LONDON BRIEFING:Judgment day may be looming for banks but regulation holds little attraction for that elite

IS BOB Diamond a member of the feral elite accused of running and ruining the country? The chief executive of Barclays was certainly lending support to British chancellor George Osborne yesterday, endorsing the coalition’s swingeing austerity measures. The alternative – the loss of Britain’s AAA credit rating – would be far more serious, he said.

It is important to support the prime minister and the chancellor, Diamond told reporters.

Straying into such controversial political territory is a risky move that bank bosses normally swerve, but Diamond’s words of support come at a crucial time for Osborne. Britain’s economic recovery has ground to a halt; growth forecasts for 2011 are being slashed, and the chancellor is facing a growing chorus of criticism of his strategy, in the financial centre of the city and among the wider population.

Bankers and politicians have been singled out by a new campaign, launched this week, aimed at putting the public interest back into the heart of the system. Led by left-leaning think tank Compass, the campaign blames a powerful feral elite of bankers, politicians and media barons for recent crises, accusing them of treating the public with contempt.

Backed by author Philip Pullman, its supporters also include former director general of the BBC Greg Dyke along with academics, economists and trade unionists. They are calling for the establishment of a public jury consisting of 1,000 individuals selected at random who would take on the task of deciding what is in the public interest. The idea is that the new jury would propose reforms in banking, politics, media and the police.

It’s an intriguing idea, but one that might struggle to capture the public interest. Moreover, the chances of 1,000 people coming up with a workable consensus on anything, let alone the contentious areas of banking and media reform, can’t be that high.

While Diamond and his fellow bankers are unlikely to lose any sleep over the prospect of being judged by a public jury, there is a judgment day ahead for the banking sector.

On September 12th, the Independent Commission on Banking, headed by Sir John Vickers, delivers its report into reforms of the sector. These include ring-fencing investment banking businesses, the so-called casino banks, from traditional high street banking.

The banks are opposed to ring-fencing and Diamond warned once again of the impact that such a move could have on the economy, with the cost of the split leaving Barclays unable or unwilling to invest in its UK operation. His comments echoed those of HSBC on Monday, which warned that radical reform of the industry could trigger job losses.

Both banks are already cutting jobs: HSBC are to shed 30,000 globally over the next three years and about 3,000 at Barclays this year.

First-half figures unveiled by Diamond showed Barclays suffered a 33 per cent slide in profits, to £2.6 billion, but that was largely because of a £1 billion provision for the mis-selling of payment protection insurance.

Underlying profits showed a 24 per cent rise, to £3.7 billion, ahead of analysts’ expectations.

Diamond had some good news, too, on the bank’s progress in lending to Britain’s small businesses as demanded by the government under its Project Merlin initiative. Barclays lent £7 billion to small businesses in the first half of the year, ahead of schedule, and a total of £20 million to UK business customers generally. The full-year total will be double that, it says.

Will that, along with Diamond’s warm words for the chancellor, help the industry escape the more radical ring-fencing reforms? We will find out in September.

*****

In the biggest takeover of a UK-listed company this year, Hong Kong’s richest man, Li Ka-shing, has won agreement from Northumbrian Water for his £2.4 billion takeover bid.

Last year his Cheung Kong Infrastructure company bought EDF’s UK electricity business in a £5.8 billion deal, and it also has a near 5 per cent stake in the unlisted Southern Water.

Utility firms operate in a highly-regulated environment, which can be a drawback for some owners as they are required to meet strict targets on pricing and infrastructure investment. But the predictable earnings stream is a big attraction, particularly for overseas investors such as Li.

Shares in Severn Trent rose more than 2 per cent yesterday and Pennon, which owns South West Water, was 3 per cent higher as the market bet the Northumbrian deal won’t be the last in the sector.

Fiona Walsh writes for the Guardianin London