war. Convincing the taxpayer that investment banks serve any purpose other than to line the pockets of bankers has not yet been done. Martin Taylor, the former Barclays chief executive who sits on Vickers's team, had himself wanted to break up the bank, not with a mantra of safety first, but on valuation grounds.
How ironic it would be, if the bankers came round to the same argument again. In the process, generating nice fees for the very investment bankers the policy makers seem to want to penalise.