Penny for them: George Osborne should consider that the role of the banks is more complex than the consensus suggests (PA Images) 

Britain's economic outlook, like that of most developed countries, is difficult. Recent data suggests that the recovery is feeble and unimpressive, and that even in 2012 — almost five years from the onset of recession — output may fail to grow faster than the long-run trend rate. Prime Minister David Cameron is reported to have become impatient with his Chancellor of the Exchequer over the economy's sluggishness, fearing that a continued lacklustre performance will undermine support for the Conservatives at the next general election. 

Chancellors of the Exchequers are not magicians. George Osborne has many abilities, but he cannot be expected single-handedly to improve the productivity of British companies. Much that is wrong with the economy in the Great Recession reflects mistakes made under New Labour, while both the Gordon Brown and David Cameron governments have been prepared to sacrifice economic efficiency for the sake of political correctness. For example, it is Cameron, not Osborne, who wants to maintain Labour's policies on renewable energy and the environment, and is pressing that the United Kingdom takes an international lead in reducing carbon emissions. The Chancellor of the Exchequer has no choice in the matter. He has to accept that an official programme to reduce the UK's carbon emissions is under way, that it will raise energy costs for heavy industries and that the adverse effect on economic growth is important. 

Nevertheless, this article will suggest that at least some of Osborne's difficulties — particularly in banking regulation and monetary policy — are self-inflicted and avoidable. Some of its supporters in the City of London may have hoped that, once in office, the Conservative Party would check officialdom's attack on their businesses. In the event the government's reluctance to rock the boat of political correctness has extended to its treatment of the financial sector, now by far the most politically  incorrect part of the economy. In its final stages the last Labour government indulged in a large-scale programme of bank-bashing; in its first year the present Conservative-led coalition has continued that programme. Osborne has gone along with the consensus post-crisis argument that Britain's banks must be more tightly regulated, with higher capital relative to their assets and new restrictions on their operations.  

The focus of debate in the next few weeks will be the final report of the Independent Banking Commission, due out on September 12. The final report will no doubt tweak the conclusions of the interim report, but little more than tweaking is in prospect. The Commission has been chaired by Sir John Vickers, the warden of All Souls College, Oxford, and a former chief economist at the Bank of England. In the interim report Vickers and his team recommended — among other things — a further increase in banks' capital ratios, with systemically important institutions to maintain equity capital equal to a minimum of 10 per cent of their so-called "risk-weighted assets".

This may sound like mumbo-jumbo, but — as we shall see shortly — the technicalities have great social and political significance. (To be vulgar, they could even affect the results of general elections.) The phrase "systemically important institutions" is code for "the large UK clearing banks". So a common interpretation of the Vickers recommendations is that the ratios of equity capital to risk assets at the UK clearing banks will have to be 12 or 13 per cent. Superficially, this may sound reasonable. Given the consensus view that the banks were taking excessive risks before the crisis began, and that the excessive risk-taking was the cause of the slump in economic activity, there appears to be a compelling case for Britain's major banks to operate in future with more ample and comfortable capital cushions.