Mervyn King, governor of the Bank of England, wants smaller banks and an end to implicit state guarantees for those combining high street retail banking with “risky investment banking or funding strategies”. If Mr King has his way, institutions heavily involved in risky trading activities would be denied access to retail deposit insurance and lender of last resort facilities, and would have to shrink: if they are to face the market discipline of bankruptcy, they cannot be too large to fail.

Mr King’s ideas are at odds with those of the Treasury and the Financial Services Authority. The FSA, as seen in the Turner Review, remains sceptical of a Glass-Steagall style separation of investment banking from commercial banking and high street deposit taking. First, it believes it will be impossible for any one country to pursue a clear separation while others do not. In most of continental Europe, universal banks are involved in securities-related activities and in some cases, hold large industrial stakes. Second, it believes that serving the financial needs of today’s globally interconnected economy requires large, complex banking institutions that can provide risk management products. These can only be delivered by banks with extensive market-making activities, which involve some position-taking.