LONDON BRIEFING:Chancellor facing an impossible fight to keep the banks, public and his coalition partners happy

BRITAIN’S BANKS will learn their fate in just under a fortnight’s time, when the Independent Commission on Banking, led by Sir John Vickers, delivers its final report into the industry.

After a brief lull in hostilities in August, the lobbying resumed in earnest this week as the city returned to work after the long UK bank holiday weekend.

There was fighting talk from John Cridland, director general of the Confederation of British Industry, who warned of dire consequences should the reforms recommended be too onerous.

The government would, he said, be “barking mad” to press ahead with radical restrictions on the banks while the economy remains so fragile. He urged the coalition not to act “for political reasons”, warning that the banks might be forced to “shift away from a focus on the UK because the rules have been set unilaterally in the UK”.

In other words, they’ll lend even less to British businesses and some (Barclays, for example) may opt to shift their headquarters to New York, dealing a massive blow to British employment and tax revenues.

Cridland’s call echoed that of Angela Knight, head of the British Bankers Association, who warned that tough action on the banks carries a very real risk of derailing still further a recovery that has already ground to a virtual halt. Rather than reforming the banks at this critical stage, the government should concentrate instead on securing the recovery, she suggested.

Ms Knight is paid to speak for the banks, of course, so it would be surprising if she said anything else. But why on earth can’t the government do both – curb the banks that created the crisis in the first place and nurture the fragile recovery at the same time?

The bankers may not think so, but there is a strong argument that a more secure retail banking system is an essential part of moving forward from the crisis.

The key recommendation of the government-commissioned Vickers report, which will be published on Monday week, is that the retail operations of the banks (current accounts, savings, mortgages, credit cards and loans) should be separated from riskier investment banking activities.

The High Street banking businesses – and the nation’s taxpayers – will thus be ring-fenced from the worst effects of any future collapse, as “casino banks” can be left to go bust.

The banks are opposed to the plan, which they say could cost as much as £10 billion, will prove hugely complex and will put them at a disadvantage to overseas competitors. Some have already intimated that they will be forced to cut back on lending and raise charges in order to meet the cost of ring-fencing, particularly if they are forced to separate funding from lending.

George Osborne has already accepted the report’s key recommendations, although the pro-bank lobby argues that so much has changed since the commission released its initial findings in April that he would be advised to have a rethink.

Politically, though, that would be extremely risky as the Lib-Dem side of the coalition, particularly business secretary Vince Cable, continues to insist on swift, tough action on a sector that has proved extremely adept at resisting any sort of radical reform, whether it be on pay and bonuses or on lending to small businesses.

Osborne may attempt to head off a backlash by delaying full implementation of the reforms – perhaps until as late as 2019, according to some suggestions. That is unlikely to go down well in the Cable camp, nor with the wider public, who hate the banks every bit as much as they did at the height of the crisis.

The row over ring-fencing has tended to overshadow the other aspect of the commission’s remit – to look at ways of ensuring increased competition.

The hasty government-brokered Lloyds’ takeover of Halifax Bank of Scotland at the height of the crisis, which left the combined bank with a near one-third share of the current account market, has received particular scrutiny by the commission.

In its interim report, the commission made clear its view that Lloyds should be made to dispose of many more branches than the 600 or so it has on the auction block. This suggestion was fiercely criticised by the bank, which claimed the delay involved in a larger sale would impede competition. Consumer groups are also keen to see measures to make it easier for customers to switch banks, such as portable account numbers.

Whatever the commission recommends, the final decision rests with Osborne. Positions on the banking industry are so polarised, there’s no chance he will be able to keep everyone happy. It’s more a case of who he’s most afraid of – the banks, or his coalition colleagues and the public.

Fiona Walsh writes for the Guardiannewspaper in London